Think tank slams Help to Buy: "government is the housing crisis"

The Adam Smith Institute has accused the government of propping up the housing bubble.

The Government's Help to Buy scheme has come under sharp attack from the Adam Smith Institute, which writes that it:

will raise the height of all the rungs on the housing ladder by boosting house prices… [and] redistributes wealth from taxpayers to house buyers.

The key to the Institute's analysis is that the British housing market is suffering a problem of supply, not of demand. That's an analysis which bridges the normal left-right divide, and puts the ASI on the same side as many on the left (indeed, that coalition is also why the ASI's Preston Byrne has written for the New Statesman on the housing crisis several times). And the report lays out compelling reasons to support that analysis:

A 2010 House of Commons briefing paper wrote, “it has been clear for some time that housing supply is not keeping up with demand,” adding that there are “significant levels of overcrowding in the private and social housing stock.” However, the briefing continues, reductions in the price of housing accompanying the recession have done little to improve its affordability, as price falls have been accompanied by “by tighter lending criteria, particularly larger deposit requirements,” such that poor working families in rented accommodation, even assuming spartan personal budgets with little or no provision for incidentals, would need to save for several decades in order to purchase a house in most major urban centres…

Housing stock in the capital’s 10 most expensive boroughs is now worth more, taken together, than the entire property markets of the rest of Northern Ireland, Wales and Scotland combined.

The government's approach to fixing the housing supply problem is to boost demand, in the hope that builders will follow through. And to a certain extent, their analysis of what's holding back demand is correct:

The 2013 Budget makes it clear that the government believes lack of access to finance is the primary problem.

Once prices reach the sky-high levels they currently sit at in the south east of the country, then the big bottleneck is likely to be access to finance. In 1997, "the average house cost 3.54 times the median wage" but "by 2011 one cost 6.65 times the median wage". Lenders who may have been happy to loan four times someone's salary are likely to be considerably less happy to offer seven times that.

Help to Buy sets out to improve that situation, but does so in two ways which are woefully substandard. One, an equity loan, subsidises the homeowner in their purchase by offering an interest-free loan on up to 15 per cent of the value of the house; the second involves a guarantee to the lenders of up to 80 per cent of the value of the homes they have lent against.

The latter is most punishingly described as Britain's Fannie Mae. That organisation, as well as its sibling Freddie Mac, both played a similar role in the US mortgage market for years leading up to the crash. But when the housing bubble popped:

the extent to which the taxpayer was potentially liable was the difference between (1) the prices at which Fannie and Freddie issued their debt, and (2) the price Fannie and Freddie would have to pay the private sector to take on those risks in the event of a default.

In the US, that difference was 0.4 percentage points, but "with combined assets of over $5 trillion, 0.4 percentage points represents a very substantial figure".

That risk to taxpayers represents an all-or-nothing gamble. If the bubble pops, we'll be firmly out of pocket, but it's possible that the risk will end up coming to nothing. The same is not true of the equity loan. Although it is being written off the books (the government will bank the value of the assets they now "own" to prevent the Help to Buy scheme affecting the bottom line), it remains the case that billions of pounds are going to be "invested" in an asset class with no return on investment at all. On top of that:

this aspect of the Help to Buy scheme will take effect as a subsidy, meaning in practice that non-participating taxpayers, in addition to paying for the loans, will have to work against them as the infusion of government liquidity increases competition for limited supplies of land.

That is, insofar as help to buy merely subsidises a particular group to buy rather than boosting building, it is zero-sum: renters who can't afford even the subsidised deposits will lose out. The hope is that increased building will offset that effect, but that hope is looking slim.

What could work instead? It's in the proposed solutions that the ASI becomes most noticeably libertarian; the fact that there is broad agreement that interventions need to be on the supply side does not mean that there's broad agreement about what those interventions should be. And so the report suggests:

Releasing limited amounts of farmland for suburban development… radical liberalisation of urban planning laws… and the abolition of mandatory affordable housing provision in new housing development.

Of those, the liberalisation of urban planning laws is the most likely to get widespread support: from maximum height restrictions to requirements for car parking, there are a number of regulations which prevent us from making the best use of inner-city space. But to the ASI's suggestions might be added a nationalised programme of housebuilding, either paid for with a land value tax or deficit funded as a stimulus measure, or major investment in public transport, opening up greater areas of the outskirts of cities to inner-city population density. The institute probably won't like those ideas as much, but even they might agree they are better than what we have at present.

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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Debunking Boris Johnson's claim that energy bills will be lower if we leave the EU

Why the Brexiteers' energy policy is less power to the people and more electric shock.

Boris Johnson and Michael Gove have promised that they will end VAT on domestic energy bills if the country votes to leave in the EU referendum. This would save Britain £2bn, or "over £60" per household, they claimed in The Sun this morning.

They are right that this is not something that could be done without leaving the Union. But is such a promise responsible? Might Brexit in fact cost us much more in increased energy bills than an end to VAT could ever hope to save? Quite probably.

Let’s do the maths...

In 2014, the latest year for which figures are available, the UK imported 46 per cent of our total energy supply. Over 20 other countries helped us keep our lights on, from Russian coal to Norwegian gas. And according to Energy Secretary Amber Rudd, this trend is only set to continue (regardless of the potential for domestic fracking), thanks to our declining reserves of North Sea gas and oil.


Click to enlarge.

The reliance on imports makes the UK highly vulnerable to fluctuations in the value of the pound: the lower its value, the more we have to pay for anything we import. This is a situation that could spell disaster in the case of a Brexit, with the Treasury estimating that a vote to leave could cause the pound to fall by 12 per cent.

So what does this mean for our energy bills? According to December’s figures from the Office of National Statistics, the average UK household spends £25.80 a week on gas, electricity and other fuels, which adds up to £35.7bn a year across the UK. And if roughly 45 per cent (£16.4bn) of that amount is based on imports, then a devaluation of the pound could cause their cost to rise 12 per cent – to £18.4bn.

This would represent a 5.6 per cent increase in our total spending on domestic energy, bringing the annual cost up to £37.7bn, and resulting in a £75 a year rise per average household. That’s £11 more than the Brexiteers have promised removing VAT would reduce bills by. 

This is a rough estimate – and adjustments would have to be made to account for the varying exchange rates of the countries we trade with, as well as the proportion of the energy imports that are allocated to domestic use – but it makes a start at holding Johnson and Gove’s latest figures to account.

Here are five other ways in which leaving the EU could risk soaring energy prices:

We would have less control over EU energy policy

A new report from Chatham House argues that the deeply integrated nature of the UK’s energy system means that we couldn’t simply switch-off the  relationship with the EU. “It would be neither possible nor desirable to ‘unplug’ the UK from Europe’s energy networks,” they argue. “A degree of continued adherence to EU market, environmental and governance rules would be inevitable.”

Exclusion from Europe’s Internal Energy Market could have a long-term negative impact

Secretary of State for Energy and Climate Change Amber Rudd said that a Brexit was likely to produce an “electric shock” for UK energy customers – with costs spiralling upwards “by at least half a billion pounds a year”. This claim was based on Vivid Economic’s report for the National Grid, which warned that if Britain was excluded from the IEM, the potential impact “could be up to £500m per year by the early 2020s”.

Brexit could make our energy supply less secure

Rudd has also stressed  the risks to energy security that a vote to Leave could entail. In a speech made last Thursday, she pointed her finger particularly in the direction of Vladamir Putin and his ability to bloc gas supplies to the UK: “As a bloc of 500 million people we have the power to force Putin’s hand. We can coordinate our response to a crisis.”

It could also choke investment into British energy infrastructure

£45bn was invested in Britain’s energy system from elsewhere in the EU in 2014. But the German industrial conglomerate Siemens, who makes hundreds of the turbines used the UK’s offshore windfarms, has warned that Brexit “could make the UK a less attractive place to do business”.

Petrol costs would also rise

The AA has warned that leaving the EU could cause petrol prices to rise by as much 19p a litre. That’s an extra £10 every time you fill up the family car. More cautious estimates, such as that from the RAC, still see pump prices rising by £2 per tank.

The EU is an invaluable ally in the fight against Climate Change

At a speech at a solar farm in Lincolnshire last Friday, Jeremy Corbyn argued that the need for co-orinated energy policy is now greater than ever “Climate change is one of the greatest fights of our generation and, at a time when the Government has scrapped funding for green projects, it is vital that we remain in the EU so we can keep accessing valuable funding streams to protect our environment.”

Corbyn’s statement builds upon those made by Green Party MEP, Keith Taylor, whose consultations with research groups have stressed the importance of maintaining the EU’s energy efficiency directive: “Outside the EU, the government’s zeal for deregulation will put a kibosh on the progress made on energy efficiency in Britain.”

India Bourke is the New Statesman's editorial assistant.