Five problems with the Help-To-Buy scheme.
1. It could create a house price bubble
The UK is not building sufficient new homes to meet demand. Instead of focusing policy on the supply side the government has taken steps to increase demand by making it easier for people who couldn’t and perhaps shouldn’t to get on the housing ladder.
It is basic economics that if demand increases without an increasing supply prices will rise as a consequence of the shortage.
Government policy should not be underwriting and subsidising another housing bubble. This policy is not making homes more affordable but will make them easier and more expensive to buy.
2. It could help the well-off buy a second home
The Treasury has published a list of those who would be eligible to benefit from the Mortgage Guarantee element of the Help to Buy scheme, which is available on properties up to £600,000.
This did not rule out people using the scheme to buy a second home- an issue still yet to be clarified by the Government. The scheme may even be used by existing owners to remortgage their property.
As it stands, unless the eligibility criteria is revised to rule out people exploiting the scheme it looks like Osborne is making it easier for the well off to get wealthier.
3. Government policy should focus on social housing
Most experts argue that the State should be focusing policies that increase the provision of social housing to help those most in need in our society, rather than attaching itself to the mortgage market and helping house builders by making it easier to buy a new home.
The government should not be encouraging mortgage providers to lend to borrowers that it would otherwise consider too risky.
We all know what happens next.
The Government funds allocated for social housing are small beer when compared to the scale of Help to Buy, which could potentially underwrite £130bn of home loans.
4. The taxpayer is exposed to huge losses
If Help-To-Buy starts price bubble in the housing market that then bursts, leading to a property price crash many borrowers “helped” to buy could default on their repayments and lenders being forced to repossess and sell.
If house prices fall with resultant losses, it will be the taxpayer picking up most of the liability.
5. It may not lead to cheaper mortgages
At present only the banks partly owned by the taxpayer, Lloyds Banking Group and Royal Bank of Scotland have agreed to use the Help to Buy Mortgage Guarantee Scheme. If the scheme is to be a success it will depend on the uptake by lenders and the extent to which they reduce their rates and fees prices to account for the Government underwriting loan guarantee.
At present current financial regulations force banks to hold over six times more capital against 95% loan as they do for a 60% loan. The regulator may be looking at offering banks some relief from the capital adequacy rules.