Cheap money will push up house prices

Tim Wallace
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GEORGE Osborne’s mortgage guarantee scheme will push up house prices instead of making housing more affordable or boosting construction, the government’s top economic forecaster warned yesterday.

The Office for Budget Responsibility’s (OBR) attack came as Osborne revealed the Treasury hopes to avoid making losses on the guarantees by charging banks a fee for the support – although the exact details are yet to be determined.

The chancellor told the Treasury Select Committee yesterday that he is helping buyers to get on to the housing ladder despite the UK’s difficult macroeconomic circumstances.

But the OBR argued the impact would be felt mainly in climbing prices.

The Help to Buy scheme – announced as part of last week’s Budget – will guarantee up to 20 per cent of a mortgage for buyers with only a small deposit saved up.

Osborne hopes the subsidy will make banks treat people with a five per cent deposit as if they had a 20 per cent deposit, getting around the higher deposit requirements demanded by banks in the wake of the financial crisis. But he came in for criticism after the OBR’s Steve Nickell said the scheme would barely boost the market.

“Is it just going to drive up house prices? By and large, in the short run the answer to that is yes,” the forecaster told MPs on the Committee.

“In the medium term will the increased house prices stimulate more house building? Our general answer to that would probably be: a bit. But the historical evidence suggests not very much.”

MPs criticised the chancellor for creating a scheme that will drive prices even further out of reach of many first time buyers and young families.

But Osborne rejected the argument.

“The big obstacle is the size of the deposit required. In the market at the minute the number of first time buyers has halved and their deposits have doubled as a percentage of income,” he insisted.

“This creates economic problems – it is more difficult to own your own home – and a social problem – you cannot aspire to home ownership. This guarantee is designed to address these problems.”

The Treasury believes the guarantee could apply to 190,000 mortgages over the three years from January 2014, leaving the taxpayer with a contingent liability of up to £12bn.

It plans to cover the cost of the scheme and any defaulting borrowers by charging lenders a fee.

But the details of how that will be levied are still up in the air, with the Treasury in hurried discussions with lenders over how much of the guarantee would be charged as a fee and whether the charge would be lined to the riskiness of the borrower.