“Government-backed housing guarantees: Ineffective aid or developers’ delight?”

“It is ineffective in areas where housing is no longer affordable y ends up benefiting the promoters. The last measure announced by the Government of Pedro Sánchez to help, according to his estimates, to about 50,000 young people under 35 and households with dependent minor children to buy a house, a guarantee of up to 20% of the mortgage and a measure that the Popular Party already offers in the communities in which it governs, for which it accuses Sánchez of having copied his electoral initiative, It failed miserably in the UK..

There, the baptized Help to buylaunched between 2013 and 2019, led to a sharp rise in house pricesespecially in areas, such as London, where it was more inaccessible to buy a home and ended up benefiting the developers of those homes.

“The aid seems to have ended up benefiting the owners and developers of land”

In fact, according to a study published in 2019 by the Christian Hilber London School of Economics & CEP, ‘Housing Subsidies, Supply Constraints, and Housing Affordability: Evidence from Help to Buy’. evidence from Help to Buy), these endorsements sparked a New construction home prices increased by 6.2% in the city of London and its municipalities, a percentage that, according to the conclusions of this study, represents almost twice the amount of the subsidy or aid received (3.2%). And not only that, but in London, did not have a significant effect on build volumes.

In other words, it did not favor the increase in supply in the market, which, according to the consensus of economists, developers and experts in the real estate sector, is what would really help to reduce tensions in the housing market in Spain, both in buy as for rent.

Prices rose and favored promoters

The program Help to Buy offered government loans of 20% – up to 40% in London – of the value of the vnew build property under £600,000. Since the loan to value (LTV) maximum offered by banks was 75%, buyers were only required to contribute 5% of the property’s value as savings. The objective of this program was to help households with fewer resources and without savings to overcome the barrier of credit restrictions in order to buy a house.

During its five years of implementation, according to another study on the impact of the Help to Buy in the United Kingdom, also prepared by Christian Hilber, Felipe Carozzi and Xiaolun Yu, for the London School of Economics and Political Science, more than 195,000 properties were purchasedloans totaling £10.7bn were signed, with property values ​​totaling £49.9bn, according to data from the Ministry of Housing, Communities and Local Government 2019.

And, despite the enormous financial outlay, the measure did not achieve the desired effects. “He Help to Buy is a ineffective policy in areas that are no longer affordable: increases subsidies and does not stimulate construction. Encourages construction in ‘wrong places’ (where it is easy to build, but not where there are productive jobs). Young people who want to buy in less affordable areasare probably not in a better position to buy, while the aid seems to end up benefiting land owners and developers. Policy makers in the UK should focus on supply side reforms rather than propping up demand.”

An article published this Sunday by The Times warned, for example, that “as demand skyrocketed, so did the price of new homes. While first-time buyers who bought without help they had to borrow 3.5 times their incomewho used the scheme Help to Buy borrowed 45 times, up to 6 times their income in the case of London. During the housing boom prior to the global financial crisis in 2007-2008, the average home loan was 4 times income.”

Promoters and banks, in favor of the measure

Despite the studies that show the lack of effectiveness of this type of guarantees, and unlike what happens with other types of measures such as the limit on rental prices, The private sector is positive about this type of initiative. Both from the bank and from the development sector.

In the case of Spain, as the President of the Government, Pedro Sánchez, advanced this weekend, he the creation of a line of guarantees from the ICO to finance up to 20% of the mortgage of those under 35 years of age when buying their first home. A measure conditional on their level of income – maximum 37,800 euros per year – and which will also be extended to families with dependent minors. However, the maximum amount of housing that these households could access is unknown.

“In the absence of knowing the details of this measure, if it is finally approved, we believe that the news would be positive for the Spanish developer sector, although the impact is difficult to measure,” according to the analysis department of Banco Sabadell.

“Reducing the commitment to pay with own resources to people who already have few resources is an incentive to default and leads to evictions”

“The aid would facilitate the acquisition of a home for many buyers who, even with recurring income to cover interest and mortgage payments, do not have enough savings to pay the down payment”. And the Sabadell analysts add that “in other countries where similar measures have been adopted (such as the Help to Buy of the United Kingdom), the impact on sales of new homes has been positive”. cheaper)”.

In addition, there are entities and communities that already use the figure of the endorsement. For example, the Community of Madrid signed the adhesion agreement with Santander, CaixaBank and Ibercaja less than a year ago to develop the My First Home program that allows increase the granting of a mortgage of up to 95% of the value of the property to those under 35 years of age.

On the contrary, the opinion in the academic world is much more critical of this type of aid. “Give money to rent or buy a house it can be well-intentioned. These are called demand incentives, but these are also have very harmful effects. In the UK, this measure led to the increase in house prices and had zero effect on access to housing. In other words, the British government not only spent billions of pounds in a measure that had no effect, but the money ended up in the pockets of the builders who sold the new houses, that is, precisely those who did not want to help “. Jaime P. Luque, associate professor at ESCP Business School, recently assured El Confidencial.

An opinion shared by Sergio Nasarre Aznar, Professor of Civil Law, founder of the UNESCO Chair on Housing, URV. “This type of aid usually has at least two negative effects. First, price inflation in new construction in stressed areas, as its price is guaranteed 20% with public money. And, second, because everything that is reduce the commitment to pay with debtors’ own resources (which necessarily required savings before, like the savings accounts of the 90s and early 2000s, and privations, and commitment,…) people who already have little or no savings, it is a incentive later to get into debt (more if sales prices rise, as we have seen), default and lead to evictions”.

In Nasarre’s opinion, “It is not recommended that mortgage debt be admitted beyond 80% LTV -indirectly is what is achieved with this public guarantee-, without contributing the rest with own resources -or savings- as was seen in the subprime mortgages of the world financial crisis of 2007. An alternative is to obtain a loan and buy what that one has and can contribute through Catalan intermediate tenures, such as shared ownership and temporary ownership”.