Bank wants Help to Buy scaled back

Keys in a door

I have learned that the governor of the Bank of England would like the Treasury to reduce the maximum size of loan that qualifies for a government-backed Help to Buy mortgage from £600,000 to perhaps £350,000 or £400,000.

I will explain why this matters in a bit. But first, here's a bit of general context.

There is a lot of talk here in Davos about how this era of cheap money has pumped up asset bubbles.

In the UK, as you know, that concern focuses on whether the housing market is overheating - which it may be doing in London and the south east of England.

All of which raises the question whether it is time for the price of money (interest rates) to start being gradually raised from its historically low level in most of the rich developed economies.

There is a related issue in the UK, which is whether the pace and nature of the economic recovery - driven to a considerable extent by household consumption - justifies a rise in interest rates.

My sense is that the Bank of England's Monetary Policy Committee is not united on this issue, that some members are moving to the view that a small increase in interest rates would be beneficial sooner rather than later.

There is a lot of gossip from informed sources to that effect - that the governor, Mark Carney, who has made it clear in recent months that he would rather keep interest rates at current exceptionally low levels for as long as possible, risks being outvoted.

Against that backdrop, I interpreted last night's interview with Carney, on BBC's Newsnight, as a sign that he fears he may not be able to stave off a rise in the policy rate in coming months.

Mark Carney interviewed on Newsnight

Because what stood out for me was his emphasis that as and when interest rates rise, those increases will be very small - implying an initial rise of a quarter of a percentage point.

This sounded like a concession to his more hawkish colleagues - those who favour an earlier rise in rates.

Start Quote

Those who favour pushing up interest rates to prevent a housing bubble... could be placated by a reduction in the maximum Help to Buy loan value”

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Which will not thrill the chancellor, George Osborne, who will want to be confident that the UK's recovery is firmly entrenched before there is any rise in rates.

There is however one thing the chancellor could do which could perhaps stave off an interest rate rise for a bit longer, and that would be to modify his Help to Buy mortgage support scheme.

As I have already mentioned, I am in no doubt that the governor of the Bank of England would like the maximum size of mortgage that qualifies for a Help to Buy loan reduced from £600,000.

The reason is that in doing so, the charge could no longer stick that the Help to Buy scheme is pumping up prices in London and south east England, which is the only part of the UK where there are signs of overheating in the housing market.

How so?

Well the appalling truth, which you know, is that there simply aren't that many low value properties in the capital and its environs. So reducing the maximum from £600,000 would mean that Help to Buy would see reduced take-up in that part of the country.

So those who favour pushing up interest rates to prevent a housing bubble, and in turn reduce both incipient inflation and possible financial instability, could be placated by a reduction of perhaps £200,000 or £250,000 in the maximum Help to Buy loan value.

Would such a modification be embarrassing for the Treasury and chancellor?

Probably only a bit.

Because in practice, Help to Buy is already having more impact outside London, where it is needed most, than inside London.

I know this based on data about its impact, passed to me by banking sources, who point out three things:

  1. That the average value of Help to Buy loans is just under £150,000, which implies it is helping first time buyers and those on lower incomes
  2. That around 80% of Help to Buy mortgages are for houses outside London and south east England, where in theory they are most needed
  3. That so far there have been around £1bn of applications for Help to Buy loans, which implies that demand is good but not spectacular.

By the way, when I talk about Help to Buy, I mean specifically the second scheme, aimed at the second-hand market, not the original scheme to encourage house building.

Will the Treasury bite and reduce the maximum value to £350,000 or £400,000?

Well all I can say is that the Chancellor seems to be to show no sign of any waning in his admiration for Carney, so there is a fair probability he will heed his advice.

UPDATE 10:30

The Bank of England has given me this statement in response to my story on the Governor's position on Help to Buy:

"The assertion that the governor would like the Treasury to reduce the maximum size of loan that qualifies for a Help to Buy mortgage is completely without foundation."

For what it is worth, I stand by everything I wrote.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 30.

    Has 2008 been forgotten already? Government-backed mortgages are just another form of propping up the banks. Banks lend based on calculated risk, and this is done for a reason - risky loans are extremely dangerous and if/when things go desperately wrong again, the Government wont have the 'choice' of whether to step in, we will be legally obliged.

  • rate this

    Comment number 29.

    Osborne employed Carney to tell him what to do (not being an economist) so presumably he is going to do what he says.

  • rate this

    Comment number 28.

    One thing that's likely exacerbating the boom bust cycles we keep going through is property speculation. Building firms have land banks (Bovis 5 yrs) which they sit on thus pushing up the price of land. Land Value Tax would go a long way to stop such anti-social practices. It has other benefits too

  • rate this

    Comment number 27.

    Well done to the members of the MPC who want to do something about the house price inflation. Hopefully they will outvote Carney and start raising rates soon.

    If they decide to reduce the HTB2, surely it should be reduced down to 200-250K and not 350-400K.

    So MPC please outvote the governor and start raising rates!

  • rate this

    Comment number 26.

    A £570k mortgage (95% of a 600k house) would cost £28,500 per year on a 5% interest only mortgage and you would never own the property.

    Really helping the little guy.......

    When interest rates rise it'll put the reality back into the property market which has been overpriced for over a decade.

  • rate this

    Comment number 25.

    The Bank of England looks less and less apolitical to me and more and more like a part of the Tory party.

    Adjustments made now will be altered later to make the government look good as it comes up to the next election.

    I wonder how much the BoE paid for its Tory party membership did it get a group discount?

  • rate this

    Comment number 24.

    21.Mark "Raising rates now, will be filling the hole whilst still in it."


    Unless rates are actually raise the borrowers perception is that rates will never be raised so they will take on exponential quantities of economy crushing debt.

    The rule should ALWAYS be mortgage must be limited to 3 times earnings and never any more.

  • rate this

    Comment number 23.

    Carney's obviously going to raise interest rates in the medium term before cutting them back just before the election (for that "feel good" dosh in their pockets to bribe the illiterate electorate). Allowing people to possibly overstretch themselves to buy would send the wrong message when their homes get repossessed just ahead of the election.
    The BoE is not independent of the Tory party.

  • rate this

    Comment number 22.

    I don't believe Carney or Osborne are controlling the economy at all.

    It is as if they are riding a trick tandem bicycle and which ever way they turn they will create another credit bubble because they are constrained by their political and economic ideology.

  • rate this

    Comment number 21.

    When the country has dug itself into a hole, the first thing you do is stop digging. (Stop adding to the debt problem)

    Second, is to get out of the hole. (Pay a living wage so we can pay off our debts) fill in the hole.

    Third is not to do it again (ban credit and only spend what you have) then you can raise rates to reward savers.

    Raising rates now, will be filling the hole whilst still in it.

  • rate this

    Comment number 20.


    And this time when the housing bubble goes bust it'll be us, the tax (AGAIN......) picking up the tab for a large chunk of the defaulted mortgages....

    ....once again the tax payer is shafted by the Tories....

    .....this time in cahoots with the "mini me tories".....aka the "Orange Book" liberals....


  • rate this

    Comment number 19.

    It has never made sense to me that the government has capped the price of properties at £600,000 under this scheme.

    If you can 5% of £600,000 (£30,000) then you are not, by definition, "struggling" to get on the housing market - Given this would be considered a very reasonable sized deposit for a house anywhere other than London.

    Reduce it.

  • rate this

    Comment number 18.

    A lot of talk of the country doing well. Maybe DC and GO spend too much time with banker chums, the tax payer helped.

  • rate this

    Comment number 17.

    Interest rate rise before the election? Possibly, as there are quite a few savers, including pensioners, to be won over. But then again they don't want to lose middle England. So I guess a small rise is in the offing, but got to time it right. Not that any of this, or their, analysis takes in to consideration the effect it'll have on the economy long term, they're not bothered about that just now.

  • rate this

    Comment number 16.

    Perhaps if lending was also restricted to three and a half times your income we would never have these Government boom and bust cycles again and the market would find its true level. Negative equity here you come.

  • rate this

    Comment number 15.

    Must we encourage another housing bubble ?

    Also, in spite of today's announcement from the Ministry Of "Truth", there is no feelgood factor. People don't feel better off (unless they are bankers).

  • rate this

    Comment number 14.

    Carney must know we have achieved little regarding our manufacutring sector and the jobs we have created are the race to the bottom cheap immigrant labour trade off jobs that produce little tax return.
    The fact we are already talking about rate rises makes me suspect Carney will be leant on heavily to ignore the truth and turn on the profits for the banks 2 years early.
    Greed of the few!

  • rate this

    Comment number 13.

    What was wrong with old school (50s-60s) credit checks?
    Emphasis was on how long you'd held down a job, salaries, whether you'd paid off credit/ personal loans in the past, personal references.
    Now it is all about big deposits (often from mum & dad) and loan to value ratios. Protects the banks but not the borrowers who loan as much as they can to squeeze in one more tube zone.

  • rate this

    Comment number 12.

    I interpreted last nights interview with Carney as someone running away with the goalposts.

  • rate this

    Comment number 11.

    It is inevitable that the ecconomy will suffer.
    Throughout every economic cycle interest rates have been cut too soon, too much and too quickly.
    Conversely have always risen too late too little and too slowly.


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