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20 March 2013updated 26 Sep 2015 2:46pm

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.

By Alex Hern

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.

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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.

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