Conservatives are gloating about their new initiatives for home buyers. Those struggling to buy won't be helped by a scheme that could backfire and leave the economy in tatters. Allister Heath argues that this policy could create a new asset bubble:
If the chancellor’s inability to tackle our fiscal crisis is frightening, his attempt at trying to recreate a private sector housing bubble is truly terrifying. In the 1980s, Margaret Thatcher’s right to buy policies helped created a sustainable home-owning democracy, based on individual responsibility and genuine private property, and Osborne’s small extension to that scheme is good news.
But his help to buy policies are a perversion of that Thatcherite tradition, which helped millions of ordinary, hard-working aspirational folk declare their independence from the state and from social housing. Osborne’s plan achieves the opposite: it injects social democracy into home ownership and is making people more, rather than less, dependent on subsidies.
Help to buy is made up of two schemes – an “equity loan” where the government lends buyers who put in a five per cent deposit up to 20 per cent of the value of a new build home and a “mortgage guarantee” where lenders will be incentivised to make more mortgages available, with the government shouldering a vast amount of risk. Both these policies are absurd and will merely push prices up, while encouraging people to take on excessive risks.
On the one hand, the authorities have tried to make banking safer and discouraged high loan to value mortgages – on the other, they are subsidising them and exposing the taxpayer to them. The problem in the housing market – including that of excessive prices – is an insufficient supply of the right kinds of homes in the right places, which is damaging the quality of life of millions. The best way to tackle this deplorable situation is to drastically increase house building, and the supply of homes, not to further increase demand. Sadly, this isn’t on the cards: one of the Budget’s many failings was that it didn’t deregulate the UK’s antiquated planning laws.
Instead, we are left with a system which will turn thousands of homeowners – with properties worth up to £600,000 – into recipients of other taxpayers’ largesse. The 20 per cent loan is interest free for the first five years. From year six a fee of 1.75 per cent is payable on the equity loan, which rises annually by RPI inflation plus one per cent.
What will happen to all these new, riskier home owners with tiny deposits when interest rates eventually go up, or if house prices slump? It will be a catastrophe, and taxpayers will bear the loss. In the short-term, this policy may well buy votes; it is, however, bound to end in tears. It is astonishing how some people simply do not learn any lessons from history.