UK ‘help-to-buy’: a government inspired mis-selling scandal in the making?
by George Hatjoullis
The type of economics that students are rushing to study at ‘A’ level is ‘market’ economics. They will be taught that, under impossible assumptions, the outcome from private transactions through markets will also optimise social welfare. [Nobody will define social welfare for them but that is beside the point]. They will be told that the use of impossible assumptions is just a conceptual tool and that it is accepted that markets have imperfections and they will then be introduced to the concept of ‘externality‘.
An externality exists if the market outcome in terms of production and consumption is not socially optimal. A modern example is pollution. The level of pollution that would result from purely private transactions is higher than is deemed socially optimal so some government intervention to complete the market or adjust the market outcome is necessary. Correcting for market imperfections is the primary justification for government intervention within the framework of market economics. So let us consider what market imperfection the help-to-buy (HTB) initiative is correcting.
The HTB scheme (http://www.helptobuy.org.uk/) subsidises and in other ways facilitates some people in acquiring a mortgage to buy a property. The implication is that the market is under-providing mortgages to this category of people and that there is a net gain in social welfare by redistributing wealth in favour of this category.[All use of taxpayer money to subsidise one group is a redistribution of wealth]. This is not self-evident.
The market provides mortgages to those it deems to be suitable ‘risks’. The government is thus saying that banks and other lenders are too risk averse in relation to this category. This is odd given that the same government has been berating these same lenders for being too cavalier in their lending in the past. In particular, they have been accused of lending too much (as a percentage of collateral) to marginal borrowers!
Perhaps the problem should be looked at differently. Some people who want to buy a home need help because house prices are too high relative to their incomes. They have been unable to save for a deposit because of low income. The high average level of house prices is also challenging the capacity of this category to repay interest and principle even though interest rates are very low. Perhaps the market is failing to provide a socially optimal level of housing.
If the problem is inadequate housing provision and a constant excess demand for housing then the HTB is merely aggravating the situation by sustaining the excess demand. The externality is sub-optimal housing provision and it is this that the government should be addressing. If it does not do so then it may not be doing those that are using the HTB any favours.
Rising house prices generally favour only those about to leave the housing market or trade down to a less expensive property. The HTB category are generally people who will seek to trade up over time so rising house prices will work against them. Moreover, given that they are, by definition, marginal buyers in financial terms, any small variation in their economic circumstances (unemployment, higher mortgage rates, higher council tax etc) could move them into default. The HTB scheme looks like a case of mis-selling to me!
Why is there excess demand for housing? Building houses does not seem to be unprofitable. The problem, of course, is the limited availability of suitable sites in the areas of demand. This has been caused by successive governments through planning regulations. The green belt and the resistance to high-rise apartments are two important factors. Another is the unwillingness to invest in the infrastructure necessary to support a higher density of population.
The government needs to confront the unpopular implications of the housing shortage and not aggravate the situation through politically expedient schemes that may leave some people in ultimately unsuitable accommodation that they may one day find they cannot afford.