Help to Buy: a terrible policy doing exactly what we thought it would

When the Help to Buy scheme was first introduced in the UK, we were distinctly unimpressed. You can read our thoughts from two years ago here.

Our main worry was simple: subsidising one group of people to buy houses would push up prices, hence making it more difficult for all other groups to buy them.

That, it seems, is exactly what has happened.Capital Economics has been having a look at the share of loans with a loan-to-value (LTV) of over 90% (as all Help to Buy loans would be). They rose from around 2% of all mortgages up till the end of 2013, when the Help to Buy mortgage guarantee was introduced, to around 5% in the second quarter of 2104.

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Since then, take up of Help to Buy and of high LTV loans have fallen back. This is partly because government efforts to boost lending to riskier households run entirely counter to the efforts of the Bank of England to bolster financial stability by toughening up mortgage regulations, says Capital.

So regardless of the guaranteed bit, borrowers "with small deposits find it harder to pass the affordability and interest rate stress tests introduced as part of the MMR [mortgage market review] in April of last year."

But it isn't just that. The second part is exactly the part we worried about.

Thanks to the boost given to demand by the scheme, house prices have gone up for first-time buyers: "figures from the ONS [Office for National Statistics] show that homes bought by first-time buyers went up in price by 18% between March 2013 and September 2014, when the popularity of the scheme was growing, compared to a smaller rise of 14% for home-mover properties".

The result is that "since the scheme was launched, the value of a 5% deposit on a typical first-time buyer property has risen by over £1,500. And even factoring in the modest rise in loan-to-income ratios, the income required to buy an average first-time buyer house has increased by 12%. That compares to a rise in average earnings of just 1.5% over the same period."

So a subsidy that allowed a small number of people to take an early leap on to the housing ladder has had the final result of stamping on the fingertips of everyone coming behind. This isn't a surprise (we weren't the only ones to worry about it). But this subsidising the few at the expense of the many is still a bemusingly bad policy.