Another stunning article from someone I work with (I swear I’m not biased 😉 ), this one is about housing equity schemes. Now it seems the government is keen to introduce a housing equity scheme, having put money in the Budget for it.
Now, the article covers most of the problems with a shared equity scheme, so all you have to do is read it and tell me if you agree 😉 .
One thing I am going to say is that I think most of government/bank money put into the scheme, when the housing market is this tight, will go to the person selling the house.
In the case when the loan is avaliable to all but not income tested, everyone would be able to take out the loan to buy the house, but as their reservation value of the house hasn’t changed (and thats what they are willing to pay + the loan) the price will just go up. This is because the effective price is no different, and as agents are rational and know that the price of property will remain elevated, the rate of return on property won’t change the investment incentive either.
In the case when it is income tested, people on low incomes will be able to drive up the price of lower quality housing, much to the dismay of people on the margin who are unable to get the loans. Most people apply for a no credit check loan, and are able to get the loan that way. Here the full surplus may not go to the seller (as they face competition with other property types, and the whole demand curve is not getting subsidised), but some negative distributional effects will eventuate. In this case we are likely to find that those on low-moderate incomes (not low) are forced out of the housing market, does the government think that these people are worth less than the very poor?