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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