Philip Hensher: Stop this property madness

I don't get it. House prices are absurdly high, bearing almost no relation to incomes

Now, I don't know anything about economics, apart from the bits that I like. So it's entirely possible that I'm missing something important here, but I've been trying jolly hard to understand how Gordon Brown's latest wheeze is going to work. I just can't see it, and I wish someone would explain.

Now, I don't know anything about economics, apart from the bits that I like. So it's entirely possible that I'm missing something important here, but I've been trying jolly hard to understand how Gordon Brown's latest wheeze is going to work. I just can't see it, and I wish someone would explain.

The plan is aimed at helping first-time buyers to get on "the housing ladder". Basically, you will be able to buy 75 per cent of your new house; the remainder will be owned equally by the Government and the mortgage company, or the house builder, to whom you will pay rent. There will be an option to buy the stake back, but fundamentally, any first-time buyer will be eligible for what amounts to an indefinite loan from public funds.

As I say, I don't get it. House prices, as everyone knows, are absurdly high, bearing almost no relation to incomes. I have no idea how anyone at all buys a house in London if they don't already have one. Is this not a ludicrously inflationary situation? And - this is really the bit I don't understand - is it really a rational proposal of the Government to keep this ludicrously inflationary situation going by pumping vast amounts of public money into the market?

The figure quoted is £1bn, which, it is anticipated, will help an additional 110,000 people to buy houses by 2010. That is quite a lot of people. The consequences, surely, are obvious; the first wave of new buyers will benefit from the policy, but very quickly there will be 110,000 more people boasting at dinner parties that the house they paid £150,000 for is now worth £600,000. And below that, there will be a new generation of would-be buyers, for whom the Government will have to find more billions, until the inevitable crash comes.

The crash, of course will be much worse than before, and carry with it an entirely new sting. The Government's share of the equity is the first to suffer if house prices fall - more public money. The buyers themselves are cushioned from the collapse, something which would introduce a bizarre imbalance into the market.

Now, as far as I can see, the problem we already have is an excess of demand over supply - something masked by the fact that a lot of people who would like to buy a house can't do so. Effectively, the Government's proposals would just increase that demand.

A report commissioned by the Treasury last year estimated 70,000-120,000 new homes were needed every year to keep house price inflation at reasonable levels. That figure will now have to be revised upwards sharply.

The Government does recognize this necessity, and John Prescott is simultaneously announcing a raft of measures making land more easily available for the building of new homes. Personally, I doubt very much whether such an immense building programme is at all likely to happen.

One and a half million new homes in the next 10 years? Is it really worth it, just to meet the Chancellor's ambition of turning three quarters of us into home owners? Above all, is this a better use of public money than making improvements to existing housing stock?

The situation is clearly unsustainable, and driven by a false belief. Politicians are always explaining the striking fact that the British, much more than other major European countries, are home-owners rather than renters by reference to cultural factors. I doubt that.

The reason why most of us want to own our own homes is that rented property, in this country, is often second-rate or wildly overpriced. Most of it, unlike similar property in Europe, is rented ready-furnished. It is basically something you settle for, rather than something you might be happy about.

But, given the increasing fluidity of many other areas of modern life, surely a lot of people would be very happy indeed to live in rented property if it was fairly priced and well maintained.

I have plenty of friends in Berlin, say, who live in beautiful flats occupying hundreds of square metres, with their own furniture, who, like almost everyone else, pay a few hundred euros a month for it. And, since the market is stable and there is no particular incentive to make a quick buck out of it, they stay there happily for years or even for decades.

You just couldn't do that in London. Firstly, you couldn't find a flat like that. If you could, it would be obscenely expensive, and probably already promised to a Japanese bank. So, you grit your teeth and rent a really horrible flat for a few years. The incentive: not to move up within the rental market, but to get somewhere of your own is very strong indeed.

But the market just can't go on like this, and it won't. If the Government starts putting billions into the pockets of individuals, it will just stave off the collapse a little longer, and blight the landscape with thousands of bleak new estates.

Rather than throwing good money after bad, it would be wiser to start thinking of ways to make the option of long-term renting as attractive as it is in Germany and France. At present, people feel obliged to buy because, in the interests of quality of life, there is little choice. That is not really what New Labour is supposed to believe in.