When the Chancellor announced his two-part Help to Buy scheme in the Budget last month it was met with a chorus of disapproval. Representatives from the mortgage and construction industries – who, of course, have a financial interest in seeing the scheme implemented – were positive about it. Pretty much everyone else thought it was a pretty dumb idea.
When I reviewed the scheme at the time I noted:
Just about the only perspective from which this initiative makes sense is carrying through on an absolute determination not to add directly to the public sector deficit, but not minding too much if the guarantees get lost amongst everything else in the public debt.
So it probably makes perfect sense to the Treasury.
Otherwise, the scheme has almost nothing to commend it. The economic illiteracy it displays is remarkable. The fact that, coming from the current occupant of No 11, this is no great surprise is perhaps equally remarkable.
The debate has now been joined by the Treasury Select Committee in its report on the 2013 Budget. What comes through clearly from the paragraphs of the Select Committee’s report is that they are not hugely impressed with the Help to Buy scheme. But it is perhaps even more clear is that the Committee is not at all impressed with the quality of thought – or lack of it – that underpins the scheme. They finish their discussion of the scheme with a list of 17 questions they would like the Treasury to answer (para 182). These questions address topics of an absolutely fundamental nature. They are the basics that need to be in place before it is possible to conduct a sensible appraisal of the wisdom of spending more than £15 billion under the Help to Buy scheme. You get the unmistakeable sense that the Select Committee is frustrated, and not a little alarmed, that the Treasury is as yet unable to provide clear answers to even the simplest of questions (Para 177: “As far as can be understood from the Chancellor’s evidence, …”).
Most of the issues covered by the Select Committee report have already been discussed. And the pattern of industry support for the scheme contrasted with scepticism elsewhere repeats itself.
One important further dimension the Select Committee adds to the debate – apart from further weight behind the criticism – is a form of the slippery slope argument.
Help to Buy is intended to be an intervention designed to deal with a temporary “market failure” – although whether this is a market failure in any conventional sense or lenders having a perfectly accurate assessment of the risks associated with high loan-to-value lending in the current market context is a matter of debate. The Select Committee recognises that once the path of intervention in the market has been taken, particularly on such a large scale, there could be considerable difficulties in the Government extricating itself from the situation. Indeed, given that once the guarantee scheme is in place the Government will have a financial interest in keeping house prices elevated in order to avoid losses to the taxpayer, it may well have an incentive to perpetuate the problems we’re facing.
So the Select Committee spent no little time reflecting on the exit strategy from the scheme. It concluded:
175. … Our concern is that, should the current scarcity of high loan-to-value mortgages reflect structural rather than cyclical factors, the pressure for Government to extend the scheme in three years time will be immense. The unintended and unwelcome outcome could well be that a scheme designed to deal with a supposedly temporary problem in the UK housing market becomes a permanent feature of the UK housing market.
176. The decision to out-source to the FPC whether to continue with the scheme may be a recognition that curtailing the scheme after three years will be politically difficult, as has been the case with housing support and subsidy programmes in previous decades. However, it is not clear that, given its remit, the FPC is best-placed to take this decision, nor that the decision should be out-sourced at all. …
178. The closure of housing support measures has often been fiercely resisted. The FPC’s reluctance even to ask for a loan-to-value macro-prudential tool, preferring instead a less politically visible proxy, sectoral capital requirements, is a reflection of this. There is a strong case that such decisions should be made by politicians acting on advice, in this case advice from the FPC.
This last point is telling. We can already see that the FPC itself is not immune from political pressure and factoring political considerations in to its decision making. What reason is there to think that this won’t be the case when we get to 2017? There is a clear danger that the Government is in the process of stumbling thoughtlessly into a set of institutional arrangements that not only make the housing market situation worse but are, for political reasons, very difficult to alter. We risk getting locked in to an even more dysfunctional system.
I have yet to see anything to demonstrate that Help to Buy is the right strategy to pursue. It has very few friends beyond those who are in line to benefit politically or financially from it. This should surely raise alarm bells.
Everyone, including the Treasury, agrees that lack of supply is at the heart of the problems of the housing system. But no one, as far as I can tell, thinks that Help to Buy is the most effective way to address supply issues. It appears that the Treasury Select Committee doesn’t entirely buy the Government’s argument that lack of supply is a result of planning constraints. But it is forthright in its view that rather than messing about trying to deliver new supply through schemes like Help to Buy:
Overall, … if the Government’s priority was housing supply, its housing measures should have concentrated there. (para 171)
Amen to that.
Interesting viewpoint !?
I’m guessing you are not on a low or middle income, nor trapped in rental accommodation costing more than a mortgage would cost.
Very very good post.
For the previous poster, can you tell how this scheme will help us when it is obvious it will increase prices? If anything, this is a negative equity trap for FTB.
The HelptoSell (Sorry helptobuy) does not address the problem but it makes it worse. The real solutions available are:
-Build more houses
-Cap Rents (or force landlords to pass their low rates savings to Rents)
-Introduct Property tax
-Increase interest rates