Graeme Leach is Chief Economist at the Institute of Directors
The IoD has reacted strongly to the extension to the Help to Buy scheme, under which the
Government will guarantee part of a home buyer’s mortgage on properties worth
up to £600,000. In its press response, the IoD said that instead of trying to
pump up prices, the Government should focus on radical reform of planning laws
and reducing local authority charges on developers, to make it easier to build
So why did the IoD react so strongly? It’s basic economics
that if you stimulate demand in a market that exhibits a very steep supply
curve, the stimulus will impact more on prices than output. Yes, the Help to Buy scheme might increase the
supply of properties a little, but those homebuyers will be paying more for
their properties. The Government says that that there is plenty of evidence
that supply will be very elastic to an increase in mortgage availability, so we
can avoid a large price response. We beg to differ. Any increase in the flow
(new builds) of housing is peanuts compared with the overall housing stock.
UK house prices do not look cheap, quite the contrary. They
remain expensive on a long-run comparison of the ratio of house prices to
earnings. Yes, debt servicing measures suggest they’re more affordable, but we
can’t take a judgement based on record low interest rates now, which ignores
any future normalisation of interest rate policy in the future. So we have a housing market grossly distorted by the
planning system, where land with building rights can sell on a multiple of 100-200
times agricultural land, and on top of this we propose to superimpose another layer
Of course we recognise that housing transaction levels are
below average but further increasing prices is hardly going to help this
situation in the long term.
There are deeper concerns as well. It will be very easy for
politicians and the electorate to get hooked on this subsidy drug. The
Government may intend the policy to be temporary, but so was Income Tax. Look
how long we took to wean the housing market off MIRAS. One can easily envisage
a situation where future politicians are scared of ending the scheme, because
of the potential negative impact on house prices. Once the scheme becomes
capitalised in house prices it will also become politically embedded as well.
The UK has the smallest, most expensive and densely
populated housing stock in Europe, with 90% of the population living on 9% of
the land. This is a market screaming out for radical supply-side reform. Help to Buy may
provide a temporary feel good factor over the 2014-15 period as house values
pick-up, but there will be a price to pay. There always is.
In a City AM editorial earlier this week, Allister
Heath made two very strong points related to the debate around Help to Buy. The first point relates to
schemes such as the Community Infrastructure Levy (CIL). The second relates to
developer’s land banks. Looking at schemes such as the CIL he said:
“It’s not just
planning that is reducing the supply of homes and increasing their cost but
also hidden taxes in cash and kind that are imposed on new building projects.
These drastically reduce gains that developers can make … there have long been
levies for local government to grab chunks of the planning gain and schemes to
get developers to pay for social housing, schools and new roads as part of the
green light for private housing developments … But there is no free lunch – if
you slap a tax on home construction, somebody will have to pay for it. Fewer
new homes will be built, and those that are will be sold at higher prices”.
With regard to land banks Heath stated:
“It is also true that
sometimes developers do sit on land banks. Yet such behaviour only happens
because of the madness of our planning system and would disappear were land
more easily available … under our current idiotic system land prices keep going
up because of artificial scarcity – so some developers have an incentive to
hold on to ever appreciating assets.”
Heath’s point is very simple. If we had radical
liberalisation of the planning system which made more land available, the
incentives for land-banking would be reduced sharply. The share of land in house prices can obviously vary, but a
reasonable estimate is that it is around 40 per cent. If we really want to help first
time buyers get on the housing ladder, this is where we should focus policy.
The housing market is not a functioning market. A real help to buy policy would
make it one.