UK moves to reflate housing market

I have talked previously about how the United Kingdom (UK) operates the worst kind of housing policy – one that pumps demand while placing a tight straight jacket on land/housing supply – the outcome of which is both unaffordable housing and a propensity for boom/bust property cycles (see below chart).

Now the UK Government is about to throw more credit fuel on the proverbial housing fire through a ridiculously generous new first home buyers’ (FHBs) subsidy.

According to the press release, the scheme will provide FHBs with a 5% deposit a 20% loan, thus allowing them to obtain a lower mortgage rate on the remaining 75%. Buyers will not pay interest on the loan for the first five years but will do so after that, at rates that are pegged to inflation. The loan must be repaid when they move (or after 25 years) and they will have to return 20% of the sale price (i.e. a form of shared equity loan).

The scheme is only available on the purchase of newly constructed homes and is expected to cost £500m over the next two years – split equally between taxpayers and housebuilders – and should ‘benefit’ around 10,000 people [other articles explaining the scheme can be found here and here].

UK Housing Minister, Grant Shapps, described the policy ‘breakthrough’ as follows:

“With 80 per cent of young first-time buyers depending on parental help, I am determined that we pull out all the stops to help those who want to take their first steps onto the property ladder.

“FirstBuy will do just that – a Government-backed scheme making £500 million available to offer a valuable alternative to the Bank of Mum and Dad. Over the next two years, this will help as many as 10,000 people in England to get that much-needed deposit together and realise their dreams of owning their own home.

“And because this help will be available on newly-built properties, it will also offer a much-needed boost to our housebuilding industry, supporting thousands of jobs across the country.”

As is often the case, demand-side measures such as this scheme are self defeating since they typically lead to higher house prices. Even though this scheme has been targeted only at the purchase of newly constructed homes, it is likely to do little to boost housing supply as the UK’s highly restrictive ‘green belts’ surrounding the major cities – which have been in place for over 50 years – have left little greenfield land available for development. Accordingly, with supply severely limited irrespective of price, the subsidies will simply increase new home prices, thus benefiting the developers taking part in the scheme.

If the UK Government truly wanted to make homes more affordable and prevent future boom/bust cycles it should do two things: (1) significantly increase the quantity of land available for development and reduce planning constraints [remember, only around 6% of Britain’s land is urbanised, so would an increase to 10% really be that evil?]; and (2) abolish all forms of demand-side subsidies.

Unfortunately for the Brits, they are more likely to see pigs fly backwards…

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Unconventional Economist
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  1. That entire policy leaves a bad taste in my mouth.

    More financial engineering and moral hazard just to keep prices up to satisfy the older (and home owning) voters, at the expense of ladelling younger generations with debt they won’t pay off.

    I wonder if the UK Housing Minister has ever been to Ireland?

    i can see this policy put in down here – a HECS system for young home “owners” (sic)….it would be very easy to set up given the profilgate nature of the FHBG/boost etc

    • Plato writes about this generational issue in The Republic. He must have been reflecting on the consequences of the laws of a previous Athenian leader called Draco (the Draconian Laws). His assessment of how an oligarchy changes into democracy has striking similarities with our world today:
      “Then doesn’t oligarchy change into democracy… as a result of lack of restraint in the pursuit of its objective of getting as rich as possible?…
      Because the rulers, owing their power to wealth as they do, are unwilling to curtail the extravagance of the young, and prevent them squandering money and ruining themselves; for it is by loans to such spendthrifts or by buying up their property that they hope to increase their own wealth and influence…
      It should then be clear that love of money and adequate self-discipline in its citizens are two things that cannot co-exist in any society…
      This neglect and encouragement of extravagance in an oligarchy often reduces to poverty men born for better things…
      Some of them are in debt, some disenfranchised, some both, and they settle down, armed with their stings, and with hatred in their hearts, to plot against those who have deprived them of their property and against the rest of society, and to long for revolution…
      Meanwhile the money-makers, bent on their business, don’t appear to notice them, but continue to inject their poisoned loans wherever they can find a victim, and to demand high rates of interest on the sum lent, with the result that the drones and beggars multiply…
      But as the oligarchs reduce their subjects to the state we have described, while as for themselves live in luxury and idleness, physical and mental, become idle, and lose their ability to resist pain or pleasure…
      Then democracy originates when the poor win, kill or exile their opponents, and give the rest equal civil rights and opportunities of office, appointment to office being, as a rule, by lot…”.

      Read ‘The Renaissance of the Polis’ at my website

  2. ‘only around 6% of Britain’s land is urbanised, so would an increase to 10% really be that evil?]; and (2) abolish all forms of demand-side subsidies.’

    bad idea –
    as a net importer of food,
    the UK has already exceeded its
    carrying capacity. As peak oil
    bites, carrying capacity constraints will
    bite even harder.
    The best Ag land is often close to major cities, for very good reasons.
    Peak Oil = economic contraction.
    Declining energy supplies means
    a lot of these debts will never
    be repaid. A surplus of energy allows
    economic activities to out grow the
    cost of servicing debts.
    The growth game is over folks.

    • Peak Oil is rubbish. Just look at the Santos Basin in Brazil and as well as the monster fields in Iraq, which are now being ‘exploited’ not to mention coal to liquids.
      Peak oil, Peak Population, Peak food it all has that religous element of guilt attached for our wicked ways I thought I left behind at high school.

      Repent or else the end is nigh.

      • True, there is no such thing as “Peak Oil” – but there is such a thing as “Peak Cheap oil”, either economically or politically environmentally (but I repeat myself).

        Same with other “peaks” – they are economic system peaks, not necessarily an arbitrary nominal limit.

        • Peak Cheap Oil merely represents the break point at which alternative technologies kick in.
          The “exponential growth, linear reasources” doomsayers completely fail to see the exponential nature of technological progress. The ultimate essay on all this, is “Environmentalism Refuted” by George Reisman.

        • I Agree – oil will never run out, but only get more expensive to extract. You can think of oil as being an infinite resource that gets more expensive to obtain.

    • John Theodorou

      May as well call the laws of nature rubbish.

      Santos Basin? Too little, too deep, too expensive. This is he future as conventional oil declines into oblivion.

      Coal to Liquids? Err, too little, too late, too expensive and coal is not oil. Gotta squeeze it, like blood from a stone.

      Peak everything has nothing to do with wickedness, since God will cause the rain to fall on the just and unjust equally, I’m afraid.

      Best continue your profligate ways – everyone else is or wants too anyway, as the faster this game show ends the better for the rest of the planet and future generations.

      • The fact that expensive and energy intensive processes such as coal to liquids (or things like shale oil, tar sands etc) are even being considered is pretty good evidence that the era of cheap oil is coming to an end.

        I’m not sure why people seem to think that peak oil theory is some extremist nonsense, on a country by country basis it holds pretty well. Oil discoveries peaked in the 1960s, we now use way more oil each year than is discovered.

        The Santos Basin, containing the Tupi oil field, the largest discovery in the Western hemisphere in 30 years, holds an estimated 28.2 billion barrels of oil. That’s less than a year’s supply at 2008 consumption levels.

        • John Theodorou

          Nope swimming in the same sea of unreality that you are, except I can recognise it for what it is.

  3. I am all for this policy because the Brits have clearly not learned their lesson. With a banking system that has a combined balance sheet several times that of its GDP the GFC almost sent the UK into a severe depression.


  4. At the macro level –

    Peak oil/the tightening of oil supply
    a decade ago created the GFC.
    That is rising oil price = inflation = rising interest rates = default

    Every recession that has occurred
    in the last 80 years was preceded by
    a spike in the price of oil –
    adjusted for inflation the price was/is
    above $80 per barrel.
    Economic contraction and the birth
    of funny money/the financialistion
    of everything is a permanent condition
    given the unrepayable debt burdens.

    Given the name of the site, its a shame
    the real ‘macro’ challenges are not openly and thoroughly discussed.

    • But the longest period of sustained high growth, recession-free, in the USA, was the era of Levittowns, sprawl, and massive increases in home ownership and car ownership.
      This has a lot to do with the elimination, possibly for the first time in history, of “planning gain” and the extraction of exploitive “rents” from newly developed land.
      Oil price rises may be what pops house price bubbles, but what creates them, is rent-seeking and “planning” rackets at the urban fringe. The most resilient economies in the world, will be those who successfully continued to avoid this phenomenon. See my later comment.

  5. S

    with thoughts like that you are still
    high school

    data beats hyperbole everytime

    cognitive dissonance indeed

  6. Being a Brit myself I am not so sure about that. I am not sure where you got the figure from, but a quick search brought up this paper from 2005 ( which says
    “according to the most recent definition
    of the term. Urban areas covered 8.9 per cent of the UK’s land

    Take into account that the vast majority of the population live in England, and the majority of those in the area south of Liverpool – Manchester – Leeds.

    If you drive south from there it becomes pretty much a continuous area of development with only the “green belt” areas stopping the whole place being a single urban sprawl. And even in those areas there are constant villages and towns.

      • I think the Lincoln Institute “Atlas of Urban Land Consumption” is the best source of this data. It is full of surprises and myth busters. There is almost nowhere in the world where “overcrowding” is not the result of “too little sprawl” rather than “too little land”. That includes China, India, Pakistan, Bangladesh, and Indonesia.

    • Less than 15% of the land within 1 hours commute of London Charing Cross is urbanised.

      The lack of supply stems back to 1947, when in an act of socialist spite, the govt of the day nationalised the planning system via the Town and Country Planning Act

      Prior to that, private enterprise delivered nearly 1 and 3/4 million classic ‘metroland’ houses built at densities of 8-12/acre in the inter war period for an average purchase price of approximately £25k in todays money.

      The problem from a Labour perspective was that home owners tended to be Tory voters…….

  7. “Same with other “peaks” – they are economic system peaks, not necessarily an arbitrary nominal limit.”

    peak oil is nominal,
    nominal is real not arbitrary

    exponential growth on a finite planet?

    • There was exponential growth in horse manure too at one stage.

      The mistake is assuming that exponential growth will continue past a point of no return, with a sudden crunch and no viable alternatives to the oil economy. Its the same mistake that the Club of Rome made with population and food. Food supply has increased through technological innovation while population growth slows with economic development.

      In reality, with higher oil prices comes greater technological innovation and gradual changes in the structure of teh economy. Peak oil causes major problems iff you believe that we are incapable of finding technological solutions to the problem and adapting.

      I suggest that there is little basis for that assumption; the combination of alternative sources of oil such as such and synthetics (and even hemp, a wonderful source of biofuel that grows almost anywhere, which may just be legalised again in the US) which will stave off a peak oil crisis and imminent energy production advances support the alternative case for adaption as has been historically the case. Other innovations such as telecommuting and improved fuel economy from modern vehicles and a gradual uptake of electric vehicles also slow the demand for oil. I dont see oil demand being exponential for very much longer.

      As for this property ‘boost’ (haha), the UK will get whats coming to them. A combination of terrible economic mismanagement and misguided green policies may just finish off the last of the British empire for good.

      • biofuels are an energy sink

        That is, they have very poor EROEI.
        Energy cannot be invented, most
        new technologies have a questionable
        EROEI – 100 years ago 1 barrel of oil
        produced 100, today it is 1 in 20.

      • Oh good, another “rational optimist”. Pete: keep spreading sanity, mate. Good on ya.

        Recommended reading for all: “The Rational Optimist” by Matt Ridley. “Environmentalism Refuted” by George Reisman.

        “Exponential growth; linear resources” is pessimistic, Malthusian nonsense that is an insult to long-proven human ingenuity. Technological advance is exponential too. The fact that people still buy V8’s and SUV’s show how much fat there still is in the system. People will switch to 80mpg minicars long before they will “stop driving”.

        As for the people whose solution is “living in apartments and catching trains”, what a pack of idiots. IF “peak oil” doomsday really is true, we need extra LOW density living, not high density.

      • John Theodorou


        It’s obvious that you have never read Limits to Growth, since the COR made no forecasts that can be categorically disproven before 2070. None.

        Ok, so we saw oil go from $10 to $150 barrel over the course of a decade; 1998 to 2008. A mountain of money rolled in, but did that put more oil in the ground? No, we have been on a plateau of production for nearly 6 years. Did all the deepwater drilling, biofuel production, talk of hydrogen or widespread appearance of electrified-style cars make a dent on the rising price of oil? No it keeps increasing, even with a swooning global economy.

        After the US-48 peaked in production back in 1971 did it ever recover, despite the most conscientious application of technology and money ever thrown at an oil province? No, the bringing online of Alaska and deepwater gulf oil has not been sufficient to arrest the decline.

        If you think that telecommuting or conservation is going to collect your garbage, deliver food to the supermarket, let alone grow it, you need your head examined.

        At the end of the day nature does not care about your assumptions, prejudices or aspirations. As the saying goes, nature bats last – and it bats 1000%.

        • ‘nature bats last’ + 1

          the biosphere will shake the
          human race off like a bad case of fleas

          • I seem to have indicated this earlier today. The planet will continue. Nature will conquer all. But I haven’t given up on human ingenuity just yet.

          • Montgomery Burns

            well give up on it now then because wingnuts want to ban credit issuance so good luck funding ingenuity.

        • umm US production peaking because they reduced their drilling and stopped building new refineries, not because they ran out of oil.

          You should put a bit more thought into some of your assumptions mate. Telecommuting and conservation might not deliver food to the supermarket, but it reduces oil consumption to allow that food to continue to be delivered.

          You guys seem to think that we are going to hit a wall that says “no more oil” and the world is going to end.

  8. michael francis

    Looks like ‘Peak Property’ for the UK thanks to the FirstBuy scheme.

    No wonder Grand Designs is back.

  9. When it comes to land use policies – the United Kingdom is the classic case of what not to do.

    Unfortunately this “British disease” is well ingrained within the local government / planning communities in Australia and New Zealand.

    The Canadians were more fortunate, in that they have been influenced instead by the Americans.

    • Except Vancouver……! The USA’s California.

      Australia doesn’t just have a “California”, the whole country is “it”. Like Ireland and Britain. It is interesting to read the history of housing in Britain via some really good authors of papers like Alan Evans or Paul Cheshire. It is like an object lesson in “how not to”, or “how to stuff an economy”.

      One hypocrisy is that they say they want to preserve land for food production – yet on the other hand they are busily handing their sovereignty over to bureaucrats in Brussels. Can’t they trust the land-rich nations of Europe to supply them food? Why trust the EU at all then?

  10. There is no such thing as peak oil – just very very expensive oil. i.e. you just need a suitcase full of cash when you go to the bowser 🙂
    Same with peak debt – Theoritically, Greece can still borrow from the market, but the interest rates are catastrophically high.

  11. There are more home owner than home buyers, therefore propping up house prices gets more votes than making housing affordable. We can expect something similar to be proposed at the next Australian election.

    • Exactly. These policies are so hard to reverse, that they might as well be an economic WMD devised by a belligerent power.

      My only hope in all this is that one day, the balance will reverse in favour of the locked-out-of-home-ownership generation. Meanwhile, you see, the dying-off property owning generation will have concentrated ownership of property in fewer and fewer hands.

      But I expect economies to tank terminally long before this point is reached.

  12. feed the banks

    Here’s a thought:
    Instead of govt getting to own 20% of the value of the home, why not they get to own 95%?
    Here’s how: provide FHBs who have a 5% deposit with a 95% loan. (No deposit, no problem, FHB can forego the deposit if they prove they have a pulse).

    What could be cleverer and more inflationary?

    Thank you policy makers of UK for a policy Labor will surely adopt.
    After all, the name of the govt game is ‘Increase RE Prices/Feed the Banks’.

    • “What could be cleverer and more inflationary?”

      A £1-Billion first home owners grant might do the trick.

      If the entry level homes were all to become at least £1-Billion, and all superior property pegged abvoe that, imagine how much wealth they could create, boosting the fortunes of the country to millenia to come.

    • That’s likely to be the solution (eventually) when the housing bubbles burst again.

      Debt for equity swaps. Government/TBTF bank (but I repeat myself) owns 95% of your house, you get 5% (instead of being underwater).

      No loan to service, you give the government/nationalised bank any proceeds upon sale, but you live in it as yours.

      In theory.

  13. I detest my favourite economics and finance blogs getting subjected to “attacks of the Malthusian trolls”.

    The most resilient economies in the world, happen to be the ones where people can still afford gas guzzling V8’s. It’s like the story of the fat guy and the skinny guy adrift in a life raft; when rescued 10 days later, the fat guy has lost 20 kgs and the skinny guy is dead.

    The Darwin Award economies in the world who constrained urban growth and wasted hundreds of billions of their people’s hard-earned money on bubble-level mortgage and rental payments; will be back to the trees and caves and tribal warfare; civilisation will still exist in heartland USA; they will have traded down their gass guzzling V8’s but will still be getting around in minicars of some sort and will still have a modern economy based on low cost urban land and “mobility”.

    • ah… PB, the earth is a sphere,
      there is no away, externalities
      need to be accounted for,
      the economy is the subsidiary
      of the environment not the other
      way round etc etc

      I weep

        • And you miss my point anyway, Arne; about which humans will retain the modern lifestyle the longest. It will be the ones who did not waste half their hard-earned incomes on “bubble value” mortgage and rent payments, and had discretionary income to invest in real capital, r&d, hi technology, etc.

  14. PB,
    I couldn’t agree more,
    this is my favourite blog besides zerohedge of course.

    Be careful you are not guilty of
    confirmation bias. Energy descent
    and the complexity in which this intersect the economy is a challenge few
    understand. I would have thought
    ideas other than the cornucopian
    variety would be welcomed here.

    ‘economics is a dismal science’


    urban designer, melbourne

    • MontagueCapulet

      There’s a middle road between doomer and cornucopia.

      Oil will get very expensive, we’ll be forced to modify behaviour drastically and supplement with LPG, CTL, coal powered electric cars etc.

      Electic cars recharged by coal power stations will allow us to get by for the rest of the century and we’ll eventually replace them with safer nuclear plants.

      After a couple of millenia of thorium power we’ll switch to fusion. If we fumble that one, we’re back to pre-industrial society when the thorium runs out.

      There’s no denying the next few decades could be rough. But it’s a bit early to talk about Oldavai Gorge.

      • John Theodorou


        Sorry, there’s no middle road between denial and physical reality. Nature does not care what you think might happen, which clearly it isn’t since all the technofixes you’re pinning your hopes on are either not occurring, or appearing fast enough for affluent consumer lifestyles to escape the peak oil juggernaut heading its way.

        Perhaps if we had begun a transition 30 years ago you may be able to say this today, but at this late stage and with TPTB determined to preserve the petrol-driven economy (that’s petrol-driven) at all costs, it is, well, far too late.

        As for safe nuclear power, have you been living under a rock these past few months? Does Fukushima and now Ft. Calhoun not ring a bell?

        • There are safer options for nuclear power generation than the current plant designs that are currently being researched.

          The research will probably need more funding to get results sooner, but you can be assured that there are options down the track.

  15. I applaud the British Government. They finally had the guts to nationalize the RE market. Well done. Who needs a private market with all that volatility!

  16. gt – new British housing today at 76 square metres average size, is smaller than the slab developments the East German’s fled from after reunification.

    Last I had read as I recall from the UK based Royal Institute of Chartered Surveyors (RICS), the lead professional property organisation globally, was that there were 1.5 million empty ones now.

    It is remarkable how the British allow the elites to force them in to shoebox living. The Upper Crust do not want the riff raff living anywhere near them on their country estates of course.

  17. El Zorro Dorado

    One wonders at the standard and veracity of the policy advice govenments ( everywhere it seems) are deriving from their bureaucracy. From afar, from deep in the private sector wilds, the adverse ramifications of government involvement in markets seem so obviously detrimental and repetitive, that one feels like taking Ministers by the shoulders and giving them a good shake and the admonishment: ” Do you know what you are doing to your people?”. But of course such would be to no avail; as the purpose of this scheme ( like others elsewhere…think batts and schools and FHBG) is not to rectify disaster, but to give a positive fillip to an ever-deteriorating economic position. In the case of the UK housing market, 500 big ones is a small price to pay for superficially positive ‘action’.

    • Extending short-term middle class welfare to buy votes while simultaneously driving up prices and getting the poor suckers into lifelong debt.

      Obviously not a good idea.. but it does sound like a politically expedient option, which is what most modern governments are all about.

  18. I certainly won’t argue that restrictive planning practices aren’t one of the causes for boom/bust cycles in property. But surely there are other than direct pricing issues at play here – certainly in cities like Australian cities.

    One of the realities of the world in the future will be the ever increasing cost of power, whether for transportation, electricity, whatever. For a city to remain functional, people need to be able to move around, and low-density sprawl will only make that harder and harder to do over time, both through the resulting congestion through additional car use, and through additional costs related to that sprawl.

    Additionally, low density sprawl can increase the amount of electricity used (through transmission loss over additional distances), and through having to provide more facilities to support a bigger infrastructure, such as more and larger water/gas piping and the related pumping requirements.

    There is a need to minimise sprawl from a city planning perspective. Continual unfettered sprawl on the urban fringes might make for cheaper housing, but it certainly won’t make more functional cities as they get larger, and costs to run them increase. A dysfunctional city can’t be an economic plus.

    On the other hand, the idiocy of current negative gearing and capital gains tax breaks as well as the FHOG – well that’s driving a bubble with things that have no justification except to make investors richer.