30 Sep 2013

Why has help to buy 2 been rushed out the door?

A lot of people were taken by surprise by David Cameron’s decision to bring forward the start of help to buy 2 from January 2014 to next week. Not least, it seems, his own business secretary.

BRITAIN-GOVERNMENT-CONSERVATIVES-HOUSING

But then again Vince Cable made his thoughts about state-backed mortgages pretty clear during his speech at the Lib Dem party conference earlier this month when he warned in no uncertain terms of “an old fashioned housing bubble”.

But there’s evidence Sunday’s announcement wasn’t long in the making. I’m told that when the “quad” (Cameron, Osborne, Clegg and Alexander) met three weeks ago to agree and sign off on government announcements, there was no mention about an acceleration of the flagship housing policy.

Instead, apparently it’s been rushed forward as a counter to Ed Miliband’s “cost of living” attack which included a plan to build hundreds of thousands of affordable homes – to address the “real” problem in Britain’s dysfunctional housing market, as Labour would have it- a chronic lack of supply.

Either way it does seem clear the policy’s being kicked out the door in rather a hurry since the key part of help to buy 2 – the government guarantee itself – still won’t be available until next January.

What happens?

So what will start happening next week (to be clear the week starting 7 Oct) is that the mortgage providers will begin marketing and offering their deals three months earlier than planned.

Natwest has its NatYES adverts ready, as does RBYES. But they will likely only fuel the fire of those who claim this is a policy destined to backfire as the availability of 95 per cent loan-to-value mortgages boosts demand which in turn pushes up house prices and fuels the wrong kind of economic boom.

The type where interest rates rise and cash-strapped households find themselves suddenly unable to make the payments on their hugely over-leveraged house purchase. Sub-prime mortgage anyone?

Of course that’s exactly what kick-started this whole crisis in the first place, only this time round, through help to buy 2, it’s us, the British taxpayer, on the hook for the riskiest 15 per cent of the loan book, should things start to go wrong and people start to default.

Bubble?

That’s not the smartest outcome, surely, for a government with the deficit still going in the wrong direction? It’s true the £12 billion of help to buy guarantees have been set up cleverly as an “off balance sheet” transaction which won’t hit the books, but any future losses certainly will.

The government would argue – and Philip Hammond did on our programme – that house price increases and transaction volumes are still way below their peak before the crisis hit. And it’s not fair that people earning decent salaries are either being stopped from taking out high loan-to-value mortgages or can’t afford the interest rates even if they’re approved.

Others would argue that’s no bad thing. That increasing the supply of houses while waiting for buyers to save their own deposits is exactly what our housing market needs, working to lower prices over time not cranking them up.

But the government has shown it’s determined to press ahead regardless. And judging by the number of times they’ve mentioned the new powers given to Mark Carney, the governor of the Bank of England, to stop a bubble developing, I don’t think you’ll have to look too far to see who’ll be to blame if it all goes wrong.

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3 reader comments

  1. adil says:

    Do you think that this will be similar to the sub-prime catastrophe? I’m hoping that the Government will have put some checks in place to ensure that the levels of repayment are affordable to those taking out the mortgage. But, for me the real point here is the bubble is created by speculators. The very fact that there needs to be this help-to-buy suggests that the housing ‘market’ is over-inflated already. We need to look at the root cause of this and I’m afraid that it’s property speculation – people believing investment in property is a sure fire winner. It would be interesting to understand of the new-built buildings (say flats) how many are buy-to-let and how many expect to live there.
    Neither the help-to-buy scheme nor increasing the number of homes will help. What will help is to reduce the buy-to-let market.

  2. Caterina says:

    I personally know a very rich London based person who is busily applying for loans under this scheme. She is planning to buy high spec apartments to rent out. Her friends are doing the same. Is this an intended or unintended consequence? Stopping ‘land blocking’ would help – why not 6 months to submit plans or the land must be re-sold? The release of more land for building and encouraging individuals to buy rather than developers would help owner builders have a chance. I can’t help but think that this is either a very ill thought out scheme or it is actually intended to help those who already have.

  3. Andrew Dundas says:

    Enabling existing home-owners to buy another home with only a five percent deposit boosts spending.
    In effect, movers can release some of the house price appreciation in their homes. That gives them access to a very low interest loan with which to buy a new car, appliances and so on.
    That increased spending feeds through into a “feel-good” euphoria ready for May 2015’s General Election.
    Too bad if the hike in house prices makes it harder for younger voters: they don’t bother to vote anyway. It’s the older generation who change governments. That’s why this subsidy for them is so significant.

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