Nothing gives a homeowner more of a sense of material well-being than the news that house prices are on the up. In our debt-fuelled economy, a property is not just somewhere to live; it is a measure of wealth, a pension fund and security for a bank loan, all in one. Though we might know that owning a house is an unproductive way to get rich, and even that ever-rising prices place an impossible hurdle before those trying to get started, this is still the one and only form of inflation greeted as good news.
Hence the cheers for yesterday’s figures showing that house prices have recorded their biggest year-on-year rise for six months – evidence, it appears, that the economy is at last escaping the post-2008 slump. Meanwhile, there were other numbers which the Government was equally keen to spread – namely that 10,000 people have submitted applications under the Help to Buy scheme introduced by the Chancellor in his March Budget. In this initial stage, the programme offers interest-free loans for five years for anyone purchasing a new home with a value of up to £600,000. In the second stage, which kicks off in January, the state will underwrite £130bn worth of mortgages, to encourage banks to keep lending.
It is not difficult to see the appeal of Help to Buy. The next general election is less than two years away. The Government needs evidence of a growing economy and rising expectations if it is to hold on to office. Help to Buy is putting money into the economy, bringing confidence back to the construction industry, and helping ensure that house prices do not stagnate.
But while the political rewards may be great, that does not make the scheme good economics. Why? Because Help to Buy addresses the wrong problem. The issue is not that there are too few people wanting to buy a place to live; in June alone, 25,000 first-time buyers secured mortgage loans, a 30 per cent increase on the previous year. The issue is a shortage of homes for them to purchase.
Making more money available to buyers, increasing demand without increasing supply, will inevitably push up prices which are already, on average, above the peak reached before the 2008 crisis. As the chief executive of the housing charity Shelter, Campbell Robb, warns: “Some will see house price inflation as good news, but with a priced-out generation and their parents worried about their prospects of climbing on to the property ladder, the result will be many people tempted to overstretch themselves.”
When a mortgage is underwritten by the state, the lender profits if the loan is repaid and the taxpayer loses if it is not. Any such scheme will obviously encourage lenders to be more adventurous, even though it was so-called “sub-prime” loans, made at no risk to the lender, which triggered the banking crisis from which we are still suffering. The bubble has burst once: we do not need to reinflate it.