Capital Economics has warned that the government's controversial Help to Buy scheme may hinder business investment. By making mortgage lending more attractive to banks than other types of lending, credit may be diverted from firms to households. If Help to Buy were to drive up house prices, leading to more mortgage lending, business loans could be crowded out.
The London-based consultancy cited evidence from US during the housing boom of the 1990s and 2000s. In those of parts of the US which saw higher house price growth, banks increased mortgage lending but decreased commercial lending. The full impact of Help to Buy has yet to be seen, but even before the scheme was launched, mortgage lending had been outpacing business lending. The flow of credit has been a major concern for UK businesses which have seen credit falling ever since 2008.
However, Capital Economics said that other factors may be able to improve business lending, in spite of the damaging effects of Help to Buy. The Bank of England's Funding for Lending scheme has been heavily directed towards small businesses and may have an offsetting effect. A rise in house prices will also give firms greater collateral to borrow against and large firms can still access capital markets with ease.
If the housing market is a driving factor behind the UK's improved economic outlook, the increasing confidence generated by the recovery could lead to broader-based and more balanced growth. If conditions in the wider economy remain positive Help to Buy will not have a huge effect on business lending.
Martin Beck, UK economist, Capital Economics:
Overall, while being unhelpful in some respects, HTB shouldn’t knock a recovery in business investment too much off course.
However, if the recovery is restricted to a boom in the housing market and debt fuelled consumer spending, credit conditions for businesses will remain poor.