One of the big debates following last week's Budget statement has been the likely impact of the Chancellor's new initiative to improve access to home ownership - "Help to Buy". The scheme aims to encourage housebuilding by countering fears in the development industry that a lack of affordable finance for buyers would leave new homes unsold. But will it help our cities combat the housing challenges that they face?
Under the scheme 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 Chancellor also introduced a new "mortgage guarantee" to underpin £130bn of new mortgage lending for three years from 2014, in order to help more people get a home loan without the need for a prohibitively large deposit.
While it is positive that the Government recognises how many people are struggling to buy their own homes, expert reaction to these policies has been mixed at best, with the Chairman of the Office of Budget Responsibility becoming the latest to suggest that the Help to Buy scheme may be more likely to push up prices than lead to an increase in the supply of new housing.
This is particularly concerning, as the reason why house prices are so high in this country is because we've consistently failed to build enough homes for the last 40 years. By increasing the availability of credit for individuals to buy a home, the Chancellor may simply succeed in increasing demand in a system that has too few houses within it to begin with.
Conservative estimates suggest that we are currently building around 90,000 fewer homes per year than required to meet demand. This lack of new housing and the associated difficulties with becoming a home owner are often discussed in terms of their social impacts. But there is a serious economic dimension to this debate that should not be ignored.
The average price of a home now stands at just under nine times the average yearly salary, and in many of our fastest growing cities, this picture is even worse. For example in the two most unaffordable cities in the UK, London and Oxford, the gap between the average wage and the size of deposit required to buy the average house is more than £50,000. In Cambridge and Brighton it is more than £30,000, while in Bournemouth and Reading it is over £20,000.
While existing home-owners and volume house-builders tend to view high and increasing house prices as a good thing, excessively high house prices like these are bad for the future economic success of cities because they price people out of the job opportunities that are available within them. This is bad for the individual, bad for businesses in such cities and, as a result, is bad for the local and national economy. Vodafone recently reported that it was struggling to attract middle managers to London because of high housing costs, while the CBI's recent London Business Survey found that businesses perceived high house prices to be one of London's biggest weaknesses.
So if "Help to Buy" is unlikely to lead to the boost to supply that is needed, what should be done? The new National Planning Policy Framework, which officially came into force this week, seeks to encourage further sustainable development across the country. But if the rhetoric of 'we need more homes' is to become the reality of 'we are building more homes' then more fundamental action is likely to be required.
As well as targeting specific funds to get stalled schemes in our most buoyant cities moving, we need to see more autonomy for cities to drive investment in new housing. By removing the restrictions on councils' ability to borrow money against their existing housing assets to invest in new housing, industry experts suggest councils could borrow an additional £2.8bn to invest in new housing. Cities should also be empowered to make decisions on the best and most viable sites for housing, which may include Greenbelt in some places.
But perhaps most fundamentally, there is a need to introduce more competition and variation into the house building industry. A good first step would be to encourage and support elements of the housing association sector to expand their role in delivering new homes, including for full private sale or rent.
Only by opening up the market to new players, and by being empowered to take a lead on significantly boosting the supply of housing in their area, can our fastest growing and least affordable cities meet the housing challenges they face and help restore sustainable growth to the UK economy.