Interest free loan lollyscramble part II

Not content with the interest free student loan scheme the government has decided it might be time to add an interest free home loan scheme (ht Rates Blog).

Now, this is essentially a transfer from everyone (taxpayers) to first home buyers and the people they are selling to.  In such a situation I have to ask why?  It certainly doesn’t seem fair to take money from people and give it to first home buyers and the section of the property market they are involved in … (disclaimer:  I would be able to get the loan as I would be a first home buyer – just like I have an interest free student loan.  This doesn’t stop me as an economist saying that they are bad policies)

The government says it is to “encourage building” – if this is the case, then why this scheme?  Why not a direct subsidy to home builders.

Furthermore, why do we want to encourage building – why aren’t we doing enough building.  The answer I believe is that in the current environment residential builders are credit constrained – so why doesn’ the government just offer them loans (at a MARKET rate of interest).

Bad policy idea …

  • Woot, another policy that is silly on a macro level that I can benefit from personally:D

  • Agree bad policy, but why would you expect it to hit only the section of the market first home buyers are in?

    Loans for first homes –> price of starter homes is bid up (some leakage via new construction) –> folks who’ve SOLD their starter homes have more money –> price of second homes is bid up (some leakage via new construction) … It works its way up the chain I’d have reckoned.

  • @Eric Crampton

    Indeed, it would also push up the price of other houses – it would be a pecuniary externality.

    But, if there the houses first home buyers go for are different to the composition of the general market, the impact on prices will be heavier in those markets. That is why I just mentioned that side of the coin. I agree that people moving “up the ladder” will be able to bid up prices – but unless they extracted the full surplus from the sale I’m guess that the impact on demand will be weaker.

    The main people that will lose out are people who really don’t want to buy a house – and people that aren’t eligible (I’m guessing immigrants) …

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  • Definitely stronger effect at the lower tail of the market. All will be complicated by differential elasticity of construction to prices at different segments of the market.

    I rather suspect that as a taxpaying homeowner I’m hurt more by this policy in tax cuts foregone than I’m helped by the slight unrealized capital gain…

  • Yay, inflation on houses = just what I need to make some extra cash on the place I bought in 2007.

    Shit policy, but good for me (in the short term)

  • @Eric Crampton

    Very very true.


    Maybe – you are still a taxpayer after all 🙂

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