Government gloats of Help to Buy success as bubble expands

Since the launch of the Help to Buy equity loan scheme in April, there have been 10,000 reservations for new build homes: evidence, the government has said, that the scheme is working (release).

Earlier today, communities and local government secretary Eric Pickles said:

This government’s package of measures to boost the housing market is working, with house building and housing supply on the up. The tough decisions we’ve taken to tackle the deficit are now delivering a sustainable increase in housing and providing real help to hard-working people.

But there are growing concerns that the government scheme is creating a housing bubble - an issue brought up by City A.M. editor Allister Heath after the budget was announced in March this year.

If the chancellor’s inability to tackle our fiscal crisis is frightening, his attempt at trying to recreate a private sector housing bubble is truly terrifying. In the 1980s, Margaret Thatcher’s right to buy policies helped created a sustainable home-owning democracy, based on individual responsibility and genuine private property, and Osborne’s small extension to that scheme is good news.

But his help to buy policies are a perversion of that Thatcherite tradition, which helped millions of ordinary, hard-working aspirational folk declare their independence from the state and from social housing. Osborne’s plan achieves the opposite: it injects social democracy into home ownership and is making people more, rather than less, dependent on subsidies.

(Full article)

The equity loan part of the scheme provides buyers of newly-built homes with a value of up to £600,000 with a 20 per cent equity loan interest-free for five years.

The second part, which will begin in January 2014, is set to guarantee a proportion of a loan on any property worth up to £600,000. But the government is coming under increasing pressure to drop this part of the scheme amid fears it could worsen the housing bubble further, making it even harder for first-time buyers to get on the ladder.

Ironically, the government seemed keen to highlight that new housing supply is at its highest level since “the tail end of the [2008] housing bubble”, with a total of 319,000 additional homes added in the two years to October 2012.

One key statistic notably absent from the press release is the effect the scheme has had on house prices. The Royal Institute of Chartered Surveyors’ said this morning that house prices are rising at their fastest pace in seven years, with the seasonally adjusted house price balance jumping to +36 in July from +21 in June and just +5 in May.

From the same Heath article referenced earlier:

The problem in the housing market – including that of excessive prices – is an insufficient supply of the right kinds of homes in the right places, which is damaging the quality of life of millions. The best way to tackle this deplorable situation is to drastically increase house building, and the supply of homes, not to further increase demand. Sadly, this isn’t on the cards: one of the Budget’s many failings was that it didn’t deregulate the UK’s antiquated planning laws.

Instead, we are left with a system which will turn thousands of homeowners – with properties worth up to £600,000 – into recipients of other taxpayers’ largesse. The 20 per cent loan is interest free for the first five years. From year six a fee of 1.75 per cent is payable on the equity loan, which rises annually by RPI inflation plus one per cent.

What will happen to all these new, riskier home owners with tiny deposits when interest rates eventually go up, or if house prices slump? It will be a catastrophe, and taxpayers will bear the loss. In the short-term, this policy may well buy votes; it is, however, bound to end in tears. It is astonishing how some people simply do not learn any lessons from history.