First-time buyers scheme flawed: The chancellor's proposals are surprising considering his record
Copyright 2005 The Financial Times Limited
Financial Times
May 28, 2005 Saturday
SCHEHERAZADE DANESHKHU
What most first-timebuyers need is a crash in the housing market to help themon to the property ladder, but that is something Gordon Brown is clearly reluctant to provide. Instead, his announ-cement this week to help 100,000 new buyers through a shared-ownership scheme not only appears to be a policy U-turn, but is also likely to prove counter-productive.
The plan, which helps first-time buyers by providing half the capital for a mortgage, is surprising given Mr Brown's record.
In 1999, he was responsible for finally scrapping another housing subsidy, mortgage interest tax relief, or Miras, which was blamed for the late 1980s housing boom.
In fact, successive governments had spent the best part of 20 years trying to dismantle Miras, once Britain's largest private-sector housing subsidy. It cut the cost of servicing mortgage debts through a tax break. As such, it encouraged the British obsession with saving through property.
It was then chancellor Nigel Lawson who made the decision in March 1988 that couples would have only one, rather than two, Miras allowances per property. The clampdown was delayed until August, so hordes of first-time buyers rushed to beat the deadline, which helped to fuel house prices in the late 1980s.
Buyers gained a few hundred pounds of tax relief, only to lose thousands once the property market collapsed the following year.
When Mr Brown scrapped what was left of Miras he declared: "The change will remove a distortion in the housing market." His apparent change of heart over the benefits of using such subsidies has therefore raised suspicions among some economists over his motives, particularly since it comes just as the housing market and consumer spending growth have slowed.
Mark Richards of Lombard Street Research, the consultancy, said: "This latest move smacks of an attempt to fuel consumption by further inflating house prices, but dressing it up as an ambition of creating an asset-owning democracy."
He believes the scheme has the potential to undermine the Bank of England's aim of curbing inflationary pressures through five interest rate rises, which have helped slow consumer spending growth and cool the housing market.
"The Bank of England is meant to be independent - is this going against what the Bank's been doing over the past year and a half?" he asked.
Others say there are good reasons to try to help first-time buyers - whose numbers have almost halved as a proportion of new borrowers - but that the government has done it the wrong way.
Gavin Cameron, fellow in economics at Lady Margaret Hall, Oxford, said: "There are sound reasons for encouraging equity-based mortgage products through the banking system to share risk with first-time buyers, but I don't think the government should be in the business of stabilising the market."
Like most economists he believes the scheme will not make housing affordable for new buyers.
The supply of housing is relatively fixed, so, unless there is significant housebuilding to accompany the scheme, the effect will be to push house prices up. "It will help the individual first-time buyer chosen for the scheme but those who don't get on will face higher prices so the net effect is not helpful to first-time buyers as a whole," he said.
Ray Barrell, of the National Institute of Economic and Social Research, added: "This scheme will increase the demand for housing and push up prices."
He believes that the government should increase the supply of homes, instead of stimulating demand.
Mr Brown has said that the package of government measures includes an increase in the supply of new homes and should lead to 200,000 new properties this year. Treasury officials doubted that the shared-equity scheme for 100,000 new buyers over five years could have an impact on house prices given the total housing stock of 26m. Brown's mortgages, Page M26
You can email me at Gavin.Cameron@economics.ox.ac.uk
Last updated: 29 June 2005.
