The “help to buy” scheme looks like giving a modest boost to home sales and, in time, a modest boost to home construction and hence economic growth. But far from reducing the gap between the have-homes and have-nots, it may in the medium term have the opposite effect – making homes in Britain even more expensive than they need to be.
That is the problem with economic intervention. There is a long and inglorious history of policy initiatives having unintended adverse consequences. Take quantitative easing. It has probably given some boost to the economy and probably helped put a floor under house prices. But it has also deeply damaged pension funds because of the way the funds’ liabilities are calculated.
Earlier this year we got the first part of the scheme, the equity loan, where people can borrow interest-free (but with conditions) from the Government. Now we have this second element – the mortgage guarantee. The general perception is that the first bit has already given a boost to house prices; as for the second, since some people will get larger mortgages than they would otherwise get, that too is likely to lead to higher prices.
Is that unreasonable? Well, put it this way: is it conceivable that pumping more money into housing and guaranteeing parts of people’s mortgages might reduce house prices? The answer must be “no”. Indeed, the impact could only be neutral if the supply of housing increased by as much as the demand, something that, in the short term, simply cannot happen.
So the next question is how big the increase in prices is likely to be. Here we should be cautious because we simply don’t know. The first part of the scheme, costing £3.5bn, sounds big, but it is equivalent to about 0.1 per cent of the value of the housing stock of the UK. So in terms of the total market it is tiny. However, all economic intervention works at the margin and it does seem to have had some impact. What matters far more is the need for housing, and particularly the increase in the population, both of which are skewed towards the South-east.
A common-sense conclusion would be that homes overall will be 3-5 per cent higher than they would otherwise have been, but maybe more in the South. Will supply rise to meet demand? Well, maybe a bit, but remember that supply did not increase much during the great property boom running up to 2007.
Now move to the impact of higher house prices. At the margin these support consumption. People not only feel richer; they are richer, at least on paper. We won’t go back to the levels of equity take-out of the boom years, when households almost stopped saving altogether, re-mortgaging to maintain their lifestyles. But some of the additional value of higher homes will leak out into consumption, and the very act of moving home boosts sales of consumer durables. When you move you put in the new cooker.
But higher home prices help the rich. So a policy that purports to help first-time buyers, and on the face of it does, actually gives greatest help to existing home-owners. Those with the most valuable homes get the biggest gains. A well-intended policy that seeks to decrease inequality by helping people get into their own homes who might not otherwise be able to do so, could actually end up increasing inequality.
It may however help the Government get re-elected. As Capital Economics pointed out in a note yesterday, the popularity of the incumbent government in recent years has been closely linked to house prices. Renters suffer if prices go up, but there are more owners than renters and owners are more likely to vote. Not for the first time, dodgy economics may be good politics, at least for a while.
Don’t give the baby too much credit
So the royal baby may be worth $375m (£245m) to the British economy? That was the rather sweet story running on Bloomberg TV yesterday, based on some work by the Centre for Retail Research in Nottingham. But before you take it too seriously, ponder three things.
First, money spent on buying royal-related stuff is money not available to be spent on something else. Second, is it really credible that more people have visited London just to catch the buzz associated with the event? Third, even if it were correct, that £250m is minimal when set against the £1,000bn of annual consumption in the UK.
The big point here is that high-profile public events – the most recent example being the Olympics – are not that important in economic terms.
The authorities scratched around and concluded that the Olympics had brought a £10bn boost to the economy but that was only by throwing in investments that would surely have occurred anyway, such as a shopping centre on the other side of London. Economic prosperity depends on getting the really big things right, such as fiscal, monetary and regulatory policy; not hosting a great Olympics or the birth of a future king. Sorry to be a spoilsport.
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