Back in 2013, , the UK central government launched “Help-to-Buy“, a scheme that provided government mortgage guarantees to marginal borrowers that would not otherwise qualify for a loan. At the time, Help-to-Buy was denounced by the Office of Budget Responsibility and the Treasury alike, who claimed that the scheme would do nothing but force-up the cost of housing, whilst opening taxpayers up to potentially large losses in the event that loans turn sour.
To date, Help-to-Buy has injected a massive £8.9 billion of Government support into the housing market, with a further £10 billion pledged as the scheme has been extended until 2021. Under the scheme, the Government lends up to 20% (40% in London) of the cost of a new-build home, with the buyer adding a 5 per cent cash deposit. The loan is interest-free for the first five years. So far, nearly 170,000 buyers have used Help-to-Buy to enter the housing market.
With this background in mind, The Times has warned that Help-to-Buy could leave a generation of homebuyers in negative equity:
Analysis of house prices in ten towns and cities across Britain has found that homes available under the scheme cost an average of nearly 15 per cent more per square metre than comparable properties that are not eligible.
Experts say the figures show that housebuilders are using the higher budgets of Help to Buy purchasers to ramp up prices and profits, while young people are being left in overpriced homes that they will struggle to sell…
To put it bluntly, subsidies like Help-to-Buy are abysmal policy. They benefit current rather than future home owners, create distorting subsidies that are difficult to remove, raise rather than reduce property prices, sustain the addiction to debt, and further inflate an asset bubble.
Politicians inflate asset bubbles for the simple reason that owners of assets are more likely to vote favourably. This was the UK Government’s gamble: that it could enjoy the housing bubble and delay the burst. It is myopic and selfish. But using first home buyers as cannon fodder and doubling down on housing risks a much bigger debt hangover (and bust) in the future.
Sadly, be prepared for the Scott Morrison to launch a similarly stupid scheme in Australia in a desperate bid to prevent Australia’s housing market from sliding further.