The cure for the unaffordability of Britain’s housing is not to help people to stretch themselves to get on the “property ladder”. The solution is to make house prices more affordable. You do that by letting prices come down, and by helping people to save by giving them positive real interest rates and more tax efficient savings vehicles.
What the government is doing
The British government is doing whatever they can to keep property prices high and push them even higher. They have enacted a number of policies such as a stamp duty holiday for first-time buyers, the NewBuy Guarantee scheme, and the Rent to HomeBuy scheme. Not to mention the £500 billion of deficit spending and the £375 billion of Quantitative Easing.
However the most effective tool that has been used to support house prices has undoubtedly been the setting of interest rates by the “independent” Bank of England. By dramatically reducing the cost of monthly mortgage payments, record low interest rates have allowed millions of heavily indebted households to remain in their homes.
The Help to Buy scheme
The government’s latest Help to Buy scheme provides home buyers with further assistance when they look to buy a home.
The scheme consists of two options, the first is the Help to Buy equity loan which is and expansion of the First Buy scheme, and is aimed at those buying a new build property. Beginning on 1 April this year, those with at least a 5% deposit will be able to get a loan from the government for up to 20% of the value of the property. The scheme is available on homes with a purchase price of up to £600,000.
The second scheme is the Help to Buy mortgage guarantee. The scheme will be available from January next year and is designed to increase the appetite of mortgage lenders to offer high loan-to-value lending to creditworthy customers. According to the HM Treasury website, it will do this by “providing lenders with the option to purchase a Government guarantee that compensates them for a portion of their losses in the event of foreclosure. The Government will charge a commercial fee for the provision of this guarantee”.
The mortgage guarantee scheme is available to existing homeowners as well as first-time buyers, and can be used to purchase both new build and existing homes. Buyers will still need at least a 5% deposit and the same £600,000 limit applies.
What the government should be doing
What the government should be doing to help make housing in Britain more affordable, is the following:
- Let interest rates rise to at least one percent above the rate of RPI inflation (currently 3.2%).
- Increase the amount of money that savers can invest in tax efficient vehicles such as ISAs.
- Take steps to bring Britain’s estimated 900,000 uninhabited properties back on to the market.
- Embark on a program of affordable home construction on brownfield sites (abandoned industrial and commercial land).
These measures would help buyers to save for a deposit whilst also bringing down overvalued house prices, and increasing the supply of sensibly priced homes.
The bottom line
In the same way that the solution to low prices is low prices, the solution to high house prices, is high house prices, i.e. to let the free market bring about more supply and raise the price of money (interest rates). The bottom line is that we need less government intervention, not more.