Across the Pond

As the US continues to discuss what to do with Fannie Mae and Freddie Mac and how to reframe housing policy so we don’t have another boom and bust, there are similar debates in England, as explained by Martin Wolf in the Financial Times.  If this sounds a bit like the US story some ten years back, it does.  The British government’s Help to Buy policy will provide financial guarantees equal to about 8% of the nation’s GDP. First, the government will offer loans to home buyers for 20% of the purchase price, enabling someone to buy a house with only 5% down. Second, the government is providing partial insurance on mortgage loans similar to what Fannie Mae and Freddie Mac do for US banks.  The results of this could be like the US boom – rising home prices and lots of buyers, some of whom couldn’t buy a house without the government’s help.

In the US, similar conditions (including loans with little or no money down) helped push prices up and up and up while also sparking a building boom in cities with plenty of open space for new construction.  The difference in England is that land use policies are more stringent and there is much less land available for home construction.  The likely result in Britain may be even larger increases in home prices with very little addition to supply.  The Help to Buy program will help to raise home prices while supporting banks making mortgage loans to people buying houses with only 5% down.  It isn’t like to expand the supply of housing very much.

The posts on this blog are opinions, not advice.
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