There were many aspects to George Osborne’s crowd-pleasing Budgets to dislike, but few promise do as much long-term damage as his Help to Buy, that impressive example of economic illiteracy. In the face of a shortage of housing supply, the subsidy to buyers stimulated demand, pushing prices further up and creating an artificial two-tier market.
An analysis this week from brokers Peel Hunt showed the baleful result, and quantified just how successful Help to Buy Builders Yachts has been. In the years before the 2008 crisis, the sector made steady profits of about £2bn. The profits then disappeared, and did not regain that level until 2015. At that point, Mr Osborne’s big idea clicked in, and the profits took off. Houses financed by Help to Buy typically fetched a 5 per cent premium over the market price, which came straight through to the bottom line.
In the past four years the sector has more than doubled profits, to more than £5bn a year, while building much the same number of houses as before the crisis. Help to Buy has transformed the trade’s margins, allowing dividends, which previously totalled about £500m in a good year, to soar to almost £3bn. Executives who happened to be in the right place at the right time have made fortunes, even at companies whose remuneration committees were more awake than those responsible for Jeff Fairburn at Persimmon.
This would matter less if some of the benefit had gone where it was intended, to the buyers of the overpriced homes. They are effectively being forced to gamble on a resumption of house price inflation, something the latest RICS survey cannot see.
After five years, the cost of the government help starts to rise sharply, to encourage owners to remortgage commercially or sell. If the homeowners cannot borrow enough or find a buyer at a profit, they will be looking for someone to blame for mis-selling them the loan. No prizes for guessing where.
Railing at the wrong target
London’s new railway is turning into very cross rail, as the traditional game of passing the blame gets under way. The scheme, commonly dubbed Europe’s biggest construction project, is late and over budget, and thus must be considered yet another example of Britain’s inability to build infrastructure.
This is silly. According to McKinsey, only two out of every 100 projects worth more than $1bn comes in on time and budget. The average cost overrun is 80 per cent, and the average delay is two years. Crossrail was supposed to start last week, but 2020 now looks a realistic target. In 2012 the estimate was £15.9bn, and the latest budget increase only takes it to £17bn.
Unlike that other railway, the £100bn (just wait) HS2, that is hardly a runaway financial train. The London Olympics had to come in on time, and came in on budget by the simple expedient of raising it to four times the original estimate. By these standards, Crossrail is a model of how to do it.
How to raise productivity
We are constantly being told how hopelessly unproductive we British are. The average worker in France or Germany produces much more per hour than the average Brit. Now it seems that while we do indeed lag behind those clever continentals, it’s by much less than we had been told.
The OECD has looked at the way the figures are compiled and found that differences account for half the gap, which is thus not 16 per cent, but only eight. This is still quite a lot, and increasing prosperity requires increasing productivity, but measuring it in real life is close to impossible.
Information that previously took hours or days to gather is now available in a few clicks. How productive is that? Airline productivity may have risen dramatically, but mostly by forcing the passenger to do nearly all the work themself. Banks no longer employ armies of tellers, passing over routine stuff to the customer.
We should be grateful to the OECD for sparing some of our blushes, and producing this helpful research. But the organisation itself is something of an anachronism, and its highly paid, well qualified employees might find themselves more productive employment by closing it down.
A full list of Neil Collins’ financial interests can be found at www.ft.com/collinsportfolio