Could London’s housing market do with a brake? According to the Office of National Statistics, the 3 per cent rise in house prices in England in the year to June 2013 was driven by an 8 per cent rise in London and a 2.9 per cent rise in the South East. That compares with a 1 per cent rise in the rest of the country and has led to concerns of a housing bubble rapidly inflating in the capital.
The Bank of England’s financial stability watchdog, the financial policy committee, has been given responsibility to put the brakes on parts of the economy which are overheating by applying sector specific extra capital requirements. But with house prices in London increasing eight times quicker than the rest of the country, should carving the capital out of the controversial extension of Help to Buy be considered?
The first part of Help to Buy began operating in April and offers buyers 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.
More controversial is part two, 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.
Many have raised concerns that failing to link the scheme to an increase in supply could help inflate a housing bubble.
Labour MP for Erith and Thamesmead Teresa Pearce sits on the Treasury select committee which was highly critical of the Help to Buy scheme in its report on this year’s Budget. It said the Government’s claims that planning reform and measures to support more building of affordable houses would increase supply as Help to Buy helped boost demand as “unconvincing”.
She says: “London already has a housing bubble compared to most parts of the country and the Help to Buy scheme will only push prices up further and price ordinary Londoners out of their own city.”
Her party colleague in the London Assembly Tom Copely is Labour’s housing spokesman in City Hall. He says the Greater London Authority’s Economy committee has been told by developers that the extension of the scheme could be “very destructive” for the city.
He says: “I would support getting rid of it in London as I would support getting rid of it across the country. It is going to exacerbate the problem and it is going to be even more pronounced in London.”
So would a carve out from Help to Buy for areas where house price rises are already racing ahead of the pack help? Institute of Economic Affairs senior research fellow Christian Niemietz says: “It would probably dampen the effect but it would also contradict the whole purpose of the thing. The idea is that they wanted to help people in those constrained places.”
Adam Smith Institute research director Sam Bowman says the whole concept of Help to Buy is flawed and the argument for excluding London can be applied equally to the rest of the country. He says: “Help to Buy will push up prices in London and it will push them up elsewhere. A London carve out would be a start but it would be better to scrap the whole thing.”
Niemietz suggests abolishing or at least rolling back the green belt around London to create space for more building to help boost supply. He says: “The problem is that the Government want to be see to be doing something but they do not want to upset anyone, and opening up the green belt would upset people living there and the benefits would only be seen much later and might not be attributed to the Government.
The list of big names warning about a potential bubble resulting from this failure to link the scheme to housing supply continues to grow and Bowman says he is “cautiously optimistic” the Government might change course.
“The next election will be about the cost of living and steadily rising rents are squeezing an important group of voters. Help to Buy creates an upward pressure on entry-level house prices that, without an increase in supply of housing may soon become untenable,” he says.
However, New Economic Foundation senior economist James Meadway says that political calculation, an approaching election and the fact that the Government’s main aim has been to get the economy back on track means it will probably be spared.
He says: “Help to Buy will have far more of an impact in London and parts of the country where house prices are already rising and a carve out for those areas would in theory make it a better scheme. But no one is going to call for it because people would claim, quite reasonably, that it is discriminating against Londoners. Also, if push comes to shove an easy way to get the economy looking like it is moving is to sustain the house price inflation.”