Sir Mervyn King has issued the Bank of England's inflation report for the last time. He warned that chancellor George Osborne's Help to Buy scheme could be "dangerous" if it became permanent. The governor said:
Very important we don’t see it as a permanent feature of the landscape.
The RICS' survey of property professionals showed this week that demand for housing has jumped to a three year high as a result of the policy. Many warn that this could create a dangerous new housing bubble. Fathom consulting has warned that price inflation could rise to as high as 20 per cent by 2015.
Kristian Niemietz, senior research fellow at the Institute of Economic Affairs, argues that housing markets need relaxed planning rules, not more government schemes:
You can’t get closer to the textbook definition of perfectly inelastic supply, and we are paying the price. As recently as the 1980s, an average income earner could buy a house in the middle of the price range for three times their annual gross salary. Today, they would be lucky to find one for five times their annual salary. Rent levels, as always, have followed the same trajectory.
And there’s no prizes for guessing why supply is so unresponsive. There is now a substantial body of empirical research on the determinants of house prices, and the literature is as conclusive as econometric literature can get. House prices are affected by dozens of factors in the short run, but ultimately a lasting increase is almost always the result of regulatory constraints. Make it easy to build new homes and house prices will fall; make it hard and house prices will climb. It really is that simple. When I wrote a review of the empirical literature on this for my book Redefining the Poverty Debate, I was looking for some counter-evidence to avoid the accusation of cherry-picking, but failed to find it. The literature is one big cherry tree.
That is why the mortgage guarantee will do nothing to overcome Britain’s housing affordability crisis. The value of the implicit credit subsidy it contains will simply be capitalised into house prices. Housing in the UK is a supply-side issue, which is why any demand-side measure will be at best ineffective, and at worst counterproductive.