Why does the Scottish Government insist on housing policies that fail

The lead story in today's Herald comes from a Common Weal briefing. We are arguing that John Swinney's proposed Help to Buy scheme for first time house buyers is a terrible idea which will do little or nothing to increase the supply of housing but will actively waste money on those who don't need it and inflate housing prices as a result – making the housing crisis worse.

Help to Buy schemes crop up on a recurring basis in British politics and can be seen as an encapsulation of precisely what is wrong in our housing system. Our politics continues obstinately to pretend that the housing crisis is about absolutely anything except the price of houses. It assumes that the market cost of a house 'just is' and so you need to subsidise the people who don't have houses.

There are layers of mistake in this. For a start, we know it doesn't work. Studies of previous Help to Buy schemes have failed to find any significant resultant increase in supply of housing but they do find that the outcome is a rise in house prices.

For example, on one occasion that it was used in London it was assessed by the London School of Economics and found to have cause a six per cent rise in house prices with no increase in supply at all. The reason for this is found in basic economics; the housing crisis is a crisis of price, not demand. There are plenty of people who want a house, they just can't afford one.

So if you create a market subsidy by giving potential buyers a cheap loan it increases demand but in itself does not increase supply. That is because it is not in the housing developer's interest to increase supply in a way that reduces price and therefore profits. As any economics student knows, if you increase demand but do not increase supply, prices rise.

That is most certainly not the only problem. The average deposit for a house in Scotland is about £40,000. First time buyers usually come in at the bottom of the market so the average deposit for a first house is closer to £20,000. It still means that a £10,000 loan only helps someone who has £10,000 in cash, and someone with £10,000 in cash is not the primary problem.

What is so ridiculous about this proposal is that this is exactly what the Scottish Government itself found in its own assessment of its last Help to Buy scheme. It concluded that a substantial number of those who took advantage would have been able to buy the house anyway. It was in effect subsidising precisely the people who needed support most.

So why do governments keep returning to a policy they know doesn't work? To understand that you need to follow where the money goes. While the proposal looks like a subsidised loan to house buyers, they can only spend it one house purchases, and since 70 per cent of the new build market is controlled by a tiny number of volume developers including Barratt Redrow, Persimmon, Taylor Wimpey, Bellway, Miller Homes, and Vistry Group, we know where this money will end up.

Which is to say that a very large proportion of all of the public money being spent on this will end up in the pockets of large property developers or speculators, and that simply enables them to raise their prices. The impact of this is bad across the board – while big developers control 70 per cent of the market now, it was only 42 per cent ten years ago.

Why do governments keep returning to a policy that they know benefits exactly the wrong people? The reasons as cynical. First, they believe that middle class young people looking to buy a house are more likely to vote than those reliant on social housing. But mostly, they make housing policy with and for the big developers.

Over the next two years there will be a battle of arguments. The volume developers will argue that what is causing the housing crisis is regulation and restrictions on their 'build everywhere' impulses. Common Weal and housing experts will warn that the problem is house price ratios, that houses are too expensive in comparison to average wages.

If the Scottish Government listen to the former they will follow the usual playbook of delivering the asks of big business, but that most certainly does not mean that big business will reduce prices. In fact that is almost all it has done for two decades and the result is that the average new build house now costs nearly £430,000 and the developers take about £40,000 in straight profit from every one.

If the Scottish Government listens to the latter it will take steps to increase public rental supply, force and constrain house price rises through property tax reform and rent controls, take action on the nearly hundred thousand of empty properties in Scotland and invest heavily in high-quality public rental housing that people actually want.

Pushing for the latter is now a key strategic goal for Common Weal over the coming 18 months.