Will Help to Buy equity loans create a new housing bubble?

From April this year anyone wanting to buy a new home is entitled to a ‘Help to Buy’ equity loan from the government worth up to 20% of the value of the home. It will be interest free for the first five years and up to a maximum value of £600,000. The scheme will provide £3.5 billion of investment and expected to help around 75,000 home buyers.

Armed with just a £10,000 deposit, a new home buyer could get a government loan of £40,000, a mortgage of £150,000 and then be able to purchase a house worth £200,000.

According to the Home Builders Federation (HBF) the scheme is already proving popular – there have been 4,000 new home reservations in the first two months of the scheme.

I thought it would be worth looking at the pro and cons of the scheme and whether this is a good use of £3.5 billion of tax payers money.

Arguments in favour of the Help to Buy scheme

  • The government are helping people who would not otherwise be able to raise a large enough deposit to buy a home
  • The mortgage market has virtually ceased-up and this will assist lenders to go about their business of lending
  • Because people can’t get a mortgage, insufficient homes are being built – new home building is at its lowest level since the 1920’s. There were 88,000 houses build last year, but the Department for Communities and Local Government estimate that the UK needs 220,000 new homes to keep up with demand.
  • The construction industry is one of the worst sectors hit by the economic downturn. By stimulating house building, it will help the wider construction industry and the economy generally.
  • The Home Builders Federation have already seen developers committing to increasing supply and state that ‘it is clear the industry will be able to significantly increase output’

The case against Help to Buy…

  • The government should stay out of the housing market and let the prices find their own level, which would almost certainly mean that prices fall further and this would therefore help all first time buyers
  • Pushing up house prices could create another housing bubble, which is part of the reason the economy got into a mess in the first place
  • From an ideologically viewpoint, is it the role of Government to inflate house prices?
  • It is not just for first time buyers – even foreign investors could take advantage of the scheme. Has it been thought through?
  • Could the £3.5 billion be better spent in other areas of the economy – improving infrastructure, school buildings etc.
  • Should the Government be addressing other housing-related issues e.g. a lack of mortgage finance and removing some planning regulations and restrictions?

What you won’t hear!

You won’t hear a Government Minister say that the UK needs more inflation to help ease the debt burden – amongst other things, this would upset foreign investors and cause problems with the currency and cost of borrowing! Even less likely is to hear the government admitting that higher house prices will help many of their supporters.

Quick fix…

The problem is that there are not many other options for a quick fix, or at least preventing things getting worse. If people thought house prices were going to keep on declining, then the economy could flip into a death spiral with any remaining consumer confidence completely evaporating. People would not want to spend with their house falling in value; even less homes would be built and the economy would have no growth thereby re-igniting the debt problem.

With the main opposition party currently having no intelligent economic policies (see Ed Miliband is a blancmange in a hurricane) there are probably worse ideas than the government producing a little bit of inflation in the housing market. And as for a housing bubble, the market is almost dead from a transactions point of view, so anything resembling a bubble right now looks a distant prospect!

We will be happy to hear your thoughts

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