Why ‘Help to Buy’ is the wrong solution to the wrong problem

I don’t like offering immediate knee-jerk reactions to new policy announcements these days, because there are already plenty of people out there who do that for a living, but today I’m making an exception. To be fair, housing is an issue I’ve been thinking about and writing on for a long time (I first tackled it when I was a student journalist in Oxford a couple of years ago, although mercifully The Oxford Student appear to have removed the piece from their online archive) so with any luck my reaction will be more immediate than knee-jerk. Anyway, here goes.

First of all, it seems to me that the politics of this issue has become strangely inverted: on the one hand, the Thatcherite Tories and acolytes of supply-side economics are eagerly championing a neo-Keynesian solution that artificially stimulates demand. Meanwhile, Red Ed last week echoed Harold Macmillan’s pledge to build 300,000 homes a year (although Miliband set a more modest target of 200,000 a year), made when Supermac was the Conservative Housing Minister in the early 1950s.

Another anomaly that’s worth reflecting on is the fact that quite often the very same people who are most hawkish about the dangers of inflation to our economy and who believe it is absolutely right that the Bank of England’s Monetary Policy Committee focus its attention solely on keeping inflation down when it comes to set interest rates (ignoring other, arguably more important economic indicators like the unemployment rate), will often cite rising house prices as a key benchmark of economic health. This hypocrisy is eloquently dissected by the Rt Revd Dr Peter Selby here.

So why am I, despite my own neo-Keynesian tendencies, on Miliband and Macmillan’s side, rather than Cameron and Osborne’s side, on this issue? Well, let’s look at some graphs (and no they’re not Google Ngrams for a change). This page has a number of useful ones, starting with the third graph down which shows the way that UK house prices have sky-rocketed since 1970. Of course this is fairly meaningless unless you also take into account what’s happened to average earnings. The two graphs that really tell the story of what’s been going on over the last few years are the fourth one down, which shows the ratio of house prices to earnings for first-time buyers, and about half way down the page, the graph which shows the ratio of house prices to income for the population as a whole.

What these graphs show is that despite the recession, house prices have held relatively steady at around five times average income nationwide since peaking in 2005. 30 years ago the ratio was closer to 3:1. As you’d expect the figures are most extreme for London with the ratio of house prices to earnings for first-time buyers once again surpassing 7:1 earlier this year (and bear in mind that statistic only counts the people who are able to get on the property ladder, not the millions of Londoners who rent, many of them because they can’t afford to buy).

I happened to tune into Pienaar’s Politics on 5Live this morning in time to hear the Chancellor of the Exchequer saying that there is no housing bubble outside of London (I paraphrase slightly). This may or may not be the case, but with 1 in 8 Britons living in London, you’d have thought Mr Osborne would need to bear us Londoners in mind when he crafts policy. In any case, bubble or no bubble, the ‘Help to Buy’ scheme looks like a sure-fire way to create one.

If we go back to the page of graphs and scroll just a little further down, there are a number of extremely telling graphs showing what’s happened to housing supply over the last few years. Interestingly, overall housing completions across all sectors peaked in 1970 and have been in steady decline ever since, which is the mirror image of what’s happened to house prices.

To cut to the chase, any idiot who has even the most basic grasp of economic principles could look at this data and tell you that the problems in the UK housing market are overwhelmingly on the supply side not the demand side. What’s more, anyone with a memory longer than a goldfish’s can probably recall that one of the major causes of the global financial crisis, the consequences of which we’re still suffering today, was banks lending mortgages to people who really couldn’t afford them. Yet today, the government in its infinite wisdom seems to have overlooked the fact that a partial guarantee of mortgages that the banks would otherwise deem too risky to offer is almost certain to lead to a recurrence of the same problem. Yet more taxpayer money will inevitably be channelled (either directly or indirectly) towards the banking sector, which has already done outrageously well out of government largesse over the last five years.

That’s why I still agree with my student self: this is the touchstone political issue for my generation. Like our parents and grandparents before us, we have been encouraged to aspire to owning the roof over our heads, but that dream now looks increasingly unaffordable. The trends in the housing market of the last forty years have suited older generations who’ve been happy to see the value of their home go through the roof (apologies for the semi-intended pun). Politicians have acquiesced in this, knowing that to piss off the baby-boomers would be electoral suicide.

But now it appears we have reached breaking point and our two main political parties are offering diametrically opposed solutions to the problem. And I for once don’t feel like sitting on the fence. I’m going to pin my colours to the mast and say I’ll be voting Labour at the next election (assuming the house-building pledge makes their manifesto).

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