Faced with the tricky task of sticking to austerity while winning over voters, chancellor George Osborne sorely needed a free lunch last week. Using a recipe called 'Help to Buy', he settled on the familiar dish of home-ownership. Theoretically designed to boost house building while helping the "aspiration nation" to buy homes, the scheme is more likely to drive up house prices - rewarding existing home-owners while burdening first-time buyers with more mortgage debt.
The policy has two elements. The first is a dramatic extension of First Buy, a fund for new-home loans announced in March 2011 and topped up last September. Buyers stump up a 5 per cent deposit; the government contributes a 20 per cent 'equity loan' - which incurs no interest cost but shares in any movement in the house price during the period of ownership; and a high-street lender covers the rest with a conventional mortgage.
But whereas First Buy was restricted to first-time buyers with household income of less than £60,000 and homes costing up to £280,000, Help to Buy will cover all buyers and homes costing up to £600,000. The revamped scheme is also much bigger; £3.5bn of equity loans are now available, compared with £530m under the two tranches of First Buy. The government expects the measure to support up to 74,000 purchases.
The impact on house building is likely to be marginal. The housebuilders are more interested in margin than volume (see Simon Thompson), and much of the £3.5bn will flow to households who would have bought anyway. Certainly, fewer extra homes will emerge than if the government used the £3.5bn to build them itself.
The second strand of Help to Buy offers government guarantees for riskier mortgages. It is based on last year's tentative New Buy scheme - whereby housebuilders back the 90-95 per cent portion of 95 per cent high-street mortgages - but goes much further. Most radically, the scheme can be used to buy second-hand homes, which accounted for over four-fifths of transactions last year, as well as new-build. It is expected to support £130bn of mortgages over three years - roughly equivalent to 200,000 loans a year at the average house price. With total mortgage approvals of 1.1m last year, that's a meaningful number.
There are apparent free lunches at two levels here. For a start, the chancellor is conjuring money out of thin air. The equity loans require cash and add to the national debt. But because they will be paid back and qualify as 'financial transactions', they do not add to the infamous deficit. The mortgage guarantees are even easier to sign off, as they require no immediate cash.
But these policies still carry risk. If house prices fall, the government will have to write down the value of its equity loans and pay out cash to banks that have taken out its guarantees. The obvious comparison is with the US, where the government has guaranteed home loans ever since the Great Depression through the bodies Fannie Mae and Freddie Mac. Their rescue from bankruptcy in 2008 is currently expected to cost the American taxpayer $76bn by 2015.
Luckily, this probably won't happen, because the other apparent free lunch is house-price inflation. The policies are specifically designed to expand mortgage supply, which in the light of recent history seems highly likely to boost prices. If higher prices encouraged construction, the extra demand might be met by new supply. But housing supply in the UK is notoriously impervious to high prices. Even in 2007 completions were 11 per cent below their post-war average.
Readers of Investors Chronicle may be tempted to cheer gains for homeowners and landlords. This was no doubt Mr Osborne's intended result: 65 per cent of households - including mine - own their home, so boosting house prices is good politics. But it comes at an often-ignored cost. The losers are future generations of owners, who have to pay higher prices; private renters, who have to pay landlords more to compensate them for paying higher prices; and taxpayers, who have to pay more to house social tenants.
For those who, like me, believe the aspiration nation's long-term interests are well served by the current housing downturn, there are two rather feeble rays of hope. One is that the mortgage guarantees never takes off. New Buy proved underwhelming: it was supposed to help 100,000 buyers, but so far it has attracted just 3,800 reservations. Banks are otherwise under regulatory pressure to avoid higher loan-to-value lending, and consumers seem sensibly wary of taking on debt they can only afford at today's exceptionally low interest rates.
The other hope lies in a more sensible Budget policy - the expansion from £200m to £1bn of a government loan fund for build-to-let projects. These stand a better chance than suburban villas of boosting the housing supply because they meet a broader economic need. The private rented sector has been taking share from owner-occupation for a decade.
Mr Osborne tirelessly blames Labour for saddling the nation with debt, but seems oddly keen for the nation to saddle itself with debt. That does hand the choice over to individuals, which is welcome. But it still betrays a faith in free lunches from debt and housing that recent history ought to have debunked.
