THE GOVERNMENT’S commitment to underwrite hundreds of thousands of mortgages is “like a drug” that will artificially inflate house prices, critics have warned.
George Osborne yesterday confirmed details of the next stage of his Help to Buy scheme, which will guarantee £130bn worth of mortgages from January 2014. Buyers will need a deposit of just five per cent to take part in the scheme, which will see the government underwrite borrowing on any properties worth up to £600,000.
But Graeme Leach, chief economist at the Institute of Directors, told City A.M. that the “economically dodgy but politically astute” policy will artifically inflate house prices without boosting housebuilding on the required scale.
“All this is going to do is drive up prices,” he said. “The risk is that the market crashes when this is withdrawn – and hey presto, everyone’s hooked on this drug.
“We’re trying to boost demand but the fundamental issue in the housing market is not a lack of demand, it’s a lack of supply.”
But Leach agreed with Michael Pearce of Capital Economics that increasing house prices could benefit the Conservatives at the ballot box.
The Treasury was yesterday at pains to insist that leading housebuilders such as Barratt and Taylor Wimpey have said they will increase housebuilding as a result of the policy.
Major lenders have now been issued with details of the scheme so they can prepare for the launch, with Lloyds the first to confirm that they will be taking part.
The scheme is expected to run for three years and a total of £12bn state guarantees will be made available.
The news came as figures released by the British Bankers’ Association suggested mortgage approvals by its members have hit a 17-month high as confidence returns to the market.
Part of this upturn can be attributed to the first phase of Help to Buy, which sees the government take an equity stake of up to 20 per cent in new build homes. It was launched this April and attracted 7,000 reservations in its first three months.