From the TUC

Housing Bubble Economics?

22 Mar 2013, by Guest in Economics

Yesterday I fretted that the government may be abandoning ‘rebalancing’ and instead aiming for an old fashioned property price bubble to help reflate the economy.

Judging by comment pieces over the last two days, I’m not alone:

Martin Wolf, FT:

This is good politics and horrendous economics… The government is encouraging people to leverage themselves up to the hilt in order to buy what is already likely to be overpriced property and, as a result of this policy, is likely to become still more so.

FT Leader:

The UK Government is now in the business of winning over voters by tinkering with mortgage costs and putting a floor under house prices. However reckless this is, if it proves popular there might be more to come.

The Economist:

This is politically savvy: it should boost lending without emptying the Treasury’s coffers (the government only pays out if the loans go bad). But the economics are dubious. It may have no impact on supply, and merely inflate house prices.

Alex Morton (Policy Exchange), Telegraph:

A slow decline, or stable rents and prices, is preferable. But the question is whether we can afford to continue to think of property as a magic money tree – and more importantly, what will happen to our society and economy if the Government does so as well.

Iain Martin, Telegraph:

Combined with financial engineering by the banks, and the financialisation of the economy, the UK economy was made very vulnerable to an international shock. Once again, a big gamble is to be made based on pumping up the housing market.

Ed Conway, Sky:

Surely the objective ought to be to try to raise average incomes rather than mechanically reducing the requirements of mortgage companies when lending out cash. That in turn comes back to the fundamental problem: that Britain’s GDP levels (the aggregated total of incomes across Britain) are still well below the pre-crisis peak, which leaves everyone – first-time buyers included – poorer as a result. Help to Buy won’t in and of itself do anything to help that.

Nick Pearce, IPPR:

In other words, the housing bubble remains inflated, and subsidising mortgages based on the presumption of rising prices simply props it up further. The reason first-time buyers and so-called ‘second steppers’ are struggling to afford housing is that prices are so high because rates of new building are so low. The chancellor’s announcement simply perpetuates this cycle, rather than breaking it.

Robert Peston, BBC:

George Osborne’s preference for punting on the housing market rather than on small companies may be the prudent course of action to take, based on the country’s economic history since the Second World War.

Or it may reflect a set of cultural and financial prejudices – houses deemed to be a better investment than proper wealth-creating entrepreneurs – that has been the UK’s curse.

Robbie De Santos, Shelter:

The trouble is, while this makes it easier to get a deposit, you’d be borrowing 95% of already very high house prices, which are way out of kilter with what ordinary people earn. Our calculations – again based on local house prices and local double income households – suggests that the Help to Buy mortgage guarantee would bring the average local home within reach of the average double income household in only 16% of the country.

Joe Sarling, Comment Today:

No major increase in supply and no incentive for private developers to build will only lead to higher prices. The Government will combat these high prices with, essentially, easier credit which means people on stagnant wages take on debt and the Government takes on some risk.

5 Responses to Housing Bubble Economics?

  1. Peter Whipp
    Mar 22nd 2013, 1:03 pm

    The sad fact is that we do not know the purpose of this scheme.

    It might be to boost house prices so that people must borrow even more if they buy their own home.

    It might be to boost the construction industry but only 1 in 50 purchases are of newly built homes and half of the cost represents the land upon which they are built. Only 1% of the borrowing under this scheme will therefore boost the construction industry.

    Whatever the purpose, the debt must be repaid. If it is repaid over 40 years, this will impact demand by 2.5% of the borrowing under this scheme. The current depression is the result of the burden of debt that was incurred during the housing bubble.

    Perhaps the purpose is simply to help those who want to sell homes, perhaps second homes, to do so.

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