Help to Buy will inflate house prices if we don’t relax our planning laws

Kristian Niemietz writes for City AM

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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