Home truths

houseOh, dear. A few days ago, worried about flatlining or falling house prices – always bad for politicians – the UK government announced a whizzo new scheme to underwrite 95% mortgages. We warned that this was encouraging just the sort of over-borrowing that got us into this mess in the first place.

Now the Centre for Economic and Business Research predicts that house prices will rise by 15% over the next five years, with the average three-bedroom semi-detached going up over £25,000 to £202,000. But that's nothing to do with the government's latest price-boosting mortgage initiative. No, it is simply because of a shortage of property on the market (planning controls), rising demand (immigration, demographics) and the fact that the banks are starting to lend again thanks to all that money the Bank of England has injected into them by way of Quantitative Easing. And the buy-to-let sector will boost the market too, as worried savers look for hard assets to put their money into.

So – if that is right – the net effect of the government's mortgage-guarantee plan will be to boost a market that is already about to rise. Rather than preventing prices (and the government's electoral prospects) from falling, it will add further to price increases.

The government should read its Milton Friedman. The Nobel economist researched the effects of 'stimulus' packages as a supposed way of smoothing out economic cycles, and concluded that they did more harm than good. By the time government realise business is declining, work out what to do, pass the legislation, and wait for it to have its effect, the trough is usually over and the policy ends up reinforcing the cycles. Today's house-price situation looks much the same: reinforcing the boom, which will mean we will suffer even more painful adjustment in the long term.