Ryan Shorthouse: A helping hand on the property ladder

Are there too few houses being built in the UK? (PA).
Are there too few houses being built in the UK? (PA).
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There are arguments that are repeated so often that they just become assumed. This is dangerous: If we are not encouraged to continuously dissect and test arguments, there is a serious risk of erroneous judgement and action.

One such argument is that the main problem with the UK’s frightfully expensive housing market is that there are simply too few houses being built. So the current Government has – following in the footsteps of previous ones – committed to the building of thousands more houses.

It is certainly the case that, in some very desirable parts of the country such as in the South-East of England, supply is constrained, pushing prices up.

But everywhere? As Ian Mulhiern of Oxford Economics has shown, the total number of new homes has been rising faster than the total number of new households in the UK for several decades. Admittedly, part of this is no doubt due to significant latent demand, where certain members of households are unable to afford to form a new household despite wanting to.

Although part of the answer, the fixation with simply building more homes distracts from other reasons for rising prices, such as cultural attitudes towards the importance of home ownership, financial speculation by buyers, and historically generous mortgage terms.

Really, the principal problem with private housing in the UK is that, because prices continue to rise, it is becoming more expensive and unaffordable for first-time buyers.

This has been worsened by stricter mortgage terms introduced by banks after the 2008 financial crisis. The housing market is like a quickening train, progressively more difficult to get on board, but relatively easy for those on it to gradually move their way up.

This is why the Government was right to subsidise first-time buyers by introducing and expanding Help to Buy, and now cutting Stamp Duty for nearly all of them. Despite the chorus of criticism, these are good policies.

It is true there is evidence that Help to Buy, where first-time buyers can buy a house with a smaller deposit and secure a mortgage with a financial guarantee from government, raises prices in the areas where it is being taken up.

But Help to Buy represents only a tiny proportion of overall home purchases. Other factors are obviously much more important in raising UK prices.

And the biggest beneficiaries of the scheme are homebuyers in less desirable areas. The benefits of Help to Buy, therefore, are much greater than the downsides.

The Office for Budget Responsibility has forecast that the Government’s recent decision to cut Stamp Duty for almost all first-time buyers will raise house prices by 0.3 per cent by the end of this year.

Their estimates are based on the impact of the Stamp Duty holiday the Labour government introduced in the late noughties, enabling first-time buyers to save up to £1,250. Back then, evidence suggests buyers used their money that had been saved from not paying Stamp Duty to buy more expensive properties.

But, frankly, forecasts can be wrong. It is also not clear that their forecast has taken into account the possible downward pressure on house prices because of the new threshold of £300,000 for total exemption from Stamp Duty, and the new threshold of £500,000 for a reduction in Stamp Duty.

Even if house prices did rise by 0.3 per cent, the additional upfront cost to a 
first-time buyer will still be much less than the savings they get from the Stamp Duty cut.

And all, or most, of what they pay upfront will now be going into their own asset, rather than to the taxman. Undoubtedly, the cut in Stamp Duty makes the upfront cost of purchasing a home – usually the biggest obstacle to home ownership – much cheaper.

It may clash with received opinion, but if the Government is determined to fix the biggest problem with UK private housing – the growing unaffordability of it for first-time buyers – it should be finding further ways to subsidise them.

Ryan Shorthouse is the Director of the think-tank Bright Blue.