Friday, 18 October 2013

Charles Goodhart promotes “Help to Buy”!!!!!

Help to Buy is a recently introduced subsidy for house buyers in the UK. It’s the sort of questionable policy you’d expect from a politician. But Charles Goodhart backs it and he is a highly respected economist. So his arguments should be interesting.
The first reason that he and his co-author (Melanie Baker) give is:
“It will help address to a gap in the market for affordable housing.” Well, yes  - obviously. But it does so by subsidising a large number of house buyers other than those who don’t find housing “affordable”.
You might as well argue men’s incomes should be boosted because some men are poor.
Reason No.2 is that “Supply-side dynamics should respond from historically low levels to this stimulus if house builders have confidence in its duration.” That’s a fancy way of saying that if you subsidise something, more of it will be produced. Well that’s technically correct, but it leaves unanswered a more fundamental problem: is the supply of housing optimum? If it isn't, then obviously there is a case for a subsidy. But numerous so called “professional economists” have a problem with that concept “optimum”.
Moreover, given the arguments over “it” (i.e. Help to Buy) which are being aired in public, no builder will have a huge amount of confidence in Help to Buy staying in place.
Reason No3 is: “The private sector could take over some or all of this role after year 3 – by privatisation of the nascent mortgage indemnity insurer, by introducing private competition, or via re-insurance.”
Oh dear, oh dear. Help to Buy is of course a form of insurance: governemnt  insures lenders against mortgagors defaulting. But  if such insurance is viable or profitable, why aren’t private insurers already in this market? Reason is, of course, that it’s NOT PROFITABLE. Or put it another way, Help to Buy is what we all know it is: a taxpayer funded subsidy.
Reason No4: “It could be used as a powerful macro-prudential tool.”
Macroprudential policy is policy designed to avoid systemic risks: like  - er – people borrowing excessive amounts for housing. NINJA mortgages are an example, and they helped tip us into a credit crunch. So Goodhart and Baker are saying that far from DISCOURAGING excess borrowing, we should encourage it, but that the taxpayer should prevent those risks having systemically dangerous effects. Now that's a very novel use of the word "macroprudential". That needs thinking about.
Next, Goodhart and Baker claim that house building is currently 18% below long term trend. So? Demand for cars, bananas, restaurant meals, you name it may be 20% above or below trend. Who cares? We live in a FREE MARKET, not a communist centrally planned state – at least I hope we do. And in a free market consumers can spend more on housing, or less, just as they please.
Next, Goodhart and Baker twice claim that more house building is “critical” to the economic recovery. They don’t give any reasons, and I’m not surprised.
I can’t for the life of me see why lack of demand for any one consumer product should prevent demand for and supply of other products rising.
Conclusion: Goodhart and Baker need to go back to the drawing board.

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