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The chancellor's new housing scheme - "Help to Buy" - is less likely to help the housing market and more likely to create a staggering asset bubble. The scheme, which sees the government provide an equity loan worth up to 20 per cent of the value of new build home worth up to £600,000. It is expected to total £130bn of mortgage support from 2014-17. State-backed loans to first time buyers see the price of credit subsidised hugely, to what is traditionally the highest risk group of home purchasers. Using the government's balance sheet to back up these loans could end catastrophically, as rather than seeing financial institutions collapse on an asset bubble burst, we'd see the state collapse instead. This policy alone could jeopardise the entire agenda of getting the government's books in order.
Fundamentally the housing crisis is a crisis of artifically constrained supply. Planning permission rules need a radical overhaul in order to allow homebuilders to build new stock. Then demand and supply can deliver affordable housing.
Iain Coke, Head of the ICAEW Financial Services Faculty, said:
The proposal of help-to-buy home schemes may be welcome to those struggling to buy their next house. However, this will almost certainly result in higher house prices, which could make it more difficult for first time buyers in the longer term. The mechanism for the 130bn mortgage guarantee is critical, and must not cause banks to relax credit standards irresponsibly. Both schemes must be properly accounted for; neither is cost free.