Apart from George Osborne, nobody really seems to like the Help to Buy scheme, the programme under which the government acts as a guarantor for high loan-to-value mortgages. Among the latest to join the critics is the IMF. It argues that “there is a risk that, in the absence of an adequate supply response, the result would ultimately be mostly house price increases that would work against the aim of boosting access to housing.”
Quite so. But while the IMF is right to point out the inadequacies of Help to Buy, its recommendations are less helpful: “to mitigate this risk... the government should consider fiscal disincentives for holding land without development.” Apart from adding further complexity to our already overly complex tax code, this proposal would treat a symptom merely by treating another symptom.
The IMF’s job is to provide a bird’s-eye perspective, not a detailed analysis of country-specific issues. But it is worth addressing its recommendation, because the idea that the British housing crisis was caused by “land banking” is one of those misperceptions that cloud the housing debate. It is a red herring peddled by nimby groups to divert attention from the adverse impact of their own anti-development campaigns.
The argument goes that developers are sitting on vast expanses of land with planning permission that they leave idle. Allegedly, this proves that the planning system is not an obstacle to development, and that relaxing it is not necessary: how could the system be an obstacle as long as idle land remains? Why grant developers more planning permissions if they are not even using the ones that they already have? Speculators, not planning laws, drive up housing costs.
Or so the anti-housing camp would have us believe. Yet the kind of speculative hoarding they describe is itself a consequence of planning restrictions. Speculative hoarding is a risky business, because it means sacrificing certain profit today for uncertain profit in the future. Since in open and competitive markets, rational investors will demand compensation for both the extra risk and the extra waiting time, speculative hoarding is at best a fringe phenomenon. The risk that, in the meantime, some other seller will step in and ruin the hoarder’s prices is simply too great.
Speculative hoarding is therefore limited to markets where supply is fixed. You can hoard a bottle of a special vintage Bordeaux wine, or a rare book no longer in print. But you would not hoard a bottle of supermarket Pinot Grigio, or a copy of a Game of Thrones book.
Our planning system has made the housing market more similar to the former examples than to the latter, and that is why we see speculative hoarding. Developers choose this strategy in the knowledge that the government protects them from price competition, using the planning system to keep potential competitors off their back. Rather than trying to tax their behaviour away, we need to expose them to a healthy dose of competition by liberalising the planning system.
Read the original article in City AM.