Despite bits and pieces to encourage provision of a few more affordable homes within the social sector, the big housing news from last week's budget was that the government is seeking to expand home ownership again after a decline in the number and proportion of homeowners since 2005.
Despite bits and pieces to encourage provision of a few more affordable homes within the social sector, the big housing news from last week’s budget was that the government is seeking to expand home ownership again after a decline in the number and proportion of homeowners since 2005.
The first such decline in living memory and a sure sign that entry into the UK’s housing market has reached saturation point.
A £3.5bn government investment fund will provide shared equity loans of 20 per cent to buyers of newbuild homes with homebuyers having to provide only a five per cent deposit themselves.
The remaining mortgage will consequently be set at 75 per cent.
A further £130bn will be made available to extend the mortgage guarantee scheme whereby 15 per cent of mortgages on both newbuild and existing homes granted by lenders are covered by the government with home buyers having to again come up with a five per cent deposit.
There are a number of problems with the approach. Not least is the risk of creating yet another housing market bubble by driving-up demand without a corresponding supply of new housing to keep house prices stable.
Many economists, including at the Bank of England, now see the UK’s obsession with home ownership as responsible for sucking in borrowing that could have been invested in industry or research and development of new products and services.
Instead, hyper-inflationary house price rises enabled those already on the property ladder to subsidise stagnant wages through cheap credit on the back of housing equity while pricing-out new housing market entrants; a giant pyramid scheme that came crashing down in early 2008, nearly taking the UK economy with it.
The renewed support by government for expanding home ownership through subsidies for housing costs reflects a long-term trend in UK housing of transfer of subsidy from productive bricks and mortar activity to support rising rent and mortgage costs: for every £1 of housing subsidy in 1979 £1 was invested in building new housing.
Today, the ratio is £5:1 – part of the reason for the ballooning housing benefit bill, with the chancellor’s announcements set to widen this ratio.
Whether the new mortgage support schemes, which are largely political responses to the UK’s housing crisis rather than economically rational, will tackle deep-seated affordability problems in the UK’s housing market are also questionable. The median house price to median incomes remain stubbornly high at 6.7, only marginally down from 7.2 at the height of the boom in 2007.
Under the Help to Buy scheme, homebuyers seeking to purchase an average home – valued at almost £163,000 by the Land Registry – will need to have a deposit of £8,000 at a time of stunted wage growth and where households are paying down debt rather than saving.
Adding the £8,000 to the government contribution of around £32,000, potential homebuyers will then need mortgages of approximately £123,000 – still more than five times the median income: a marginal improvement in affordability only.
The budget’s housing announcements are unlikely to address the key problem of affordable housing supply in the UK, nor will they assist first time buyers greatly at a time of low confidence in the future and a flatlining economy.
However, if they are successful in stimulating the housing market, we may rue the economic consequences through another housing market crash in the near future.
Far better would have been government investment or subsidy directly in new supply – both social and affordable – to stimulate economic growth through employment and renewed demand in supply-chain products and services associated with construction. We might call it Plan B, I suppose.
Leave a Reply