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.

Photo: Getty Images
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The buck doesn't stop with Grant Shapps - and probably shouldn't stop with Lord Feldman, either

The question of "who knew what, and when?" shouldn't stop with the Conservative peer.

If Grant Shapps’ enforced resignation as a minister was intended to draw a line under the Mark Clarke affair, it has had the reverse effect. Attention is now shifting to Lord Feldman, who was joint chair during Shapps’  tenure at the top of CCHQ.  It is not just the allegations of sexual harrassment, bullying, and extortion against Mark Clarke, but the question of who knew what, and when.

Although Shapps’ resignation letter says that “the buck” stops with him, his allies are privately furious at his de facto sacking, and they are pointing the finger at Feldman. They point out that not only was Feldman the senior partner on paper, but when the rewards for the unexpected election victory were handed out, it was Feldman who was held up as the key man, while Shapps was given what they see as a relatively lowly position in the Department for International Development.  Yet Feldman is still in post while Shapps was effectively forced out by David Cameron. Once again, says one, “the PM’s mates are protected, the rest of us shafted”.

As Simon Walters reports in this morning’s Mail on Sunday, the focus is turning onto Feldman, while Paul Goodman, the editor of the influential grassroots website ConservativeHome has piled further pressure on the peer by calling for him to go.

But even Feldman’s resignation is unlikely to be the end of the matter. Although the scope of the allegations against Clarke were unknown to many, questions about his behaviour were widespread, and fears about the conduct of elections in the party’s youth wing are also longstanding. Shortly after the 2010 election, Conservative student activists told me they’d cheered when Sadiq Khan defeated Clarke in Tooting, while a group of Conservative staffers were said to be part of the “Six per cent club” – they wanted a swing big enough for a Tory majority, but too small for Clarke to win his seat. The viciousness of Conservative Future’s internal elections is sufficiently well-known, meanwhile, to be a repeated refrain among defenders of the notoriously opaque democratic process in Labour Students, with supporters of a one member one vote system asked if they would risk elections as vicious as those in their Tory equivalent.

Just as it seems unlikely that Feldman remained ignorant of allegations against Clarke if Shapps knew, it feels untenable to argue that Clarke’s defeat could be cheered by both student Conservatives and Tory staffers and the unpleasantness of the party’s internal election sufficiently well-known by its opponents, without coming across the desk of Conservative politicians above even the chair of CCHQ’s paygrade.

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.