Budget 2013: 'Osborne lays foundations for future housing market crash'

Published by Jon Land for 24dash.com in Housing and also in Central Government

Human City Institute Director Kevin Gulliver says we may rue the economic consequences of George Osborne's attempt to stimulate the housing market.

Wednesday’s Budget was delivered by Chancellor George Osborne on the United Nations designated ‘International Day of Happiness’.

The Budget didn’t hold much cheer for social housing although the 1p drop on beer duty may provide meagre compensation for those who indulge; if the breweries pass the saving on to customers that is.

Despite bits and pieces to encourage provision of a few more affordable homes within the social sector, the big housing news from the Budget is the Government seeking to expand homeownership again after a decline in the number and proportion of homeowners in the total household count in the UK since 2005: the first such decline in living memory and a sure sign that entry into the UK’s housing market had reached saturation point.

A £3.5bn Government investment fund will provide shared equity loans of 20% to buyers of newbuild homes only with homebuyers having to provide a 5% deposit themselves. The remaining mortgage will consequently be set at 75%. A further £130bn will be made available to extend the mortgage guarantee scheme whereby 15% of mortgages on both newbuild and existing homes granted by lenders are covered by the Government with home buyers having to again come up with a 5% deposit.

There are a number of key problems with the approach. Not least is the risk of creating yet another housing market bubble by driving-up demand without a corresponding supply of new housing to keep house prices stable.

Most economists now see the UK’s obsession with homeownership as responsible for sucking in borrowing that could have been invested in industry or research and development of new products and services. Instead, hyper-inflationary house price rises enabled those already on the property ladder to subsidise stagnant wages through cheap credit on the back of housing equity while pricing-out new housing market entrants; a giant pyramid scheme that came crashing down in early 2008 nearly taking the UK economy with it.

The renewed support by Government for expanding homeownership through subsidies for housing costs reflects a long-term trend in UK housing of transfer of subsidy from productive bricks and mortar activity to support rising rent and mortgage costs: for every £1 of housing subsidy in 1979, £1 was invested in building new housing. Today, the ratio is £5:1 - part of the reason for the ballooning housing benefit bill - with the Chancellor’s announcements set to widen this ratio.

Whether the new mortgage support schemes, which are largely political responses to the UK’s housing crisis rather than economically rational, will tackle deep-seated affordability problems in the UK’s housing market are also questionable.

For instance, homebuyers seeking to purchase an average home - valued at almost £163,000 by the Land Registry - will need to have a deposit of £8,000 at a time of stunted wage growth and where households are paying down debt rather than saving. Adding the £8,000 to the Government contribution of around £25,000 to £30,000, dependent upon which of the two schemes is accessed, potential homebuyers will then need mortgages of approximately £120,000 - still five times the median income: a marginal improvement in affordability only.

The Budget’s housing announcements are unlikely to address the key problem of affordable housing supply in the UK nor will they probably assist first time buyers greatly at a time of low confidence in the future and a flatlining economy. However, if they are successful in stimulating the housing market, we may rue the economic consequences through another housing market crash in the near future.

Far better would have been Government investment or subsidy directly in new supply - both social and affordable - to stimulate economic growth through employment and renewed demand in supply-chain products and services associated with construction. We could call it Plan B I suppose.