Monday, 30 September 2013

Help-to-buy 2

HTB2 is the bastard son of Help-To-Buy 1 and has just been brought forward by three months so that the Tories can get some cheap cheers at their party conference in Manchester.

HTB 1 and 2 were announced by Chancellor George Osborne in his budget back in March this year. HTB1 started immediately and was fairly uncontroversial. It provided a partial mortgage guarantee for buyers of newly built houses. It is economically neutral because the houses are built to satisfy the demand. Demand increases but so does supply - the net effect is no price inflation. HTB2 was announced at the same time but deferred until 2014. It provides the same mortgage guarantees, but to buyers of existing houses and thus is highly inflationary and likely to cause a house price bubble, followed by a bust.

So the timing of the introduction of HTB2 was always going to be tricky.

HTB is scheduled to last 3 years, ie, until 2016. The next general election, you will recall, is locked in for May 2015. This means we are on the second last Tory conference before the election. Clearly they have made the fine judgment call that if they start HTB2 now that will give it long enough to bring the market to a boil in time for the election but not so long that it has boiled over.

House prices are STILL not counted in the measure of inflation that the government targets (CPI) so HTB2 won't be hitting economic indicators in a bad way. And a simmering housing market generates a lot of positives - home owners feel richer; recent home buyers feel good about themselves and go out and spend on kitchens and carpets and the like; and "property professions" make fat fees.

Of course it is a short-term policy with a high price tag. What home buyers actually need is cheaper houses, not a helping hand to load up with even more debt. HTB will provide 15% equity in a house purchase. How much better would it be if the government just engineered a 15% reduction in house prices? This they could do by simply raising interest rates back to something approaching normal and removing the thumbscrews which are preventing the banks from taking action on delinquent home loans.

But if they took the non-debt route to recovery there would be a period of dismay in the housing market and all the businesses that piggyback onto it. It wouldn't last very long and the lower general level of housing costs would be beneficial forever more: people paying less for accommodation could work for less money and would spend more on other things. Business with cheaper labour would compete more effectively in the world and a bigger market share would come to the UK. The benefits of going down the non-debt route are permanent. Ever more borrowing is a temporary high.

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