Help to Buy scheme will worsen Britain's housing crisis, says new Adam Smith Institute paper

The government’s Help to Buy scheme will drive up house prices by increasing demand for but not supply of housing – it will not improve overall access
Help to Buy risks taxpayers’ money with no guarantee of a return
By subsidising homebuyers and introducing the possibility of socialising lender losses, Help to Buy risks recreating the perverse incentives that led to the 2000s-era US housing bubble

The government’s Help to Buy scheme, which offers government-backed equity loans to house buyers and mortgage guarantees to banks, will distort the housing market, risk taxpayers’ money with no promise of a return, and introduce into the UK housing market the same perverse incentives that led to the US subprime mortgage crisis, argues a new paper by the Adam Smith Institute, released today (Monday, September 2nd).

The report, Burning Down the House (available to download here: http://www.adamsmith.org/sites/default/files/research/files/burningdownthehouseWEB.pdf), argues that without measures to increase supply by liberalising planning laws, the Help to Buy scheme will simply drive up house prices, making housing no more accessible overall. Indeed, users of Help to Buy benefit at the expense of those who fail to use the subsidy scheme; the policy is like putting a platform under the buyer while also raising the bottom rung on the housing ladder.

If already badly-off people are less likely to access the scheme, it could have a particularly hard effect on the poor, the report says, a group who already lose out badly—the UK's extreme restrictions on housing supply have been calculated to add 3.5 percentage points to the GINI coefficient measure of inequality.

According to the report, a preferred alternative would be liberalising a hostile regulatory environment which inhibits the construction of additional housing supply—allowing houses to be built in more places, and slashing regulation on doing so. According to official statistics, only about 10% of the UK is built on, and of that the biggest fraction is gardens. If we want to control runaway house prices and give first-timers a chance to get on the ladder, we need to allow more houses to be built.

"It is crazy for the government to stoke demand even more without addressing supply and claim that this will help the housing market," said the Institute's Research Director Sam Bowman. "Making taxpayer-subsidised handouts to homebuyers will only drive further house prices up, risking a bubble, improving access for a select few but making housing even more unaffordable for most people."

"On the other hand, radical liberalisation of the planning system has the potential to drive massive economic growth, drastically reduce housing costs for the badly-off, and give millions more a chance to own property of their own. "

"Deregulation is a way of addressing the housing supply shortage while avoiding recourse to public fiscal intervention,” commented Preston Byrne, the Institute’s Legal Fellow. "If the Government is serious about finding a long-term solution to the housing crisis, it's time to take a hard look in the mirror and examine the role existing planning regimes – both local and national – play in regulating and inhibiting new housing construction.”

This paper is available to download here: http://www.adamsmith.org/sites/default/files/research/files/burningdownthehouseWEB.pdf

The Adam Smith Institute is a independent libertarian think tank based in London. For further comment or to arrange an interview about this paper, please contact Sam Bowman at 075-9682-6323 or email media@adamsmith.org