A dodgy housing deal

Let's say you are a first-time buyer desperate to have your own house at a time when house prices are overvalued by most historic measures. And let's say that I have some control over house prices. I give you two choices.

I can let house prices fall to their long-term average relative to earnings so you can afford to buy a house; or I can put in place policies to ensure that (for now at least) house prices don't fall, but at the same time indulge in some dodgy dealings with the banks to help you get a loan you can't afford to buy a house you can't really afford.

Which one would you go for? The first? Me too. And if I were the government, I'd give it to you. Sadly, I'm not and it won't. Instead, you're getting the second option, like it or not.

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This week's Budget made a couple of things clear: that debt- and growth-wise, Britain is still in deep trouble; that as a result of this, the Bank of England will keep interest rates "lower for longer" to be able effectively to ignore its inflation target in pursuit of the magic unicorn that is modern growth (seehere for more on this style of financial repression); and that as far as the Treasury is concerned, the best answer to our troubles remains pretend austerity combined with monetary experimentation and a ban on market forces operating in the housing market.

So to the new Help-to-Buy scheme. This is basically an extension of the existing FirstBuy and NewBuy schemes to those who aren't necessarily first-time buyers (second steppers') and who don't necessarily have low incomes, but who still might not have the deposit they need to buy the house they want.

In essence, it provides a government-backed guarantee of up to 20% of £600,000 to those who can come up with a 5% deposit (the result being that the banks only have to offer a 75% loan-to-value mortgage).

Will it work? It might. If lenders haven't been as free as the government would have liked with mortgages recently, odds are it's because they have felt the risk of doing so is too high (given that the house price/earnings ratio is still around five times, versus a long-term average of 3.5). This takes a large part of their risk away.

That, say analysts at Capital Economics, means it could "lead to a substantial boost to housing demand" and risk "stoking up house prices again". That's good news for the banks (less negative equity), fabulous for housebuilders and feel good for those of us who own houses.

But I can't really see how it is that good for first-time buyers. As Capital Economics point out, "it does nothing to diminish the risks of a large house-price correction at some point in the future". Quite.

The fact that house prices are still overvalued doesn't mean that our crash hasn't made a good start. Take inflation into account and prices are down 20%-30% in most areas and 15% even in London.