The governmentb s latest plan to jump-start the housing market, under the guise of supporting mobility up the property ladder, has taken shape in the form of its b Help-to-Buyb scheme run by the Homes and Communities Agency (HCA).
Limited to new-build homes valued up to B#600,000, the scheme reduces the down payment required to secure an HT mortgage to just 5%, the remainder being split between a mortgage (provided by lenders at market price) and a government equity loan of up to 20%. In theory, the reduction in necessary down payment makes the dream of home ownership more accessible to lower income households than it would be with regular mortgage providers alone.
But the reality is far from being as simple. Economists, rather uncharacteristically, have been unanimous in their condemnation of the scheme, as Jonathan Portes, director at the National Institute of Economic and Social Research, suggested it would serve only b to push up demand while achieving virtually nothing on supplyb .
The dangers of stoking demand to levels beyond growth in supply, especially in a market for loanable funds predominantly supported by sub-prime borrowers, is a recipe for creating a bubble, a concept that in a post-crash economy should be setting off alarm bells.
The irony does not end there, with commentators quick to point out the schemeb s reminiscence of being the b UKb s own Fannie Maeb , the government sponsored enterprise credited with fuelling the housing bubble in the US.
In spite of the fear of moral hazard once again taking the wheels off the housing market, and HT loans making that inevitable, there have been encouraging signs on the supply side. Household construction output is at its fastest rate for new build homes in the past 26 months, attributed to “robust and accelerated” expansion of residential activity as a result of schemes such as HTB.
That is, unfortunately, where the positives appear to run out, as the increase in household construction is unlikely to b contribute positively to labour market conditions,” according to Tim Moore, senior economist at Markit, and only minimally supporting second quarter GDP.
Strategists have also denounced the policy as a way to keep young people b indentured [in] servitudeb by piling on b more debt to buy ridiculously expensive housesb , as a result of HT mortgages with LTVb s as high as 95%, including the governmentb s equity share.
With total gross lending at its highest point since October 2008, in part a result of schemes such as Help to Buy, in conjunction with record low interest rates in the market, it is worth noting the possible shortcomings that historically accompany such market behaviour, especially with the American debacle so fresh in our memory.
It remains to be seen if opening up the scheme beyond new build properties (a policy in the pipeline for early 2014) might reduce the risk of an unsustainable price hike in housing by evening out demand across the board. Time will tell if these concerns prove to be another cautionary tale, or simply a result of post-crash paranoia.