Brown Tries to Prop up the Housing Pyramid...

So another year another budget, Brown has it seems concluded that 'New' Labour's political prospects are tied up with the housing market. The more house prices rise, the more people can release equity from their homes to say pay off a credit card go on holiday, buy a car etc... So to the chancellor a rising housing market lifts all boats and thus is a political positive for 'New' Labour. There is however a problem with this cosy state of affairs house prices are stagnating if not dropping in some areas of the UK. It is not a full blown crash quite yet but some commentators put the risk of a crash happening at one in four. If there is a house price crash a la 1988-89 then all political bets for 'New' Labour are off. A major source of stimulus for the economy would be knocked away with serious consequences for the wider British economy.

Gordon Brown is many things but one of is not stupid he realises that he needs to prop up the property market to prevent such a scenario from happening(well at least on his watch..). A key proposal in the Budget today is the subsidy for first time buyers with the government offering interest free loans to subsidise the purchase of their house. First time buyers have been priced out of the housing market by a steady increase in prices over the last ten years. The treasury is spinning this as a means of helping first time buyers onto the property ladder but neglects to mention it's desire to keep the housing market going for wider economic reasons. Without a fresh supply of firs time buyers the housing market will stagnate and possibly crash. Like any pyramid scheme fresh entrants are needed to buy properties,support the market and ensure steadily rising prices.

This then leads one to ask will these subsidies actually work? My take on this is: yes but for a limited time. These measures will postpone and make the inevitable housing crash even more painful than if it happened of its own accord by its attempts to re-inflate a partially popped bubble. The governments re-inflation of the housing market would then seem to be a short-term measure aimed at getting it re-elected and some positive headlines about 'helping' younger first time buyers. In political terms this proposal works very well for government both in the short and medium term but economically the country could pay the price in the long run.