What’s the best way of spending an extra £2bn to boost housing output? Is it really to give every first-time buyer couple a lump sum of up to £6,000?
George Osborne has committed future governments to spend £2,165 millions over the next five years to subsidise first-time buyers towards building their deposits. This is a new spending commitment: the Office of Budget Responsibility has already flagged it up as one of only five ‘very high risk’ Budget proposals, and it’s the most expensive of the five. The cost estimate is little more than a shot in the dark – if you’re giving money away from a supposedly bottomless pot, how can you possibly know how many people will want to dip into it?
It’s not as if this is the only ruse by the Chancellor which is stacking up commitments for future governments. As the UK Housing Review 2015 shows for the first time, the measures to boost the house market or subsidise developers were already due to clock up a massive figure over the period to 2020. The Budget give-away (sorry, ‘Help to Buy ISA’) brings the total commitment in terms of grants, loans and guarantees to a staggering £33bn. As Jules Birch asked in his live blog on the Budget, what would the reaction have been when the government first proposed equity loans (Help to Buy 1) and mortgage guarantees (Help to Buy 2), if it had said the next stage would be to give people free money?
It so happens that the sums now being allocated towards boosting the market are precisely double the total of grants, loans and guarantees for building affordable homes (£16.5bn). Furthermore, just looking at grants alone, the ISA scheme means that the government is now committed to direct spending over £2.7bn on the private market. To put this in perspective, this is equal to 58% of the commitment in grant over the same period to the Affordable Homes Programme (£4.7bn). Is Osborne really saying that handing over dollops of cash to first-time buyers can be justified, while the supposed need to tackle the deficit is forcing down direct investment in affordable house building to its lowest level for more than a decade?
This not only makes nonsense of government arguments about austerity, it also shows yet again that the government favours the better-off, as of course the scheme will dispense money in inverse proportion to need. Why? – because the lucky couples who have the incomes (or the bank of mum and dad) that enable them to save the maximum of £24,000 will hit the jackpot – £6,000 – in terms of government subsidy towards their deposit. It is not difficult to see that the scheme might be so attractive that it costs much more than the amount budgeted for it, perhaps forcing a cut in the already depleted Affordable Homes Programme.
And to make the most obvious point last, if a tranche of first-time buyers suddenly has access to bigger deposits, while supply of new housing continues to stagnate, the likely effect is a boost in house prices. In other words, while some lucky ISA holders will now get onto the property ladder, for those who can’t save as much it will be even more difficult than before to buy their first home. Given evidence from Zoopla that the current Help to Buy scheme is already feeding higher prices while having little effect on supply, this outcome seems inevitable. But perhaps this is just what Osborne quietly wants to achieve?
It’s perhaps not surprising in an election period that the government has given up on rational attempts to increase house building in favour of making promises of free money. But as Jan Crosby of accountants KPMG cryptically commented: “It would be better to have an ISA to help fund the building of new homes – not the buying of them.” Indeed. However, a future Labour government could do even better, it could put this money towards bringing housing investment back up to the levels achieved in 2010, as Red Brick has just argued. Someone has to call a halt to this housing market madness, who will have the guts to at least describe it as what it is?