To get the housing market moving, we need Help to Build

Last week’s protests in Spain - directly linked to housing policy - may yet bring down Pedro Sanchez’s government. Recent election victories in both New York and Berlin were both achieved by left-wing candidates tapping into unrest with housing provision, and rising rents. With a Northern Hemisphere winter ahead where the price of essentials looks poised to accelerate ahead of income growth the issue of housing costs won’t be going away anytime soon.

In the UK, having spent the first two years largely focusing on rental sector reforms, the government has now turned its attention to home ownership with the imminent unveiling of “Your First Home” - a policy that, despite limited details until the Budget, looks much like a revival of the coalition’s Help to Buy policy from 2013.

What we know so far is that the UK government will step in to provide a deposit bridge, worth up to 20% of the value of a new home, in the form of an interest-free loan. Emboldened by a recent report that was broadly positive of the impact of Help to Buy, the government is looking to generate a similar response in home ownership, and new home construction.

But let us not get too dewy-eyed about a policy that tries to plaster over housing policy failure.

In contrast to 2013 when the UK banking system was still coming to terms with the near-death experience of the subprime mortgage crisis, financing is not the issue holding back new UK housing volumes. UK lenders are in rude health. Back in 2013 at the launch of Help to Buy there were just over fifty mortgage products available offering Loan-to-Value (LTV) ratios of 95%. Finance was a clear impediment. The latest data from Moneyfacts suggests there are close to four hundred and fifty such deals today. Similarly, there are now more 90% LTV products available for potential homebuyers than there were ahead of the Global Financial Crisis.

The current market failure is not the financing backdrop to fuel housing transactions, but rather the viability of building new homes in the UK. This is a supply side problem. Not a problem of demand. And yet Your First Home - even after acknowledging that the policy will encourage additional housing volumes - is addressing a supply side problem with a demand side solution. Talk about muddled thinking from the Treasury.

How any policymaker can speak to the UK construction industry and conclude that pumping up demand is the sustainable answer is beyond me. This, and previous governments, have taken decisions that have contributed to a fifty percent increase in the cost of building a new home in the last six years. You aren’t going to do much for new housing volumes when development costs are increasing at twice the pace of wages and rents.

Whilst half of this cost increase has been labour and materials cost inflation, a full £39,000 has been the result of new regulations and fresh taxes specific to house builders. The combination of the Future Homes Standard, Nutrient neutrality and biodiversity rules, cladding and landfill taxes, and frictions from onerous new building safety processes - including dual staircasing, fits the classic description of how the UK economy has been governed in recent years. Namely, the implementation of individually virtuous policy measures with scant regard to the cumulative impact on economic competitiveness and inflation. The upshot has been a loss of construction site viability. The ex-ante assumption that these construction costs would be absorbed by declining land values has proved inaccurate. Recent data from Glenigan suggests UK housing starts are down 36% on 2025 levels so far this year, and 15% down over the last quarter alone.

Yes, if you throw enough countervailing demand stimulus at any market, including the housing market, supply will eventually respond. I suspect Your First Home will prove effective in unlocking fresh housing transactions and improving the viability of some housing development plots. The real terms value of the average UK house is down 20% from its 2022 peak, and back at levels last seen in 2013 at the advent of the original Help to Buy. Housebuilder shares certainly indicate this with the average UK housebuilder up 10% on the day this was announced. In the year after George Osborne announced Help to Buy UK housebuilder shares rose by 48%. That muscle memory for investors remains intact. But in a time of scarce government resources it is a very inefficient and inflationary approach.

It also speaks to a lack of joined-up economic thinking between the Treasury and the Bank of England. The global bond market is having another of those moments when it doubts the wisdom of large government deficits, and the path for inflation. Bond investors are expecting central banks to raise interest rates to reduce demand. At the very least the lack of policy co-ordination is on display. Over the coming months the Bank of England will be trying to squeeze excess demand out of a supply-constrained UK economy. Your First Home will be trying to force it back in.

This also repeats the mistake recent UK governments have made, contributing to high inflation, with the penalty showing up in our cost of debt. By gumming up the supply side, policymakers appear surprised when prices rise and calls increase from business or households for some offsetting support, or price controls. In housing the recent Renters’ Rights Act has triggered a refreshed withdrawal of rental supply, and a pick-up in rental inflation to 4.2% a year. Calls from opposition parties and Labour backbenchers for rental controls, rather than policies that support additional housing supply, are symptomatic of a lack of supply side thinking across the UK political class.

At my most charitable I could argue that this new policy is designed as a stopgap as recent planning reforms take time to translate to volumes. But twenty-seven months into this parliament the UK construction sector is almost 3% smaller than it was ahead of the election. This is despite six interest rate cuts and a state sector that has underwritten a large increase in departmental capital spending. This speaks to a cost problem making a shrinking number of construction projects viable without outright taxpayer guarantees. That is no way to run a healthy and productive economy.