Belfast Telegraph

Government ignores basic principles of economics

By Paul MacFLYNN

The Bank of Ireland last week became the second of the big four banks in Northern Ireland to sign up to the UK government's Help to Buy scheme. While many have sought to portray this as a welcome vote of confidence in the Northern Ireland property market, attention should be drawn to the many dangers this policy poses.

As with nearly all ill-conceived government policies, Help to Buy stems from fairly benevolent intentions. House prices in some parts of the UK have seen significant growth over the last number of years. Nearly all parts of the UK experienced some kind of property crash in 2008, but none as bad as Northern Ireland, and many have already recovered their losses.

Unlike here, the rest of the UK has actually experienced an overall slowdown in housing construction over the last two decades, leading to a shortage of supply in some of the most populous areas.

We then experienced the 2008 financial crash, which has led to an almost permanent crisis in most of the UK's banks. A new-found cautious approach to lending means that many banks are very strict in who they lend money to and how much.

The financial crisis also exposed a fundamental weakness in the UK economy. Real wages are falling, and they have been for some time. All of these factors have coincided to create a real problem for the UK economy. People cannot afford to buy houses. For this reason, the UK government has sought to act. Unfortunately it has misdiagnosed the problem, and its proposed solution could very well make the situation far worse.

As with all things in economics, it comes down to supply and demand. At the moment in parts of the UK, the shortage of houses and slowdown in construction means there is not enough supply in the housing market. While the number of available houses may have reduced, an increasing UK population means that even more people are seeking to buy houses. Economics tells us that when supply contracts and demand increases, prices go up.

The solution should be to increase supply, ie, build more houses. The UK government almost acknowledged this argument in last week's Autumn Statement – however they made no concrete proposals to increase supply.

Instead the government has sought to rectify the situation by gifting deposits (through a guarantee) to people who cannot afford them. The number of people seeking very few houses will now increase, as those who could not afford a mortgage before will now enter the market. All this policy will do is increase demand, and further increase property prices. Without significantly boosting supply, the government runs the risk of making a bad situation worse.

Northern Ireland is in a different situation to the rest of the UK. We have seen significant falls in house prices, some as large as 60%. This was because speculation and reckless lending among banks put house prices far beyond the reach of most people's incomes.

House prices are important. A house is the most valuable asset most people will ever own, but its value must be tied to something real. House prices should only increase as the value of buyers' incomes increases, not because a bank is willing to lend them more money than they were before. Help to Buy may be well-intentioned, but it is the wrong policy for the UK and the wrong policy for Northern Ireland.

Paul MacFlynn is a researcher at the Nevin Economic Research Institute

Belfast Telegraph