House prices and the free market

Recently a new report by Shelter suggested that 80% of homes were unaffordable to most families. Government intervention on this issue has failed us. Perhaps it is time for a free market solution?

Firstly, the government’s “Help to Buy” scheme is not helpful. It allows people to take 95% mortgages by allowing the banks to make less risky mortgages and the government paying the rest. The problem with this is that it allows people to buy homes they can’t afford.

The example of the Help to Buy website shows the government adding in £20,000 to the £5,000 deposit the buyer has, thus allowing them to buy a £200,000 house. But they cannot afford a £200,000 house. Based on the deposit they are putting up they can afford a £40,000 house. However, state intervention then allows everyone to charge £200,000 and have buyers for them, thus house prices go up to way beyond what they should be.

Secondly, the banks are willing to take large risks on mortgages because they know the government will bail them out if they get into trouble. Thus they can take huge risks, get rich when times are good and make the tax payer pay when times are bad. Who wouldn’t do that?

The government should stop doing things to make this huge prices affordable and actually do the opposite – making them unaffordable! Thus the free market would then bring prices down.

This, not propping up unaffordable house prices, is where state intervention would be useful. In order for the free market to function effectively you need to ensure there is liquidity in the market. This can be achieved by making sitting on second homes unaffordable.

Leeds City Council has already taken steps to do this. They have revoked council tax discount on empty properties and after two years you even may a premium of an extra 50% (you pay 150% of the normal council bill) to encourage you to sell it. Similarly, as I wrote about in 2012, you could just ban people from buying second homes.

Ending the state-sponsored propping up of house prices and introducing further measures to add liquidity to the housing market could then allow the free market to bring house prices down to a reasonable level.

Obviously this is a topic that most people will have an opinion on, so I would love to hear why I am wrong (on which I expect there will be some good arguments).



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This entry was posted on Saturday, June 28th, 2014 at 10:55 am and is filed under Religion & Politics, Thoughts. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.