Should the government help people to become homeowners? David Cameron seems to think so, based on the coalition’s new “Help to Buy” scheme. At a cost of £12 billion, the Treasury will offer banks guarantees of up to 15% of new mortgages, making it easier for people to become homeowners. The goal, according to Prime Minister Cameron, is to help those who currently “are trapped in rental accommodation, paying high rent to somebody else for their home.”
For those who are not awash with cash, the alternative to renting involves taking a loan to purchase a piece of real estate that will be used to provide housing services to oneself, at no fee. Using a mortgage to buy a house is like starting a business, with the aim of becoming one’s own landlord.
The U.K.’s risky ‘Help to Buy’ scheme will not make housing more affordable.
However, businesses involve risk. Borrowing a sizable amount of money can easily make a family vulnerable to unexpected unemployment or income shocks, especially after paying a large deposit on a new house. In the aftermath of the financial crisis, Americans who saw their houses foreclosed learned this the hard way.
Moreover, because the costs of selling a piece of real estate are substantial, home ownership also creates a disincentive to labor mobility, tying people to places that may not have the best economic opportunities a decade or two from now. It may not be a coincidence that Spain, with a home ownership rate of 80%, suffers from 25% unemployment.
If households ought to make judicious decisions about renting versus buying, policy makers should also then be extremely wary of schemes that systematically promote home ownership.
Skewing public policy to favor ownership, as Mr. Cameron is trying to do, can be a source of risk for the whole economy. Regardless of whether one believes that Fannie Mae and Freddie Mac were the main cause of the U.S. financial crisis and subsequent global recession, it is clear that government guarantees incentivize banks to make loans that they would not make otherwise. That is, after all, the point: extending credit to people who are more likely to default on their debt.
But even if we ignore the issue of perverse, or at least questionable, incentives, there is still the question of why it should matter whether Britain is a society of homeowners. In the end, the more important question seems whether people have access to affordable, convenient, good-quality housing. If that’s not the case, a reasonable government policy ought to encourage growth in the supply of the physical housing units, thereby making them more affordable both to renters and home buyers.
That does not mean that the government ought to get into the construction business—or start buying plots of land that are allegedly being “hoarded” by speculators, as Labour leader Ed Milliband had suggested. It would be enough if the government simply got out of the way and enabled private development in places where it is currently restricted. This includes not only scrapping various land-use restrictions, but also urban-planning regulations that currently make it difficult to put up tall residential buildings. One 2010 study by economists Christian Hilber and Wouter Vermeulen found that house prices in an average local planning authority in England in 2008 would be 21.4% to 38.1% lower if the planning system were completely freed.
As it stands, developers can neither build up nor out, so the U.K. ends up with “the smallest, most expensive and densely populated housing stock in Europe, with 90% of the population living on 9% of the land,” as Graeme Leach, chief economist at the London-based Institute of Directors, recently put it.
The government’s “Help to Buy” scheme will fail to make housing more affordable, as it is just a sideshow to the much bigger—and completely self-inflicted—problem of restricted housing supply. At the same time, it risks nudging people and financial institutions to make poor financial decisions for themselves,and become a new source of risk for the British economy.