If a week is a long time in politics, five months is long enough to cause a politician a real headache.
Unveiled in March’s Budget, the Government’s Help to Buy scheme was designed to prop up a struggling housing market and help borrowers struggling to raise large deposits to get on the housing ladder. But a recovery in house prices and credit conditions pushed the market back in the right direction and some critics now say the scheme is unnecessary and risks inflating a housing bubble. What is a Chancellor to do?
The first part of Help to Buy began operating in April and offers buyers of new build properties a 20 per cent equity loan, interest free for five years, on new homes worth up to £600,000 with buyers putting down a deposit of just 5 per cent.
Last week, figures from the Department for Communities and Local Government revealed a total of 10,000 new homes have been reserved under this part of the Help to Buy scheme. This has helped boost the number of mortgages to 68,200 for the second quarter of the year, the largest quarterly total for five-and-a-half years, according to data form the Council of Mortgage Lenders.
Part two of Help to Buy is a £130bn mortgage indemnity scheme where the Government guarantees up to 15 per cent of the purchase price, with the borrower putting down a deposit of between 5 and 15 per cent. Set to be launched in January, it will be available for loans to buy existing properties and will run for three years. A number of question marks remain over the scheme, such as the costs of the guarantee and whether lenders will qualify for capital relief.
The Policy Exchange has been described as David Cameron’s favourite thinktank and its senior economics fellow Alex Morton has a warning for the PM’s neighbour over his plans to extend Help To Buy.
He says: “The problem is it will only effect prices and not supply. It risks creating a mini-bubble where you increase mortgage lending for three years and there is a rise in prices and then you suddenly pull the rug from under that and prices crash back to where they would have been or even end up below that. They should take the money and apply it to other areas like supporting custom build housing which would explicitly link more lending with building new homes, and eliminate the risk of a price bubble.”
So is it a risk worth taking? ING Direct senior economist James Knightly does not tihnk so. He says: “There is certainly a less and less pressing need to provide stimulus to the market. It simply does not appear to be required.”
Building Societies Association head of mortgage policy Paul Broadhead says part two could be useful in encouraging big banks back into the high LTV space but warns it must not become a subsidy for them at the expense of others, such as the smaller societies, who already operate in this space to some extend. He says clear plans to withdraw the support after the three years must be laid out in advance.
He adds: “The nature of the absence of high loan to value lending would have been a key factor when the Government was deciding whether Help To Buy was necessary. My view is these things are more cyclical. Not long ago we were talking about whether or not 10 per cent mortgages were available so I think higher LTVs would have come back anyway.”
Last week, data from the Office of National Statistics showed house prices had risen 3.1 per cent in the year to July, up from a 2.9 per cent increase in the year to May. Figures from the CML show people are having to borrow more to buy a property with the average loan rising from £112,500 in May to £117,000 in June.
Despite these increases, brokers say improvements in the market mean people can access adequate loans without Help to Buy. Lentune Mortgage Consultancy director Stuart Gregory says: “I am seeing a range of between £40,000 and £50,000 in what people can borrow from different lenders because of how they fit into their lending criteria as well as some very attractive and affordable mortgages, even at a 5 per cent deposit. So even though it is good the Government has taken action I am not sure how necessary continuing Help to Buy for the next three years will be.”
Among those who have warned that the scheme risks inflating a new house price bubble include the previous Bank of England governor Lord King and Business Secretary Vince Cable. The warnings have been such that Knightly suggests there is a “pretty good chance” the Government could U-turn and decide against extending the scheme.
However, Conservative MP and Treasury select committee member Mark Garnier says he cannot see the Government backtracking. It should, he says, be a decision for the Bank of England’s Financial Policy Committee which is charged with spotting and acting against risks to the UK’s financial system.
Speaking to Money Marketing he says: “Can you imagine in 2005 if Gordon Brown had said he was worried about household debt and so he was going to somehow restrict access? He would have been torn apart. If George Osborne abandoned part two of Help to Buy there would be cries of U-turn and so it is quite right that politics is taken out of this and it be the FPC’s call.”
However, Morton warns it could be more embarrassing for Osborne to leave it to the FPC to block the scheme. He says: “There will be some booing from Labour if they revise the policy but if the FPC blocked this the Government’s own watchdog would paint Osborne as a risk to financial stability.”