Sunday, July 31, 2016

Government support for house price inflation

Last week the DCLG published a report 'More people owning their own home'  ( and I emailed the Department to find out whether any research had been carried out into the question of whether the demand side stimuli, on which the previous Chancellor had been so keen, was having the effect of making housing less affordable thereby making schemes like 'help to buy' necessary?

I was pleased to receive the link to a report that had looked into this particular scheme:

I only have the equivalent of an A Level in economics and read the financial pages of various newspapers for over 40 years so perhaps I should defer to the judgement of the eminent authors.  However, the report supplied by DCLG seemed not to answer my question but to actually make it more pertinent.  So I have sent the following email asking whether my take on the findings of the study is correct?

Dear ****

Thank you sending me the report commissioned by DCLG to assess the
'additionality' attributable to  Help to Buy Equity Loans.

The brief was actually not to address my question on the impact on
house prices of lending money to potential purchasers but does give
some clues.

The report emphasises and seems to support the operation of the 'market' and confirms
that the housing market is 'demand led' and that the researcher's approach/analysis  is 'market
led'. However, the plaudits for the scheme are that it would resist
downward pressures (ie a fall in house prices - which some/many people would welcome) and support 'house price appreciation' (making housing less affordable) so that the loans would be repaid! So the answer to my question as to whether the scheme maintained/inflated house prices is
"yes" (and based on deliberate interference in the market).

The report then says that an additional 43% or more dwellings were
built due to the scheme.  It does not answer my question as to how
many more people would have been able to afford to buy or rent if
house prices were say 20% lower in the absence of the inflated prices that could
be asked/paid as a result of the scheme? Of course the developers included in
the study responded by saying that those houses would not have been built.
However, that is because there is no requirement for planning permissions to be
implemented AND most if not all developers have paid prices for land
that factor in existing or inflated house prices.

So, am I right to conclude from this research that these demand side
subsidies all go to those who sell land to developers? and that
actually more people would be able to buy land and houses at the lower
land prices that would result in the withdrawal of the £10 billion
subsidy? Or has this thesis not been tested?


I don't think that a degree in economics (or PPE) is required to see the effect on prices of fueling demand without increasing supply, which is good news as Gavin Barwell the new Planning and Housing Minister has a degree in Natural Sciences. He should be sharp enough to question the purpose and effect of this interference in the housing market and (as a Tory) see the need to build the small houses and flats at prices which people could afford based on the levels of local earnings.


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