The threat of a housing bubble is casting gloomy shadows over the Government’s Help to Buy scheme.
I understand the concerns. If house prices over-inflate, the consequences of the bubble bursting will be even more painful than last time around. However, I do fear that some critics are missing the point by focusing on Help to Buy.
The Chancellor was right to defend the scheme, which is after all a temporary measure and can be withdrawn to avoid a bubble. The real cause for concern in my opinion is the chronic shortage of housing.
The shortfall in housing is fuelling house price inflation in many parts of the country. The south and the south east are already verging on bubble territory. Many areas have seen double figure percentage increases year on year. This is one of the reasons why scrapping Help to Buy makes little sense.
Keeping potential first-time buyers in the rental pool pushes rent rates ever upwards. In turn, high yields increase house prices as more people are attracted to the buy to let market. Scrapping the “help” exacerbates the problem.
We need to build more houses and help people to buy their own homes. More competition in the market will help to keep prices down. The laws of supply and demand are uncompromising. We need to balance the equation.
Although the Government has fiddled with planning rules to make them less restrictive, more needs to be done to get local councils to accept new housing proposals. Not in my back yard-ism should not interfere with government housing targets. This requires top down pressure from the Government to local authorities.
It is crucial that the current cycle is broken. The laws of economics will not allow house prices to continue with this upwards trend while wages are stagnant, inflation is high and productivity is down. The recent recovery has shallow roots with private debt on the rise as people regain confidence due to the increase in equity. A worrying case of de ja vu for the economy.
Mark Carney has tried to secure the confidence of the markets by claiming that there is no prospect of an interest rate rise unless the UK unemployment rate drops to 7 per cent. However, the markets are alive to the small print. The interest rate could go up before then if inflation is out of control or financial stability is rocked. Any significant rise could wreak havoc.
We should of course look out for any warning signs that indicate a housing bubble. It is a genuine threat. However, George Osborne is right to defend Help to Buy and through it, the return of high loan-to-valuation mortgages.
Osborne recognises that a healthy property market goes a long way to making a healthy economy: “The Government’s Help to Buy scheme is a sensible, time-limited and necessary financial intervention to fix a specific financial problem: the dramatic reduction in the availability of high LTV mortgages… 90 per cent and 95 per cent LTV mortgages are not exotic weapons of financial mass destruction. They are a regular part of a healthy mortgage market and an aspirational society.”
Yes they are. But we also need to see a big increase in the number of homes on the property market if we want to keep house prices from bubbling over boiling point.
Dominik Lipnicki is director at Your Mortgage Decisions