George Osborne’s Budget has appeared to bet the house on an election win in 2015. While his announcement was neither flash nor hard-hitting, a couple of announcements, when brought together, will have wider implications.
The first of these is Help to Buy. I won’t go into great detail as to the intricacies of the two versions of Help to Buy – all you need to know is that Help to Buy 1 offers a 20% equity loan from government to a home buyer of a new house while Help to Buy 2 underwrites a proportion of the mortgage the home buyer is issued on any home. Both mean the government has a stake in the housing market; a stake that means the models are built upon a necessity to ensure rising house prices.
This Budget announced that Help to Buy 1 would be extended to 2020 meaning the drip-feed upfront funding of housing developers (via the 20% upfront loan that the home buyer will have to pay back) will continue. The longer this continues, the greater the stake the government has in the market and the harder it will be to resist the insistence of developers to keep it.
It is arguable that Help to Buy 1 won’t inflate house prices by much because the size of the new home market is far smaller than the market as a whole. However, what it does do is it maintains prices. Instead of the market readjusting to new price levels, people leverage themselves to buy a house, developers maintain their expected price levels (and so buy land at subsequently high prices) and does nothing to break the (dysfunctional) status quo.
Clearly home ownership wins votes.
As if pumping up demand in the housing market without boosting supply (or correcting a dysfunctional land market) wasn’t bad enough, the second hit comes from an unlikely source – pensions.
From 2015 pensioners won’t have to purchase an annuity when they retire but can withdraw a large lump sum of their nest-egg to use as they see fit. I’ll tell you what I am most confused by – Osborne loudly declaring that for too long Britain has not saved enough and proclaiming this will be a ‘Budget for Savers’ while incentivising the complete opposite. Indeed, Budget forecasts predict that savings rates will decrease from 7.2% in 2012 to 3.3% in 2018.
Annoyingly, this has only been picked up in terms of whether Labour ‘trusts’ people to spend the money wisely or whether it is about choice where the individual is best placed to decide on how to use their money.
What people aren’t discussing widely enough is the implication on the housing market. With the incentive to use a chunk of a pension pot on other potential investments, one can certainly see a scenario where a pensioner uses their lump sum as an investment into housing. This could take the form of a buy to let property or it could be used as a deposit for a house for their children. Either way, funds are channelled away from their original use and into a market prone to bubbles.
When these incentives are aligned, it isn’t tough to see how a lucrative market built upon hope and speculation – where young people are priced out – could attract funding from pensioners to inflate the bubble.