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Is the Chancellor really taking a risk?

Following the Chancellor’s Budget Statement last week, there were a number of articles (Economist/Robert Peston, BBC) about the risk inherent in supporting the building of new homes
By Jablite

March 2013: Some commentators are worried that the UK house inflation bubble, created by limited housing and supply during the UK’s uninterrupted growth from 2000-2007, hasn’t really deflated. Despite five years of recession or very limited growth; real house prices are only 6% lower than at the peak of demand in early 2008.

This is linked to the Government’s funding for lending scheme (FLS) a government guarantee to lenders; it insures a proportion of their debt, should the companies they are lending to go bust.

There is some confusion over why this scheme has generated relatively low levels of cheaper finance to SMEs but ultimately it is due to low levels of demand. Britain’s economic engine (SMEs) has stalled because consumers at home and abroad (Britain’s exports to Europe were 55% of the total in Nov 2012) have lost confidence and spending power.

The point here is that despite the possibility of cheaper, insured finance, SMEs are not rushing to fund growth, because their customers are not buying as much.

So the Chancellor has determined that one way of stimulating economic activity is to build more houses, which by pretty much any measure you choose, are vitally necessary to meet pent up demand.

If his plan can encourage more people to trade up to a bigger home and mortgage then this could stimulate overall economic activity – it is Keynesian in its ambition

Will this stimulate a new house price/asset bubble? Despite the relatively large amount the Government is providing – £13 billion, this only represents 12% of the lending secured on dwellings for 2012 – a poor year by anyone’s standards.

Combine this overall low level with a substantial reduction in credit (debt) not secured on dwellings and an increase in savings rate on the scale not seen in the UK for nearly 60 years and the risk level becomes  more bearable.

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