Osborne's housing policy risks being sub-prime for Surrey

Our housing market is overheating as it is. The last thing we need is a massive lending spree.

Many of the measures announced by the Chancellor are relatively simple. Either the effects are basically known – think fuel duty, which is always a fight between climate change and revenue versus angry motorists – or the debate around them is pretty black and white – will cutting corporation tax lead to growth, or just a hand-out to businesses?

The big one which we're watching play out now is the chancellor's new housing policies. Two major measures were announced, under the branding "help to buy:

  1. £3.5bn was committed to shared equity loans. 20% of the value of a new home will be loaned by the government, interest free, repaid when the home is sold. A 5% deposit required. Available to everyone buying a new-build home worth moreless than £600k. Because it is an investment in the equity of the house, it won't be counted toward the deficit figures.
  2. Offering a mortgage guarantee to lenders to encourage them to loan to people who can't afford a deposit. The Government will back up the deposits of £130bn worth of mortgages, from 2014 to 2017. It will guarantee the equity of 15 per cent of the house's value, and apply to all homes, not just new builds.

The measures fit Dan Davies' classic summation of the eternal failure of UK policy in this area:

The whole of British housing policy can be seen as an effort to reduce the cost of housing without affecting house prices.

By extending greater credit to people who otherwise couldn't afford a house, the plan is that they will be able to buy it at the existing price. Where the increased demand might then increase prices further, the requirement that the house be a new build – which is clearly intended to stimulate housebuilding – ought to ensure that house prices hover around the same level.

The outcome of the policy depends greatly on the demand for it – and at first glance I don't expect demand to be very high.

A 5 per cent deposit is, obviously, a quarter of a 20 per cent deposit. But the problem for too many families is that the thought of saving for any deposit is beyond the realms of imagination at the moment.

The average UK house costs £238,293, meaning a 5 per cent deposit would cost a little under £12,000, which is more savings than 71 per cent of the UK have. It's certainly the case that some of that 29 per cent who do have enough savings to pay a £12,000 deposit might not have enough to pay a £48,000 deposit; but it remains the case that if you want to buy a house, you are likely to do it with money inherited from someone else in your family, because few people are in a situation where they can save nearly enough to afford a deposit up front.

Of course, despite what Ed Miliband repeats there isn't only one Britain. The housing market in London and the South-East is vastly different from the rest of the country. In the former, where the market is definitely overheating already, the policy will do little but raise prices even further. In the latter, the question is whether the difference between an 80% and 95% mortgage is big enough to turn the market around. In both, it will also be grossly distortionary around the £600,000 cut-off point, and may actually depress prices in the short term as people hold off til 2014 to buy.

But the real aim of it isn't to help people who can't afford deposits buy homes. Instead, it's to help people who can afford deposits buy more expensive homes for their money. That won't do a huge amount for those who aren't already in some way in the housing market, but it will help a great deal to keep that housing market buoyant for a while longer.

The deficit-free aspect of the scheme is also questionable. The loans will indeed be backed up by the equity the government is taking in the new houses, and in the long run – assuming that house prices continue rising, which remains unspoken government policy – it will be deficit neutral.

But so would a lot of things the government could do. If it decided to build social housing, that would likely be deficit neutral in the long run; as would investment in green energy, or loans to small businesses.

Any measure to fix Britain's housing situation must be applauded for its aims, but this, I fear, continues the worst policies we already have, and at best will only treat the symptom, not the cause.

Houses. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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The Autumn Statement proved it – we need a real alternative to austerity, now

Theresa May’s Tories have missed their chance to rescue the British economy.

After six wasted years of failed Conservative austerity measures, Philip Hammond had the opportunity last month in the Autumn Statement to change course and put in place the economic policies that would deliver greater prosperity, and make sure it was fairly shared.

Instead, he chose to continue with cuts to public services and in-work benefits while failing to deliver the scale of investment needed to secure future prosperity. The sense of betrayal is palpable.

The headline figures are grim. An analysis by the Institute for Fiscal Studies shows that real wages will not recover their 2008 levels even after 2020. The Tories are overseeing a lost decade in earnings that is, in the words Paul Johnson, the director of the IFS, “dreadful” and unprecedented in modern British history.

Meanwhile, the Treasury’s own analysis shows the cuts falling hardest on the poorest 30 per cent of the population. The Office for Budget Responsibility has reported that it expects a £122bn worsening in the public finances over the next five years. Of this, less than half – £59bn – is due to the Tories’ shambolic handling of Brexit. Most of the rest is thanks to their mishandling of the domestic economy.

 

Time to invest

The Tories may think that those people who are “just about managing” are an electoral demographic, but for Labour they are our friends, neighbours and the people we represent. People in all walks of life needed something better from this government, but the Autumn Statement was a betrayal of the hopes that they tried to raise beforehand.

Because the Tories cut when they should have invested, we now have a fundamentally weak economy that is unprepared for the challenges of Brexit. Low investment has meant that instead of installing new machinery, or building the new infrastructure that would support productive high-wage jobs, we have an economy that is more and more dependent on low-productivity, low-paid work. Every hour worked in the US, Germany or France produces on average a third more than an hour of work here.

Labour has different priorities. We will deliver the necessary investment in infrastructure and research funding, and back it up with an industrial strategy that can sustain well-paid, secure jobs in the industries of the future such as renewables. We will fight for Britain’s continued tariff-free access to the single market. We will reverse the tax giveaways to the mega-rich and the giant companies, instead using the money to make sure the NHS and our education system are properly funded. In 2020 we will introduce a real living wage, expected to be £10 an hour, to make sure every job pays a wage you can actually live on. And we will rebuild and transform our economy so no one and no community is left behind.

 

May’s missing alternative

This week, the Bank of England governor, Mark Carney, gave an important speech in which he hit the proverbial nail on the head. He was completely right to point out that societies need to redistribute the gains from trade and technology, and to educate and empower their citizens. We are going through a lost decade of earnings growth, as Carney highlights, and the crisis of productivity will not be solved without major government investment, backed up by an industrial strategy that can deliver growth.

Labour in government is committed to tackling the challenges of rising inequality, low wage growth, and driving up Britain’s productivity growth. But it is becoming clearer each day since Theresa May became Prime Minister that she, like her predecessor, has no credible solutions to the challenges our economy faces.

 

Crisis in Italy

The Italian people have decisively rejected the changes to their constitution proposed by Prime Minister Matteo Renzi, with nearly 60 per cent voting No. The Italian economy has not grown for close to two decades. A succession of governments has attempted to introduce free-market policies, including slashing pensions and undermining rights at work, but these have had little impact.

Renzi wanted extra powers to push through more free-market reforms, but he has now resigned after encountering opposition from across the Italian political spectrum. The absence of growth has left Italian banks with €360bn of loans that are not being repaid. Usually, these debts would be written off, but Italian banks lack the reserves to be able to absorb the losses. They need outside assistance to survive.

 

Bail in or bail out

The oldest bank in the world, Monte dei Paschi di Siena, needs €5bn before the end of the year if it is to avoid collapse. Renzi had arranged a financing deal but this is now under threat. Under new EU rules, governments are not allowed to bail out banks, like in the 2008 crisis. This is intended to protect taxpayers. Instead, bank investors are supposed to take a loss through a “bail-in”.

Unusually, however, Italian bank investors are not only big financial institutions such as insurance companies, but ordinary households. One-third of all Italian bank bonds are held by households, so a bail-in would hit them hard. And should Italy’s banks fail, the danger is that investors will pull money out of banks across Europe, causing further failures. British banks have been reducing their investments in Italy, but concerned UK regulators have asked recently for details of their exposure.

John McDonnell is the shadow chancellor


John McDonnell is Labour MP for Hayes and Harlington and has been shadow chancellor since September 2015. 

This article first appeared in the 08 December 2016 issue of the New Statesman, Brexit to Trump