THE BLOG

Help to Buy - Good Politics, Bad Economics, Horrendous Policy

22/05/2013 13:05 BST | Updated 21/07/2013 10:12 BST
Getty Images

The Government's wafer-thin legislative agenda for this Parliamentary session, outlined by the Queen in just seven minutes, spoke of an administration unable, and seemingly unwilling, to drive any real change in the economy. Amounting to just fifteen Bills, the programme typified the Government's laissez-faire approach and its continued failure to confront the most urgent and serious problems facing the country.

Take housing policy. A chronic lack of affordable homes, a ballooning private rented sector and more young people giving up on ever being able to afford their own home; these are persistent problems requiring bold solutions. But the Government's only bright idea - the Help to Buy programme announced by the Chancellor in last month's Budget - is to provide a system of state guarantees on mortgages similar to those issued by the doomed US mortgage banks, Fannie Mae and Freddie Mac. Among other measures, the scheme can underwrite up to £130bn of high loan-to-value mortgages. Astonishingly, George Osborne's Treasury has actually designed a policy which roughly emulates the approach taken by the two institutions responsible for kicking-off the worst economic crisis of modern times.

It's no wonder that one economic consultancy said: "Had we been asked to design a policy that would guarantee maximum damage to the UK's long-term growth prospects and its fragile credit rating, this would be it". Martin Wolf wrote in the Financial Times that Help to Buy was "good politics and horrendous economics". Even the outgoing Bank of England governor, Sir Mervyn King, has cautioned that the scheme must not become a permanent fixture of the UK housing market, clearly worried about the distortive effect that Help to Buy could have on prices.

Experts predict that the scheme will push prices up at a time when, in London, high-end properties have increased in price by 57% over the last four years, pushing up the cost of all other properties in the capital and surrounding areas. Recent research from Knight Frank showed that half of all £2m+ properties in London are now sold to overseas buyers. The Help to Buy mortgage guarantee can support purchases of property worth up to an unbelievable £600,000, casting doubt on the Government's stated priority of helping first-time, lower-income buyers. I submitted a parliamentary question asking whether EU and other overseas citizens could also benefit from Help to Buy. The Government's response took five weeks to arrive, after being passed around the Treasury and DCLG, and it still didn't answer my straightforward question.

The Treasury could not confirm that the mortgage guarantee scheme will be closed to EU and other overseas citizens, which means the scheme could have the adverse effect of offering a huge incentive for wealthy foreign buyers, further inflating an already overheated market. Ministers promise to make a full statement on the exact design of the mortgage guarantees in due course, but the lack of answers so far leads me to believe that they know they are already in trouble on this issue.

The Treasury Select Committee warned that the Chancellor's policy stokes demand with no corresponding boost to supply. Providing guarantees on mortgages for over-expensive property only treats the symptoms of the problem; the real solution to rising prices is to build more houses and start to reduce the real price of housing. Recent research from the Smith Institute showed that there are currently 2 million households on the social housing waiting list. If the Chancellor was serious about housing reform, he should have simply offered the cash directly to housing associations and companies willing to build affordable housing. Labour would have used the proceeds from the 4G auction to build 100,000 affordable homes. This is still short of the roughly 240,000 houses we must build each year to meet demand, and bridging this gap must remain a priority.

Only action at the lower end of the property market, where the base is widest, can help gradually push prices down across the board. In my own constituency surgeries in Glasgow North, housing is regularly the number one issue put to me. Lack of houses for council tenants and exorbitant rents for those in the private sector combine to paint a grim picture for working families and young people on average incomes. Local authorities suffering from cuts and housing associations often in dire financial straits cannot solve the housing crisis alone. The Government must instead use the clout of its balance sheet in more innovative ways than backing inflated mortgages. A nationwide programme of incentives for affordable house building would be a good start. Look after that, and prices should start to become more affordable.

Despite his aim to re-balance the economy, both sectorally and geographically, the Chancellor's intervention in the housing market only helps reinforce a 'two-speed' Britain in which London, fuelled by its property boom, gradually decouples from the rest of the country. And that isn't good for anyone, wherever you live.