Help us George, just not like that!

Oh George, what are you trying to do with the housing market?  The help-to-buy scheme is 100% politics and 0% economics. It will boost house prices, as if the Bank of England wasn’t doing enough, and perhaps give a “feel good” factor to the economy in time for the next election.  Perhaps that’s all you care about but its bad news for the UK economy in the medium to longer term.

The trouble with QE is that the cash isn’t getting through to real economy. Banks say this is because there isn’t enough demand for loans so lending isn’t growing quickly. So how do you boost lending to households? Well, one way is to make it easier for them to borrow by reducing the deposit they need to get a mortgage. So George has attempted to tackle the supply/demand breakdown in the lending markets with his help-to-buy scheme.

This might well be his economic argument for this very political policy but it is highly misplaced and dangerous. By introducing the “help-to-buy” scheme he’s making imbalanced supply/demand in the housing market even more imbalanced. Government intervention in broken markets is fine and can help as long as they address the broken bit of that equation. In the case of the London housing market it’s the supply side that’s broken not the demand side. By saying “we want to help young people get on the housing ladder” whilst not addressing the supply side only stores up problems in the future. It’s a very short sighted view at helping the housing market. What happens when house prices go up to such an extent that people can’t even save up a 5% deposit because 5% then is the equivalent to 10 or 20% today? By increasing lending, banks’ profits should improve but it also means that if the government ever wants to get out of this program it will be reliant on the banks to offer 95+% mortgages, something that just a few years ago politicians were saying were unsafe for the economy.

Where are all the houses?

London’s population has risen ever higher over the last 25 years after the Thatcher government made the UK a much more attractive place to do business. Not only this but EU integration has allowed increased migration across countries with many coming to London to find jobs. 

This is all well and good and should be encouraged but London’s rising population has not been matched by increased supply.  Real house prices have risen higher with population growth, an indication of demand outstripping supply. The government continues to do too little to address this problem.

Ldn housing

Another problem today is that fewer families are deciding to move out of London because transports costs have risen substantially in recent  years. This means even less supply is hitting the market.

A couple good links on what’s straggling London housing supply:

The Economist – London house prices 

The Economist –  Belt too tight

 

 

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This entry was posted in Bailout, Bank of England, Banking, BOE, Conservatives, Economics, London, Osborne, Politics, Quantitative Easing, UK and tagged , , , , , . Bookmark the permalink.

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