Criticism of the Budget’s Help for Housing

I have been disappointed to hear the criticism being levelled at the Chancellor’s plans to assist the housing market.  I think this is fuelled by a lack of knowledge of the housing market and the impact it has on the UK economy.  The main criticism is that the Chancellor’s plans will create a housing bubble making it harder for first-time buyers to get on the ladder.  I totally disagree with this.  Readers of previous blogs will know that for a free-flowing housing market, 40% of purchasers need to be first-time buyers.  I have not seen recent data in relation to this figure but understand it is somewhere between 18% and 20%, probably less than half the amount required.

The lack of first-time buyers coming into the market is the real problem and I think the Chancellor’s two schemes, one aimed specifically at first-time buyers purchasing new build properties and the other the ‘help to buy’ scheme (assisting all purchasers) will mainly help first-time buyers and will alleviate this problem.  An increase in first-time buyers will  allow the market to flow again and will benefit all potential sellers, no matter what price they are selling.   Although this will have an impact and we will see an increase in property prices,  I don’t expect it to be too dramatic as there is a glut of properties available to suit this type of buyer.  As the market stabilises and we start to see  controlled house price inflation, banks will grow in confidence and start lending to the wider economy. The lack of bank lending has been one of the factors holding back the economic recovery.

One area where I think the Government could do more is to encourage banks to lend to property developers.  I appreciate that this is a high risk strategy and I would want the Government to wait and see what impact the two new schemes  have on the market before any further intervention.  My feeling is that once the banks start to see a stabilised market along with house price inflation they will naturally be more inclined to start lending to this sector again.  If this doesn’t happen I fear  we will struggle to deal with the housing shortage in the UK.  This is something the Government needs to monitor closely.

As a caveat to all of the above I would add that once the housing market starts moving freely and the economy starts to pick up,  the Government should look at some stabilizers to give them more control over the housing market and to prevent the overheating that we saw in 2006.

Lindsay Darroch
Partner & Head of Property