Office for Budget Responsibility says scheme will do little to boost construction industry but is likely to inflate property prices
George Osborne’s flagship scheme to boost the construction industry will drive house prices higher and make it even harder for people to get on the property ladder, the Office for Budget Responsibility (OBR) has said.
The government’s favoured economic forecaster said the Help to Buy scheme – which was one of the biggest announcements in the chancellor’s budget speech – would push up asking prices instead of encouraging housebuilders to start building new homes.
The OBR’s warning comes after the former chancellor Alistair Darling accused the government of stoking another housing bubble that could sow the seeds of a US-style subprime mortgage crisis.
Osborne used the budget to set out plans for interest-free loans and guarantees to support £130bn worth of new mortgages from 2014. Under the proposals, people buying new homes up to a value of £600,000 can borrow 20% of the value of their property interest-free for five years, in return for the government taking a stake in the equity. The government also introduced a new “mortgage guarantee” to help more people get a home loan without the need for a prohibitively large deposit.
The OBR said on Tuesday that the scheme would do little to boost the construction industry but was likely to inflate property prices.
Prof Stephen Nickell, a member of the OBR, told the Treasury select committee: “The key is: is it just going to drive up house prices? By and large, in the short run the answer to that is yes. But in the medium term will the increased house prices stimulate more housebuilding, and our general answer to that would probably be: a bit. But the historical evidence suggests not very much.”
The committee’s chairman, Andrew Tyrie, noted that the scheme was supposed to last three years, so any medium-term benefits would emerge only as the programme was being wound up.
The OBR chairman, Robert Chote, said strict planning laws limited housebuilders’ ability to build more homes, so the Help to Buy scheme was more likely to push up prices than increase the supply of new housing.
“If you were to note the fact that the planning system remains an important reason why the supply of new housing is relatively inelastic [and] the need of housebuilders for working capital, I suspect that more of it would have shown up in prices than in quantities.”
Chote said the OBR had been unable to make a detailed assessment of the impact of the scheme because ministers had not provided enough information on how it would work.
On Monday Darling told parliament that house prices would carry on rising unless more houses were built. “The irony is we are not prepared to build houses but we are prepared to stoke the finance of a bubble in housing prices, and that seems to me to be absolutely wrong.”