The Guardian is reporting the following joint letter by Liberal Democrat grassroots groups including the Social Liberal Forum and Liberal Reform representing different perspectives within the party, protesting against ‘Help to Buy’.
Sir – We write as Liberal Democrats who share deep concerns over the second element of the government’s Help to Buy scheme, the implementation of which has just been accelerated as a Conservative demand within the coalition.
The UK housing market is to all intents broken, with chronic shortages of supply having combined with an out-of-control financial system to create a house price bubble which (outside of London at least) deflated but never burst.
It is clear to us that the solutions to the housing crisis, and to an extent to the UK’s wider economic problems, are to be found in supply-side measures, not in simply creating further demand. So while we supported the first part of the Help to Buy scheme, which focussed on new-build properties, we fear that the new element may simply lead to another house price bubble. As Nick Clegg said in June, “it would be real folly to simply go for easy wins on boosting supply of mortgages that doesn’t lead to supply of new housing.” Vince Cable has warned of “the danger of getting into another housing bubble” and recent price rises vindicate this.
We welcome the oversight of the Bank of England, which has recently been strengthened, but call on Liberal Democrats in government to push for further measures to ensure that another house price bubble does not emerge as a result of the scheme, and for further policy changes to significantly increase the supply of UK housing – particularly affordable housing – to the sort of levels seen in the 1930s.
[Links added]
But as with Ed Miliband’s energy price freeze, bad economics can be a hit with the focus groups.
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53 Comments
Oh, if only certain egocentrists in the party didn’t see the need to divvy themselves up into taking-my-ball-home splinter factions, and if only newspapers didn’t take them as seriously as they take themselves… we could have something like liberal democracy rather than willy-waving.
It’s good news for the grassroots that the Liberal Democrats are in government. They can end this daft policy if they want to.
It is very sad when the first response to a considered and economically well argued position, that is clearly David Cameron playing with fire in order to enhance the Conservatives short term election prospects is so trite. If we are serious about being in government, argue the points, don’t go for cheap and insulting jibes. To misquote someone else “The Lib Dems are better than that”.
@g:
It’s good news for the grassroots that the Liberal Democrats are in government. They can end this daft policy if they want to.
Best joke I’ve heard all day. Thanks for that, I needed a laugh!
@Dave Page
Is that your way of saying you think the ‘Help to Buy’ scheme is a good idea?
‘g’ and Simon, being the minor party of the coalition doesn’t give us such power, so don’t blame the LibDems for ‘letting it happen’, just blame the Tories for blatant Thatcherite vote buying.. that is all it is.
The irony of Lib Dems sounding outraged at a populist policy aimed at the middle class. The party is in denial.
@peter tyzack “don’t blame the LibDems for ‘letting it happen’, just blame the Tories for blatant Thatcherite vote buying”
Speaking about the next phase of the ‘Help to Buy’ scheme, Danny Alexander told the Lib Dem conference, “Too many young people aspiring to get on in life are stuck. They earn enough to repay a mortgage, but don’t have the funds for a large deposit. It is right that the government should step in to help them.” In an interview he told Sky News, “We are a million miles away from a housing bubble in this country … I don’t think that we need to rethink this policy”.
The Lib Dems are not just letting it happen. The party I used to vote for is joining the tories in “blatant Thatcherite vote buying”.
peter tyzack
‘g’ and Simon, being the minor party of the coalition doesn’t give us such power, so don’t blame the LibDems for ‘letting it happen’, just blame the Tories for blatant Thatcherite vote buying.. that is all it is.
It does. There’s always a choice to remain in government.
Presumably creating a housing bubble is a price worth paying for being the minor party of the coalition.
@Peter Watson:
Exactly. I was going to quote Danny Alexander as well, but you beat me to it. This government is helping the already comfortable (those who can afford a mortgage) get new homes, while kicking the poor and disabled who live in social housing OUT of their homes for the disgusting crime of having an extra bedroom, even though there is, in most cases, no suitable accommodation for said people to move to.
There is also only very minimal risk of a housing bubble because the policy is limited and giving more powers to an unelected rich banker is not entirely positive. We need to look at things from more than one angle.
Aside from Danny Alexander, is any other Lib Dem backing this policy?
@peter tyzack. But you are supporting them in the Government, you are giving them the chance to do this policies.
As the first poster says are you just waving?
@Max Wilkinson “Aside from Danny Alexander, is any other Lib Dem backing this policy?”
Nick Clegg?
(http://www.mortgagesolutions.co.uk/mortgage-solutions/news/2294790/lib-dems-shoot-down-cable-s-help-to-buy-warning)
“As with Ed Miliband’s energy price freeze, bad economics can be a hit with the focus groups.”
How true. Once we had a party who could speak truth to power, who kept the other two parties rather more honest by speaking out against crude populism, bubble creation, bribing the voters with their own money, etcetera. What happened to the real Liberal Democrats?
I would love to see this happen, you supported other policies as daft as this one, enjoy.
@Peter Watson
I’ll add that to the Clegg list.
I have just watched one the most sickening days in my political life with Tories attacking all that seems good about the UK and persecuting the poor and vulnerable again.
I am no sure anymore what is or isn’t Coalition policy as a lot of it seems to begin before 2015
Hey – my house earned more last year than me! I love George Osborne and Nick Clegg. Coz we’re a million miles from a housing bubble and it’s all going to be fine. No worries about the state taking a massive loss on crazy liabilities because of course no one will ever be under wateron their mortgage and interest rates will never go up!
Paul
Same thing happened to me between 2003 and 2006 when I sold it – I knew it was going wrong when you can earn more from doing nothing than via working.
g, etc,
This policy is run of the mill populism. It happens all the time under both parties. How on earth would our leaving government put a stop to it?
The Tories say they are “for hardworking people.” But we all know they see proper work as something only for us plebs. In reality, they see work as inheriting large sums of money (like Osborne) or being a property/market speculator. Sadly, based on Alexander & Clegg’s comments, I see no reason to believe that current Lib Den leadership don’t support it and will not be shocked at all if LD MPs are whipped into voting for this rubbish.
When did the Conservatives stop believing in a free market economy?
I do not have words to even say anything to you guys. May be the next elections will show you what a party you have become. Most fo us when we discuss in office talk about you Libdems stabbing us in the back. Tution fees, Mansion Tax, Help to buy – most of us do not believe you any more. Danny and Nick must have got big bribes from bankers/builders/estate agents to get all this done. Good luck for 2015 elections.
Given that there is now a population almost half that of Russia packed onto one small island and that housing is always going to be rationed in economic terms, young people are going to be pushed out regardless of “initiatives” like this.
The solutions are
1 “build baby build”, anywhere people want, or
2 have a more radical population policy – reducing net immigration to zero perhaps by encouraging young people to start their adult lives elsewhere (the Browne report seems to be doing a good job in this regard). or
3 answers on a postcard
I am not attracted to my own suggestions 1) or 2), but I am making them to bring the debate some kind of sense of the scale of the solutions needed, so please fill in number 3 for me:
Why are LibDems complaining? The second part of the policy will lead to more people being able to own their own homes.
Text-book economic theory would suggest that prices would rise by a limited amount, but not by the full amount of the help given, so the net effect for buyers needing a mortgage is that homes will be more affordable. Some of the people who cannot now afford a mortgage will now be able to do so, and others will be nearer to being able to afford one than before.
The people it will hurt are those with the cash available to buy a house without needing a mortgage – they will feel the full effect of the price rise without the balancing effect of the help. This probably includes everyone who already owns a home, and who are therefore less needy than the people this policy will help.
So the policy does help to achieve what LibDems seem to be saying they want.
Eddie Sammon is right – opposing the second part of the policy is an own goal for LibDems!
Even without new builds, supply is not fixed. The limited rise in price will induce a limited increase in supply, partly due to people bringing homes onto the market that are now empty, and partly in terms of new building.
Thank you Richard. Exactly, complaining about socialism for the middle class just after we offered some ourselves just angers the public.
Politics cannot continue like this – this is why people are voting for Farage and Ed Miliband: because they seem more honest, regardless of policy pitfalls. That is my theory anyway.
@Eddie Sammon. Agreed.
Both the supply of rented accommodation and the number of customers wanting it will presumably go down as more people opt for buying, with the number of customers reducing more than supply if there is new building. In principle this puts the landlord in a weaker position, meaning that rents may reduce (or go up less than they would otherwise).
I think both Farage and Miliband are also pitching their message at simpler levels, which allows more people to feel they understand. Farage also has a kind of forceful cheerfulness that can be attractive, and Miliband seems to be speaking more gently, attracting people who would be put off by fierceness.
Richard, I agree that the potential house price rise is less than the cost of the policy because of the multiplier effect, which means money spent on the policy will reduce demand elsewhere, which in turn might have been spent on housing anyway. It is a classic case of robbing Peter to pay Paul.
The fact that people can see this one coming also reduces the prospects of a bubble – bubbles only really appear when people aren’t aware there is a need to be concerned.
“bubbles only really appear when people aren’t aware there is a need to be concerned.”
Not with house prices they don’t. When there is a house price bubble, everybody knows it. Prices are shooting upwards very quickly, and the only rational thing to do is get your feet onto that ladder pronto, before it jumps out of your reach. Ergo, you the fist-time buyer make a grossly overgenerous offer on a tiny property, knowing that the price will be even higher if you leave it any later. Ergo, prices continue to shoot up, by anything from 25% to 100%, depending on when fear of over-pricing finally sets in.
There may not be a bubble this time, if only because there is still a feeling that prices are anyway high. But you can’t count on it, any more than you can’t count on lemmings stampeding over a cliff.
What David Allen says.
Also, in the early stage of a bubble people do tend to warn about the emergence of the bubble whilst the memory of the previous crash is still fresh. However, after a period of prices rising without a crash the bears go quiet and the bullish crowd sees rising prices as the new norm. Then a while later prices crash and everyone shrugs their shoulders and wonders why they didn’t see it coming.
Sentiment today seems similar to the mid 90s following the late eighties/early nineties crash. In 1997 Brown promised not to let house prices get out of control (and spent the next 10 years ignoring the biggest bubble in the UK’s history). Sounds similar to Carney’s promise to reign in a house price bubble and Clegg and Alexander’s denial of a potential bubble.
A lot of research has been done on bubbles, and a lot is continuing. They are a regular feature of economic life, occurring in cycles. There is still debate about why they occur, and many economists appear to agree that bubbles are difficult to identify as they are happening. Rising prices do not imply that a bubble is occurring.
It’s probably true that bubbles can develop when expected future price becomes a major determinant of present price. However, the first-time buyer mechanism postulated by David Allen does not seem credible on its own. Unless access to credit expands at the same rate as prices, there would only be a limited number of first-time buyers able to do what he suggests, so the effect would peter out relatively quickly.
Put another way, bankers are to blame! 🙂
http://www.frbsf.org/economic-research/publications/economic-letter/2013/september/asset-price-bubbles-theory-models/
http://en.wikipedia.org/wiki/Real_estate_bubble
Richard,
The nervous first-time buyer doesn’t have to get more credit in order to contribute to a bubble. He/she can also accept whatever level of credit is on offer but be prepared to use it to buy a lesser property, anything to get foot on ladder. He/she can also just dive into the market urgently rather than carrying on dithering and getting up late at the weekends. All the ditherers turning into urgent buyers then feeds the bubble.
@David Allen
As the prices rise, the ditherers become less in number, less able to buy their first choices, and less willing to buy their next choices, so the effect peters out. To get anything more than a blip, you need more than that.
As prices rise, traders-up join in, seeing the trade-up gap about to widen, and turning from happy-stay-heres to better-move-nows. As the vortex grows, more move-in-a-few-years turn into move-nows, reinforcing the bubble again. Sure, eventually it peters out. Often only after a ginormous “blip” has been added on to prices!
David I disagree that the only rational thing to do when house prices are rising is to jump on the ladder before they rise further because nobody knows what might happen tomorrow and it wouldn’t be a good idea to buy a house and then for the bubble to burst the next day.
However having said this, I am not denying the fact that this could lead to a house price bubble, I just think the prospects of it happening are over-estimated by politicians. Help to Buy is still a ridiculous and I would say offensive policy though, considering the cuts being made elsewhere and the skivers rhetoric added on top.
David I’ve just thought of a different scenario where I would take the action you recommended (jumping on the ladder) rather than staying away from it – if I thought there was a bubble but I was confident it was going to keep going up then I try to surf the wave, so to speak. It all depends on future expectations.
@David Allen
Ok, so you’re smarter than every economist, well done. For those of us living in the real world, your mechanism is at best incomplete. One problem with it is that all those traders-up will know that, at some time in the future, prices will crash again – after all, you say they know it’s a bubble – so their rational choice is to wait till the prices fall back down.
@Richard Dean
I am (more than) a little confused, but surely the factors that you suggest would prevent this from being a bubble are the same ones that failed to prevent previous bubbles. And this time, the government is actively increasing the available credit and (for phase 1) temporarily reducing the cost of that credit, and, by putting a cap on the limit and suggesting the scheme will be reviewed, possibly creating a rush and a very short-term bubble.
@Peter Watson
Don’t ask me, I’m not an expert! All I know is that the people who are experts generally say that it’s difficult to know what causes bubbles and it’s difficult to know whether you’re in one until you find out with hindsight later, after the bubble bursts. Looking in the technical literature suggests that experts have been wondering what causes bubbles for a long time, and have not yet come to any agreed answer!
A bubble is more than just a blip, surely? An explanation for a bubble is incomplete if it only says why prices rise – an proper explanation would need to also say why they fall again later (ie.what are the limiting factors?) and would also need to explain why some bubbles are short and others long. One of the limiting factors for the “Help to Buy” policy is that it’s a temporary measure , and one that could be withdrawn if necessary. Also, the measure would anyway fail if prices rise more than the amount of help given, because in that case the net cost to the buyer would increase.
There’s an interesting graph on http://monevator.com/historical-uk-house-prices/ . The second graph down shows “real” house prices, adjusted for inflation. “Now” corresponds to the right side of the graph. It’s impossible to know, from this graph, whether the price now is about right (which might be the message of the red curve) or too high (which would be inferred if we drew a straight line through the bottoms of the three troughs).
Does any one know if this scheme is only available to UK residents and tax payers or whether foreign buyers can take advantage of it. I only ask because of the recent article in the London Evening Standard http://www.standard.co.uk/news/london/advert-for-new-stratford-homes-sparks-no-riff-raff-row-8826336.html
[Aside: nice to see building new homes for people who don’t live here to buy, is more important than building homes for people who live and work in London…]
@Richard Dean
From the little I know about phase 1 (equity loan) of the scheme, a limited fund which provides a temporary interest-free loan of 20% of the value for somebody who can only afford a 5% deposit (http://www.helptobuy.org.uk/home-ownership-schemes/help-to-buy-equity-loans/) looks like a sure-fire way to stoke a mini-bubble with a pop when the funding stops and later problems when the loan fees start.
Even phase 2, underwriting 15% of the loan, is dubious if it encourages a house price bubble because buyers can take risks if taxpayers are left with the negative equity.
I may well have missed some important factors here – not my area of competence at all – but it all seems, well, dodgy. I seem to recall that Lib Dems used to back a safestart mortgage, favouring the stability of a 5 year fixed rate and the safety of a 85% loan-to-value ratio. How times have changed.
@Peter Watson
I don’t think anyone disputes that house prices will rise a little as a result of the scheme. But for buyers, their costs (house price plus mortgage cost) will reduce if the mortgage cost reduces more than the price increases. This favours people who need mortgages, not people who can pay cash. It means that more people will be able to buy.
The bubble question is whether the rises will create a cascade effect which results in bigger and bigger changes, of the size and duration that could be called a “bubble”. It’s a difficult one to answer. The mechanisms proposed by David Allen and others may be part of the way towards and answer, but if the answer really is that simple then why do economists say that they haven’t yet got a proper understanding of bubbles?
As you rightly say, risk is another factor – indeed the reduction of risk perceived by lenders is perhaps why mortgages can cost less. And yes, this might mean that the taxpayer ends up paying for extra defaults. But only if the risk is larger for borrowers borrowing less. Is there any reason to expect that to be the case?
Of course, if a bubble forms and prices really do take off radically, then the rise in price will offset the reduction of mortgage cost, and the scheme will stop working.
Perhaps mechanisms like those suggested by David Allen might kick in, but if that was true then why don’t they kick in anyway ?- price blips appear and disappear all the time. More likely to my mind is that the Allen mechanisms operate all the time anyway, and won’t affect the Help to Buy scheme at all.
A bubble is also less likely if the government does what it has done – making it clear to everyone that they are aware of the issue (the Cable statement) and ready to act against a bubble (the Osborne statement) if prices rise to such an extent as to approach cancelling out the effect of the help given..
“A bubble is also less likely if the government does what it has done – making it clear to everyone that they are aware of the issue (the Cable statement) and ready to act against a bubble (the Osborne statement) if prices rise to such an extent as to approach cancelling out the effect of the help given..”
You’ve just spent numerous keyboard strokes labouring your assertion that it’s impossible to tell when a bubble is a bubble, but now you’re telling us that everything will be fine because Osborne’s going to act if he sees a bubble. I’m not following your logic – is Osborne clairvoyant – can he see things that you assert nobody else can see? Besides, did you not read my earlier comment about Brown’s 1997 statement claiming that he would prevent another housing bubble? How did that work out?
Richard Dean,
“@David Allen
Ok, so you’re smarter than every economist, well done. For those of us living in the real world…”
No, I don’t claim to be smart, where did I do that? I do claim to be reasonably polite, unlike some others.
@Steve
I wrote that I thought Osborne would decide on a different criterion, namely if the price rise was large enough to cancel out the reduction in mortgage costs. That criterion can be measured. It is not at all the same as trying to decide whether a bubble is occurring, though it seems likely that polticians would couch it in that kind of language.
@David Allen
I’m sorry to read that you appear to be miffed, and I certainly apologize if it was me who did this terrible thing! Economists really don’t know what causes bubbles, how to recognize one (except with hindsight), or how to manage them. Here are some models (going wider than just house prices) …
http://math.stanford.edu/~ryzhik/bubbles-final.pdf
http://www.nber.org/papers/w13504
http://www.imf.org/external/pubs/ft/wp/2013/wp1345.pdf
I am not sure whether it is relevant if we have a housing ‘bubble’ or not – by some definitions we do others we don’t
What is happening though is home ownership is changing and the aspirations of us Brits may no longer work with the reality
With average house prices at at least 5x median income, even higher in the South then we are dependent on always having low interest rates. If interest rates rise to the norm then the level of debt is unsustainable with our model of 25 year principal pay off.
We also have no appreciable home building to provide some supply control.
The rental sector is virtually unregulated and immature
There is not much public housing stock available since the sell-off in the 80s/90s
What the Chancellor has done will just exacerbate the demand and as supply is limited then there will be an inevitable rise in prices, especially in the South.
If we accept house price inflation is good and here to stay, which seems to be the attitude of the Tories, some Labourites and LD and the press then we have to say home ownership for the masses on the current model is a thing of the past.
There are some options:
Convert purchase into ‘posh renting’ whereby you pay off <50% of the capital but continue paying interest ad infinitum. This is used on the continent in some countries whereby the house and the debt is passed on. There would need to be a change in the tax system to accommodate it though and change in culture. It also constrains the buy/sell attitude of the Brits.
A more regulated rental sector where there can be no rises in rent without certain criteria being fulfilled and long-term renting is understood
More social housing available to help those who will fall outside the buy/private rent market – we already know how this worked as it was the case in the post-war period.
There has been a Golden Age in homeownership that is coming to an end in my view., I am just not sure if we are ready to accept that
Various people seem to ignore the “planning crisis” we have in this country. Only 2.6% of England is built on but more building is unpopular and any local council that offers to build is swiftly ejected from office. Housing demand is already sky high because housing is too popular. Getting the government to subsidise these overinflated prices will hit the taxpayer hard and simply make the situation worse for all.
The government’s housing policy, all of it, is more than crazy; it’s weird!
Instead of giving, pro tem, free money to carpet-bagging buy-to-rent people, all this free dosh, provided by tax-payers, should, instead,be invested in new-build social and genuinely affordable homes.
Oh, if you are so naïve that you believe the buy-to-let/second-homes brigade aren’t already collecting big-bucks from the state, I’ll send you some names who can fix-it for you to join the scam. Well, I’ve been around the block a few times, in the UK and in Africa!
@Thomas Long
Whilst we can point to how much of England is actually built upon, with the implication that we could build on significantly more of this land. We should remember that we currently can’t produce enough food on the un-built land to feed the population living on the built land, and haven’t been able to do so for around a hundred years…
So we are in a predicament, adding to bcrombie’s final point about the golden age of home ownership, I suspect we are also coming to the end of the golden age of carefree population growth and home building…
@David White
Please could you provide the names/email addresses here on LDV?
Thanks a million (or two?) !