Introduction
Equity schemes are often seen as preferable to grants for several reasons from an economic perspective, mainly due to their ability to prevent artificial price inflation and offer continuous support.
Equity Schemes and Grants in Housing
In the context of housing markets, equity schemes function by the government, providing a portion of the funding for a home purchase in exchange for a share of the property’s equity (James, Berry, and Marks, 2019, p. 19). This doesn’t increase a buyer’s purchasing power directly but allows first-time home buyers to borrow a more significant percentage of the house’s purchase price. They still need to save for a deposit, thereby maintaining their overall purchasing capacity. This approach ensures that the money available for buying a house is not drastically increased, which can prevent overheated bidding on properties. This restraint discourages developers from inflating property prices based on artificial demand, contributing to a more stable housing market.
Moreover, equity schemes tend to offer ongoing support to first-home buyers. As a co-investor, the government shares some of the risks associated with the mortgage (Manlangit, Karadimitriou, and de Magalhães, 2022, p. 3). This risk-sharing can make first-home buyers less likely to default on their loans, providing sustained help to stay in their homes and build wealth over time.
On the other hand, grants like the First Home Owner Grant can be prone to misuse. Although they are intended to make homes more affordable for first-time buyers, developers may seize this advantage by inflating the price of homes by the grant amount (Rahman et al., 2019, p. 226). This phenomenon, where the supplier of a good or service captures a subsidy, can inadvertently make houses less affordable, negating the original purpose of the grant. Additionally, grants offer a one-time benefit with no ongoing support, potentially leaving first-time home buyers more vulnerable in the longer term.
Conclusion
Overall, while both grants and equity schemes have their merits and demerits, the choice between them should ideally be based on individual circumstances and market dynamics. However, from an economic standpoint, equity schemes appear to be a more efficient and effective mechanism for assisting first-time home buyers, primarily because they can mitigate the risk of artificial price inflation and provide ongoing support (Manlangit, Karadimitriou and de Magalhães, 2022 p. 2). Equity schemes can lead to better market outcomes, particularly in housing markets prone to rapid price appreciation.
It should be noted that while the general principles discussed here are well-established in economic theory and practice, the exact mechanisms and outcomes can vary based on the specific design of the equity scheme or grant and the broader economic and policy context in which they are implemented.
Reference List
James, G., Berry, K. and Marks, A. (2019) Alternative housing tenures. Edinburgh: Scottish Parliamentary Corporate Body.
Manlangit, M., Karadimitriou, N. and de Magalhães, C. (2022) ‘Everyone wins? UK housing provision, government shared equity loans and the reallocation of risks and returns after the Global Financial Crisis’, International Journal of Housing Policy, pp.1-23.
Rahman, M. M. et al. (2019) ‘Subsidy incidence in privately negotiated spot markets: experimental evidence’, Journal of Agricultural and Applied Economics, 51(2), pp. 219-234.