It almost seems as if the Chancellor doesn’t feel that improving house prices is possible. His range of policies set out in the Budget and Spending Review this year all point to him focussing on using public funds to ‘help’ people buy homes rather than improving market conditions. And, unsurprisingly, the problem is most acute in London.
Let’s unpack some of the policies.
There are Starter Homes – a 20% discount on a home offered to first time buyers (FTBs) under the age of 40. This government grant is eligible on homes where the discounted value is £450,000 or less and is given to the developer so they can sell to the buyer with the decrease in price.
Then there two Help to Buy offers – one for help with a deposit, one for help with a loan. Help to Buy ISAs are saving schemes where the potential buyer will open an account, save £200 month and when they come to buy a home the Government will chip in with a bonus. If the criteria are met, this could equate to an additional government bonus of £3,000 on a home valued up to £450,000 in the capital.
The other demand-stoking policy is the extended version of Help to Buy – the aptly titled London Help to Buy. This scheme allows the buyer to purchase a home with a 5% deposit and receive a loan from the Government of up to 40% of the value of the house (the first five years are interest free) up to the value of £600,000.
All of these policies stoke demand but what makes these policies in London even crazier is that, theoretically, one could use all three policies on the same home! If a new Starter Home has a discounted value of £450,000 or less and that a FTB is under the age of 40, all three policies (20% Starter Home discount; £3,000 government ISA bonus; 40% government loan) could be used in conjunction (Figure 1). When this happens, the Government effectively funds 53% of the home.
Figure 1 – theoretically, who will help to buy?
These policies – both individually and as a package – have serious implications for how we use public funds as well as the state of the housing market.
The two policies that are effectively government grants (Help to Buy ISA and Starter Homes discount) transfer public funds (taxpayer money) to a certain group in society. While there is nothing new in this – the Green Book sets out that public investment can have either overcome market failure or have redistribution goals – the group who are benefiting are very different to those who traditionally require social rented properties. Moreover, it may not provide any additionality – are extra homes being built over and above what would normally be built?
The large equity stake the Government is taking with London Help to Buy is risky. Seven years on from the financial crash (which, on a global scale, started with over-indebtedness and packages of sub-prime mortgages), the Government is prepared to purchase up to 40% of the value of a home. If the Government leaves the market to its own devices and it crashes – or ‘corrects’ – the Government is set to lose public funds (if the buyer decides to sell at that point). However, the Government may take the view that this may be too much public funding to risk and may continue to stoke demand in the future so the market doesn’t crash and it retains its stake in full.
In combination, these policies could have profound effects. Are they a) helping people who wouldn’t be able to afford a home buy one; b) helping people who would’ve bought anyway buy sooner or; c) encouraging people to buy a larger home because they are eligible for so much support to make up the difference?
Either way, landowners know the Government will provide a discount to buyers via Starter Homes and may raise the price. And existing homeowners know people might be able to bid more for a home and may raise the price. And would-be owners know they can apply to receive public funds in order to place a higher bid. And the Government knows it is risking a lot and couldn’t possibly let the market crash.
How long will this merry-go-round continue?