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You can find the current article at its original source at http://www.guardian.co.uk/commentisfree/2013/mar/21/help-to-buy-scheme-distorted-housing
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| Help to Buy: a great way of distorting an already distorted housing market | Help to Buy: a great way of distorting an already distorted housing market |
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| Housing finance has long been a particular weakness of the UK economy. Three of the past four deep recessions in the UK have been associated with banking distress connected to the property market. Whether or not clarity is achieved over whether the Help to Buy scheme can be used for second homes, it is a missed opportunity for real reform – and will actually make matters worse. The government insists it wants to remove the implicit government subsidy to the banking sector – but this scheme represents a not-so-hidden subsidy from taxpayers at large to the banks and a few, relatively well-off, homebuyers. It may push up house prices in London and the south-east, but it will do nothing to address the fundamental problems in our housing finance system. | |
| The first part of the scheme is an extension of the largely unsuccessful First Buy scheme from first-time buyers to those buying a newly built house. The objective is sensible, but the design of the scheme means that it will mostly benefit housebuilders. But the real news, and the vast bulk of the new money – £12bn – is an entirely new proposal. The government will offer banks a guarantee on high loan-to-value mortgages – mortgages for between 80% and 95% of property value – on existing as well as new houses, both for new borrowers and those wishing to refinance. If a borrower defaults, the first loss will fall not on the bank that made the loan, but on the taxpayer. And it is for banks to decide which of the qualifying mortgages they want to keep and which they think are sufficiently risky that they want to pass the first slice of credit risk on to taxpayers. | The first part of the scheme is an extension of the largely unsuccessful First Buy scheme from first-time buyers to those buying a newly built house. The objective is sensible, but the design of the scheme means that it will mostly benefit housebuilders. But the real news, and the vast bulk of the new money – £12bn – is an entirely new proposal. The government will offer banks a guarantee on high loan-to-value mortgages – mortgages for between 80% and 95% of property value – on existing as well as new houses, both for new borrowers and those wishing to refinance. If a borrower defaults, the first loss will fall not on the bank that made the loan, but on the taxpayer. And it is for banks to decide which of the qualifying mortgages they want to keep and which they think are sufficiently risky that they want to pass the first slice of credit risk on to taxpayers. |
| The economic rationale for designing a mortgage market intervention in this way is almost impossible to understand. There are well-known market failures in both the retail and wholesale markets for mortgages, so there's plenty of scope for radical reform. But, instead of explaining what problem it is trying to solve and how, the Treasury has created yet another subsidy for banks. Worse still, the structure of the subsidy will weaken competition even further by propping up incumbent banks and perpetuating an unreconstructed housing finance market with fundamental weaknesses. | The economic rationale for designing a mortgage market intervention in this way is almost impossible to understand. There are well-known market failures in both the retail and wholesale markets for mortgages, so there's plenty of scope for radical reform. But, instead of explaining what problem it is trying to solve and how, the Treasury has created yet another subsidy for banks. Worse still, the structure of the subsidy will weaken competition even further by propping up incumbent banks and perpetuating an unreconstructed housing finance market with fundamental weaknesses. |
| What about housebuyers? To the extent that they see any benefits, it will push up demand and hence prices, resulting in further distortions in an already distorted market. This will redistribute wealth from the poor to the rich and from those who don't own houses to those who do. It will neither build any new houses nor make existing ones more "affordable" in any meaningful sense. | What about housebuyers? To the extent that they see any benefits, it will push up demand and hence prices, resulting in further distortions in an already distorted market. This will redistribute wealth from the poor to the rich and from those who don't own houses to those who do. It will neither build any new houses nor make existing ones more "affordable" in any meaningful sense. |
| As always with these schemes, take-up and impact will come down to the fee that the government will charge for the guarantee. The Treasury says this will be on a "commercial" basis, whatever this means; since this would severely limit its impact, it seems highly implausible. Meanwhile, the scheme has been cleverly designed so it does not add to the headline borrowing measure – even though the risk, if the guarantees are ever called, rests firmly with the taxpayer. Given that it's precisely the high-risk part of the mortgage being guaranteed – on the highest risk mortgages – this looks like yet another of the many accounting gimmicks in the budget that seem designed to obscure the true state of the public finances. | As always with these schemes, take-up and impact will come down to the fee that the government will charge for the guarantee. The Treasury says this will be on a "commercial" basis, whatever this means; since this would severely limit its impact, it seems highly implausible. Meanwhile, the scheme has been cleverly designed so it does not add to the headline borrowing measure – even though the risk, if the guarantees are ever called, rests firmly with the taxpayer. Given that it's precisely the high-risk part of the mortgage being guaranteed – on the highest risk mortgages – this looks like yet another of the many accounting gimmicks in the budget that seem designed to obscure the true state of the public finances. |
| The chancellor claimed again in his speech that "you can't cure a crisis caused by debt with more debt". Apparently, this only applies to direct government borrowing to build schools, roads and hospitals. When it comes to off-balance sheet financing to shore up the banks by taking first losses on high-risk mortgages, this does not apply. Unfortunately, rather than tackling today's economic problems, this will simply sow the seeds of tomorrow's crisis. | The chancellor claimed again in his speech that "you can't cure a crisis caused by debt with more debt". Apparently, this only applies to direct government borrowing to build schools, roads and hospitals. When it comes to off-balance sheet financing to shore up the banks by taking first losses on high-risk mortgages, this does not apply. Unfortunately, rather than tackling today's economic problems, this will simply sow the seeds of tomorrow's crisis. |