Help to buy ISAs won't help new buyers

Our writer says we need more homes to be built, not more help to buy

Updated: 
couple signing home purchase...

Today George Osborne announced a scheme that sounds like a marvellous giveaway for the nation's aspiring homeowners. The Help To Buy ISA, dubbed the 'Help To BuySa', sounds like a fantastic idea for supporting would-be buyers but I don't believe it is.

For every £200 saved into an account the government will top it up with £50, up to a maximum government-provided bonus of £3,000.

The cash won't be available up front; you can make an initial deposit of £1,000 but then the amount you can save a month is capped at £200. The accounts are limited to one per person, rather than one per home purchase, meaning that couples buying together could potentially receive £6,000 in total from the government.

I know, I know – this all sounds great. First-time buyers face a perfect storm of low interest rates and high rents, making it particularly hard for them to scrape together the average £15,000 deposit required. Surely it makes sense for us to support people onto the first rung of the housing ladder?

Yet the problem is not with demand but with supply, which this scheme will not address.

A chronic shortage of homes

Yes there is a problem with house prices appearing out of reach for new buyers, but the answer isn't to find ways to boost the budgets of the buyers.

Forgive the painfully simplistic analogy, but if there was a chronic shortage of buttons then you wouldn't find ways to help struggling button buyers, you'd attempt to boost the supply of buttons. Putting more money into the demand side of things could only hike the price of the existing buttons – something that we existing homeowners are blinded to because of the rising value of our homes.

For years now the country has failed to build the homes we need. More than a decade ago the Barker Review of Housing Supply determined that we needed about 250,000 new homes to be build each year. In 2014 we managed to build 141,000 and that was a recovery compared to 2012-13 when just 135,000 homes were built.

Helping new buyers doesn't make any sense if there aren't enough houses to start with, it just forces them to compete with each other and push prices up even more. When supply is the issue, encouraging demand simply inflates the price. And, far from helping new buyers, that pushes home ownership even further out of reach for the next generation.

Admittedly some analysts have said that this new support for buyers won't cause house prices to rocket because it will take up to four years for new buyers to benefit from the total government support. But I think we need to consider the development alongside Osborne's other plans...

An army of pensioner landlords

Osborne's Help To Buysa plan is not the only thing that risks inflating the housing market just now. From April, people aged 55 and above will be able to access their pension pots with greater freedom; they won't be forced into purchasing annuities anymore.

This has led many analysts to predict a rush of new buy-to-let investors next month as retirees invest their pension pots into property.

Once again George Osborne's scheme looks set to boost house prices, which are already an average of almost seven times people's incomes, according to Shelter.

Earlier this week, analysis from Halifax showed that homes in a fifth of local authority districts increased in value by more than the average employee's wages over the last two years – overwhelmingly in and around London of course.

Martin Ellis, housing economist at Halifax, said this was "good news for some homeowners" but warned that it makes buying a first home even more challenging for many young people.

I refer you again to my overly simplistic button analogy – there is no point helping people pay more for homes if nothing is being done to boost supply. All you do is support rocketing prices and hurt the next crop of aspiring buyers.

Rising house prices make existing home owners feel wealthier as the value of their property soars, which probably makes them feel more confident and happy that the government is helping them.

But these established homeowners will often have children or grandchildren who are struggling to enter homeownership thanks to the high prices, and they will expect the government to do something about it.

Sooner or later our leaders will need to take drastic steps to address the housing shortage, rather than appearing to act while making the problem worse.

What do you think? Are Help To Buysas a good idea? What should the government do to support new buyers? Have your say using the comments below.

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