Housing Policy Madness

The British Government is set to announce a new initiative to stimulate the housing market...
The British Government is set to announce a new initiative to stimulate the housing market. The main plank of this scheme is a mortgage indemnity scheme which is intended to make it easier for buyers to obtain mortgages. The Government are also reviving the right to buy policy for council housing.

The argument for the mortgage indemnity scheme is that it is currently almost impossible for first-time buyers to get a mortgage. To the Government, this looks like a win-win policy as it will make it popular with first-time buyers and help to stimulate the housing market and thus the economy in general. A pick-up in the housing market would both encourage more house-building and increase the perceived wealth of existing house-owners. However, there are some very obvious flaws in the idea. For a start, the ratio between house prices and income is already high (see housepricecrash.co.uk). Anything which makes it easier for first-time buyers to get a mortgage will tend to push up prices even further in the short term. Moreover, we currently have interest rates at a record low; when they rise back from 0.5% to, say, 5%, there is a great danger that many recent buyers will not be able to meet their interest payments and will default. This sudden but predictable collapse in affordability will cause a steep fall in property price, leaving many forced sellers in negative equity. We do not yet know the details of the mortgage indemnity scheme but it seems inevitable that it will either bankrupt many house-buyers of cost tax payers a vast amount of money. Either way, it is likely to plunge the country into a deeper recession than we have recently experienced.

The right to buy policy deserves little discussion. The original scheme introduced by Margaret Thatcher was an unmitigated disaster, transferring vast amounts of public money and housing stock to private individuals. The new scheme at least intends to recirculate the proceeds of the sales into public housing but is still likely to leave the tax-payer seriously out of pocket. Very nice if you’re a builder, though.

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