Your article on six ways to fix the housing crisis (1 April) contains no mention of one of the most overlooked but important issues – house price inflation caused by schemes such as help to buy and the government’s money-creation policy.
The help-to-buy scheme seems to be welcomed by some as a positive move, but in reality, its effect is to increase house prices, because people are able to borrow more money. Research has shown that first-time buyers using the help-to-buy scheme on new homes paid a 10% premium, helping only to boost property developers’ profits.
Often people think that the money lent by banks comes from other people’s deposits, but in fact when a bank lends money on a mortgage it simply creates the money, and when the money is repaid it is destroyed, leaving the bank with the interest paid. Banks have discretion about where money is lent in the economy, and as property is considered a safe investment, it often goes there. Sometimes, particularly in a crisis, banks are less likely to lend to small and medium businesses, as they are considered a higher risk. This has a two-pronged effect – the economy is slower to recover and house prices continue to rise. The government should take control of money creation through the Bank of England, so it has the ability to ensure money is lent in the right areas of the economy.
These effects play a much greater role in house price inflation than scarcity. Indeed research by the Bank of England found the same, concluding that the “relative scarcity of housing has played almost no role at the national level since 2000”. Until these issues are discussed more frequently, there is little hope of them being addressed.