The Help to Buy scheme has made the housing problem worse

It is four years since George Osborne, tired of waiting for housebuilding to pick up from its historically low post-crash levels, gave the industry a shot in the arm. The then Chancellor’s Help to Buy scheme provided government loans worth up to 20 per cent of the value of a new-build property (later increased to 40 per cent in London), topping up what commercial mortgage lenders were prepared to offer.

On the surface, this seems to have been a success. The number of homes built annually has increased by about a third since then, with 112,000 new homes purchased with £5.3bn of Help to Buy money by the end of 2016. The scheme’s beneficiaries include about 90,000 first-time buyers over the period, and it is still growing in popularity: in the final three months of 2016 there were 12,104 Help-to-Buy loans issued, the biggest number in any quarter since they were introduced.

Underneath these headline figures, however, little has improved. Strip out the 33,600 new-builds that were purchased with a Help to Buy loan last year and the number of completions was just 130,000, barely higher than it was in the years before the scheme’s launch. So housebuilding output has only improved to the extent that the government has been prepared to give people money to buy new homes with. The underlying problem of meagre private-sector output has not gone away.

Neither has the scheme arrested the decline in home-ownership. Those 90,000 first-time buyers who have been given a leg up are the lucky ones. The private-rented sector has swelled by more than half a million properties over the same timeframe, and the proportion of households that are owner-occupied has now dropped below 63 per cent for the first time since the 1980s. The reality is that most would-be buyers can’t afford a home even with Help to Buy support.

This scheme has not just masked these issues, however, it has exacerbated them. By giving people more money to spend on homes that would otherwise have been unaffordable, it has propped up prices at the unsustainable levels that are at the heart of the problem. High house prices are not only a barrier to home-ownership, they also limit private-sector housebuilding output. Developers can only build what people are willing and able to buy. Help to Buy addresses this but from the wrong end. Rather than improving affordability by dampening speculation and resisting house price growth, Osborne’s scheme increased spending power in an already over-inflated market, thereby delaying the inevitable and necessary correction in house and residential land prices.

In this sense it was only the latest in a series of measures designed to stimulate demand—from the deregulation of the private rented sector to enable buy-to-let investment in the 1990s, to the ultra-low interest rates that have reduced mortgage costs since the financial crisis. The 2017 general election provides a perfect opportunity for Theresa May, now in a position of rare political strength, to commit to holding down house prices at every opportunity. Last summer, the prime minister entered No 10 promising to tackle constantly rising house prices. Yet while the Help to Buy mortgage guarantee scheme has now been phased out, £8.6bn has been committed to keep the equity loan scheme going until 2021.

The major developers—about half of the homes bought with Help to Buy loans have been built by just five firms—are already nervously eyeing this date. What will happen when this bailout for a dysfunctional market is taken away, assuming it is? But the longer the government resorts to Help to Buy to keep the market going, the worse the hangover is going to be when it is finally withdrawn. Better to wean the housebuilding industry off this subsidy sooner rather than later, and put those billions of pounds into a public building programme of affordable homes that will bear down on too-high house prices, rather than holding them up.