With the new Help to Buy mortgage guarantee, which will provide government backing to high loan-to-value home loans, some have pointed out that the Treasury is set to become a player in the sub-prime lending industry. And the move will cost us: if private lenders are unwilling to take on a credit risk on an unsubsidised basis, we can safely assume that they have a good reason.
But wasteful though the policy will be, it is probably not big enough to cause major damage to the public finances. The mortgage guarantee’s main flaw is on a more basic level: it mistakes a supply-side problem for a demand-side problem.
Since the recession, homebuilding has declined sharply. In 2010, the number of newly-completed dwellings in the UK was about 23 per 10,000 inhabitants – basically nothing. But that is not, in itself, a problem. Construction has always been a volatile sector. Yet housing affordability does not depend on the levels of homebuilding in any one year, or even over a five-year period. It depends on average levels of homebuilding over the course of 10 or 20 years. And that is where the origin of the UK’s housing crisis lies.
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