Was Help to Buy not such a big deal after all?

The Swedish central bank – the Riksbank – has cut its main interest rate to zero in an attempt to fight off deflation. Its policy of tightening monetary policy after 2010 to bring down house prices and household debt failed spectacularly: 'Like drenching a field of crops to put out one campfire,' as the FT put it in an excoriating leader. Sweden has paid a heavy price in lost jobs and growth.

Here, the Bank of England's more carefully targeted interventions to rein in unsustainable mortgage lending – particularly that lenders limit the proportion of mortgages at loan-to-income multiples of 4.5 and above to no more than 15 per cent of their new mortgages – appear to have been more successful. House prices are now falling or stabilising (depending on the data source) and the number of mortgage approvals for house purchases fell to 61,267 in September from 64,054 in August. This is well below the bank's forecast of 75,000 monthly approvals in the last quarter of 2014. In short, the housing market is cooling.

It therefore looks like the government's flagship Help to Buy policy has not had the dramatic effect its supporters or detractors (like myself) predicted. Hitherto at least, it has been too small an intervention in the housing market. New figures released show that cumulative completions on the Help to Buy equity loan scheme (which gives a government equity loan of 20 per cent of the property's value) have numbered just short of 34,000, while only 5,500 purchases have been completed on the New Buy element of the programme (which gives a government mortgage guarantee). The fear that it would stoke the housing market – or indeed the hope that it would produce an army of homeowners, akin to Thatcher's council-house buyers – has not materialised, at least thus far. To put these figures in context, HMRC data shows that there were 1.14 million residential property transactions in the UK in 2013/14.

Still, house prices far remain too high, particularly for first-time buyers, as this graph from the Priced Out campaign group shows:

Figure 1: House prices using Help to Buy equity loans

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The Help to Buy scheme has generously supported some well-off house-buyers too. Nearly 20 per cent of the scheme's beneficiaries are in households with incomes over £60,000. At the top, Help to Buy has assisted more than 1,000 households with incomes over £100,000 to buy new homes.

Figure 2: Cumulative number of legal completions to 30 September 2014, by total applicant household income

A sustained slowdown in the housing market would be welcome news for first-time buyers. It would tend to reduce wealth inequality. But it would also mean that households did not build up as much debt. That is good for the rebalancing of the economy, but not for the Office for Budget Responsibility's projections of economic growth, which depend on the household sector borrowing more or using up its savings, rather than deleveraging. The chart below shows why.

Figure 3: Sectoral net lending

If the public sector reduces its deficit but households do not extend their debts at the required rate, then business investment and exports must take up the slack. Despite recent strong increases in business investment, that looks heroic (not least because of the ongoing travails in the eurozone). Conclusion? The public sector deficit will take even longer to fall, and British consumers remain highly leveraged by international standards.