Housing bubble threat underscores pressing need to revise Help to Buy
HELP to Buy has been widely criticised by experts, academics and journalists as a dangerous policy. In the long term, in a supply constrained system, simply increasing lending does not build a single extra house. And due to the planning system’s failures, we have an incredibly supply constrained system. From 2000 to 2007 lending doubled, but adjusting for the fact we built smaller flats not family homes, the rise in new housing was zero.
The part of Help to Buy which deals with only new-build properties could be viewed as a real “solution,” reducing uncertainty for developers. Short-term, there is an issue with how development works in the UK.
Because it relies on leverage and pledges of upfront cash for land, developers need to know (nominal) land prices will rise between obtaining land and selling it as part of a finished house. Yet land prices are likely to rise anyway, unless there is a catastrophic melt-down in the credit market. So this aspect of Help to Buy is most likely to just have a moderate effect on prices, though it might boost supply a small amount.
In the longer term, this development model needs reform to build enough homes and reduce construction sector volatility. But there is no time before 2015 for this, and the scheme is worth only £3.5bn – not much in the overall housing market. It is an understandable short-term support to developers, but not a long-term solution to our problems.
Help to Buy’s second element is far more dangerous. Under this scheme, the government will for three years guarantee purchases of any home up to the value of £600,000, including existing properties. It is a £12.5bn scheme to support up to £130bn of new mortgage lending, a substantial increase in credit. In 2012, mortgage lending was just over £140bn, so £130bn is nearly a year’s worth of extra credit. Over three years, it could result in a 30 per cent increase in lending.
This scheme has absolutely no link to wider supply issues. Not only that, it will push credit toward mortgage lending and away from business lending (on top of capital rules that already do this). It effectively recreates something similar to the US Fannie May and Freddie Mac model, by getting the government involved in underwriting mortgage lending (which was a complete disaster).
Even the head of the Council for Mortgage Lending has publicly expressed concerns about how the scheme will operate, and that it risks creating a mini property bubble that will then collapse in early-2017 as the funding is withdrawn.
It is probably too late to scrap this scheme. But that does not mean it could not be heavily revised. The coalition has made pledges to increase custom-build or self-build housing, but it has not implemented policies to support this. Because in Britain, unlike most other countries, only a handful of homes are custom-built, this increases opposition to new homes.
In other countries, new homes are more attractive and spacious, and built for local people. In the UK they are seen as ugly impositions by greedy developers. Of course, there are other huge issues – like pointless and counterproductive regulations and planning requirements, infrastructure concerns, high land prices squeezing out quality, myths spread by irresponsible stakeholders about England running out of green space – but our limited custom-build also helps reduce support for new development.
If the second portion of the Help to Buy scheme was redirected toward guaranteeing custom-build mortgages to pay for people to build their own homes, it would help encourage the growth of a sector that in most countries delivers half of all new homes, reducing political tensions around new development.
The mortgage market in custom-build is limited in England, so it would address a genuine need. It links more credit to increasing supply. The £12.5bn being used to fuel custom-build mortgages for local people would boost the economy without creating a dangerous bubble. Custom-build homeowners will be more grateful to the Tories than those left in negative equity due to Help to Buy’s likely boom and bust.
Changing flawed policy is not an act of defeat, but the mark of a confident politician. Let’s hope the chancellor’s recovering self-confidence lets him look again at Help to Buy. The view is that his stock is recovering with the economy, and his dream of following David Cameron into Number 10 after a 2015 Tory victory is no longer impossible. By blowing a housing bubble, he risks detonating a bomb both under the British economy – and his own political career.