Simply put, the UK suffers from a large and fundamental housing crisis. It is estimated that the UK needs to build around 230,000 houses per year to just keep pace with demand (let alone alleviate the six-decade under supply) but we have only managed this figure once in 31 years (1988). Moreover, the private sector alone has never managed this in the post-war period.
House prices continue to increase faster than wages which puts a strain on the rental market. This, in turn, increases rental prices. From an economic point of view it is decreasing consumer spending and restricting the labour market. From a social point of view, it is forcing people into increasingly cramped dwellings, restricting people’s ability to put down roots and pushing people onto housing benefit or worse, high interest loan companies.
You’d be right to expect radical change. The Budget, however, delivered not only a weak response but the wrong prescription.
The key policy announcement in the Budget shows that the Government feels that mortgage restrictions are stifling the housing market. Help to Buy is a scheme which expands upon another scheme, FirstBuy, but is not restricted to first time buyers. Essentially, purchasers can now put down a five per cent deposit on a new house – much lower than banks currently demand. To reduce the risk for the bank, the government will fund 20 per cent of the house through a shared equity loan which will be interest free for the first five years and is linked to the value of the property. The argument is that house builders aren’t building because people can’t get mortgages.
Unfortunately, this targets the symptom and not the disease. High house prices – as a result of high demand and restricted supply – combined with stagnating wages means home ownership is becoming unobtainable. Making mortgages more available by taking on some of the risk doesn’t solve the problem of high house prices but rather encourages greater private debt. It is not beyond the realms of possibility to imagine how a bank may well encourage a potential buyer to take on more debt than they require as it doesn’t shoulder all the risk.
Furthermore, I can’t see developers increasing stock as a result. Perhaps, it would increase completions at the margins, but why would private developers build at a quantity that would drive down prices? Mortgage availability is not going to lead to a flood of new housing.
So the scene is set. No major increase in supply and no incentive for private developers to build will only lead to higher prices. The Government will combat these high prices with, essentially, easier credit which means people on stagnant wages take on debt and the Government takes on some risk.
Does this sound familiar to anyone? Why is it not ringing the ‘2007-housing-bubble-sub-prime crisis’ alarm?! I don’t think it takes any more than common sense to see that the solution to a housing market bubble is not expansionary credit.
All this will do is increase the share prices and profits of developers and banks by saddling the purchaser with high levels of debt and the Government with risk.
If this is the Government’s answer then I shouldn’t be saving to buy a house; I should save to buy shares in housing developers.