Viewpoints: Will Help to Buy create a housing bubble?
- 13 September 2013
- From the section UK
UK house prices have been rising at the highest annual rate since June 2010. The rise coincides with the government's Help to Buy scheme, introduced to boost the housing market. But will the scheme create a new housing bubble?
UK house prices have risen by 5.4% in the year to August, according to the Halifax's latest house price survey.
The government's Help to Buy scheme, which began in April, allows buyers to put down a deposit of just 5%, and take out an equity loan from the government for up to 20% of the property's value, up to a maximum home value of £600,000.
It is designed to help first-time buyers get on the property ladder and enable existing homeowners to "trade up" to larger properties by giving banks greater confidence to lend.
Help to Buy currently only applies to new builds but from January it will be extended to cover existing homes, with mortgages being backed by a government guarantee.
The scheme got off to a "flying start", according to the Home Builders Federation (HBF) in June.
But Help to Buy has also been criticised for having the potential to artificially raise house prices, with Business Secretary Vince Cable warning of "serious inflationary pressures".
Experts give their views on whether Help to Buy risks creating a new housing bubble.
Dr Beverley Searle, research fellow at the Centre for Housing Research, University of St Andrews
Help to Buy, or any intervention which helps pay for housing, will inevitably create a housing bubble. Providing assistance with the purchase of housing artificially props prices up. We have witnessed this twice before. When it became easier to borrow money during the 1980s house prices rose. Even after the 1990s downturn the market just kept finding ways to lend people more money, allowing prices to rise again.
If people cannot afford to buy a home because they cannot afford to save for a deposit, then there is something fundamentally wrong with the housing system. The government are clearly acknowledging this by providing an additional "deposit loan".
For prices to stabilise there needs to be a significant increase in the supply of housing for sale and rent and the market given time to adjust. Even though Help to Buy is aimed at new build properties, it will interfere with this adjustment process. It seeks to encourage high levels of demand, with only a very limited increase in supply.
The housing market has failed, it needs government intervention, but this should be in supplying housing people can afford, not letting them borrow more money for housing they cannot.
Ed Stansfield, chief property economist at Capital Economics
Help to Buy equity loans, which were introduced in April, are a good deal for both borrowers and the banks. For the borrower, they give access to mortgages with lower interest rates than would otherwise be possible. They can cut the monthly repayments a borrower might face by a third. The loans also protect the lender against falls in house prices and are simple to administer. So it is little wonder that these loans have proved popular with lenders and borrowers.
Help to Buy Mortgage Guarantees, due to be introduced in January, have the potential to assist a far larger number of borrowers than the equity loans.
So I can see why people are concerned that a huge boost to demand will give a sharp boost to house prices, which are already worryingly high. But the scheme's complexity is likely to boost lenders' costs, as will the fee that the government will charge.
As a result, mortgages backed by the proposed Government guarantee are likely to be relatively expensive for the lender and thus the borrower too.
I doubt that take-up will be anything like as high as is widely expected. If that is right, talk of a renewed house price boom may prove to be premature.
Ben Southwood, head of macro policy at the Adam Smith Institute
Help to Buy has been roundly condemned by a host of credible individuals and organisations, for good reason. As our recent research paper showed, Help to Buy risks inflating a new housing bubble, worsening inequality, and sees the government take a punt with billions of pounds of taxpayer money.
Under Help to Buy, the government will get into the home loans market, offering loans of up to 20% of the price of a house (up to £120,000, since the most expensive eligible house will be £600,000), interest free for five years, and at below-market rates afterwards. On the other side, the government will also offer cut price insurance to lenders, sharing some of the risk if mortgages go into arrears.
Firstly, this directly incentivises mortgage lenders to take more risk, since they will not take all of the losses when loans go bad. Many have seen a very similar set of policies as a major cause of the giant bubble in US house prices that collapsed and set in motion the world financial crisis.
Secondly, if everyone uses the scheme, no buyer will be worse off, but the taxpayer will simply have handed over a giant lump of cash to homeowners. This is because the cheap loan functions as a subsidy, adding to the demand for houses, but the supply of houses is restricted so tightly it can barely respond - so the effect will come almost entirely through higher house prices. If only some use the scheme house prices won't rise quite so much, but those who take the subsidised loans will gain at the expense of those who don't.
Thirdly, renters, often the worst-off people in society, will be clobbered as the supply of houses to rent dwindles.
But what's most annoying about the scheme is that there is a better solution: liberalise planning rules to allow more houses to be built.
Ray Boulger, senior technical manager at mortgage brokers John Charcol
In the desire for a good Budget headline George Osborne has caused unnecessary confusion by calling two very different schemes "Help to Buy". Their only similarity is that both are designed to help people with small deposits.
The concept of stimulating the housing market, within reason, as a way of boosting what was a moribund economy has considerable merit. The knock-on economic benefit from increased housing transactions is significant and outside London and parts of the South East house prices are still well below their 2007 peak.
Because the existing Help to Buy shared equity scheme is only available on new build properties, it is well targeted and is working well. It is already stimulating much needed increased construction of new homes and around 90% of sales on the scheme have been to first-time buyers.
It offers exceptional value to purchasers, many of whom have recognised this. As a result indications are that over 40% of current sales of the volume developers are on Help to Buy and funds allocated by the government will run out well before the scheme's planned three-year life.
After three years with little change in the amount of gross mortgage lending, indications now are it will increase about 20% this year and prices will rise around 8%.
As a result the second Help to Buy scheme, where the government plans to insure high-loan-to-value mortgages, is now redundant. The chancellor should recognise this before he wastes any more money on the new IT required to operate the scheme.
Richard Lambert, chief executive officer of the National Landlords Association
In itself, Help to Buy is a relatively small injection of additional capital to help buyers overcome the restrictions on lending hanging over from the financial crash of 2007. It's ironic that mortgages are almost inaccessible at the point in history when they are most affordable.
The government hopes that if the market starts to move, house building will increase. True, there are signs of increased activity, but not enough to even dent the fundamental problem that we simply don't have enough housing in this country to meet demand. Increasing the ability of buyers to bid for a limited, insufficient stock will inevitably lead to prices being pushed up.
So the dilemma we face is that any attempt to stimulate the housing market risks causing a bubble, but it appears that the volume of house builders will only respond to signs of increased activity amongst aspiring homeowners.
Ultimately, Help to Buy is playing to the political gallery. The question is, does it also betray the fact that the government doesn't have a holistic view of the whole housing market - rented and purchased - and so is trying to cure the symptoms rather than tackling the underlying cause?
Lucian Cook, of the research department at Savills UK Residential
Help to Buy is essentially a means of addressing a partially functioning housing market, where access to home ownership is being artificially constrained by the extreme lack of mortgage availability.
The extent of money available in the scheme, and the conditions which attach to the mortgage guarantees, restrict the likelihood of Help to Buy creating a housing boom.
Currently we are seeing a shift in sentiment amongst predominantly cash-rich buyers, or those helped by the Bank of Mum and Dad, as opposed to beneficiaries of Help to Buy. This has increased demand, thereby improving the short-term outlook for house prices.
Ultimately, however, it will be the cost of servicing a mortgage as interest rates rise that will restrict that house price growth over the next five years. We forecast prices to rise by 18% over five years, tailing off at the back end of that period.
The Bank of England has already signalled that it is happy to use mortgage market controls to head off a credit-fuelled house price boom. Part of that process will be monitoring whether the need for Help to Buy remains and identifying the point at which it has served its purpose.
John Stewart, of the Home Builders Federation
There has been much confusion over Help to Buy, primarily because two very different schemes operate under one name.
The Equity Loan part, launched on 1 April and applying to new homes in England, tackles both affordability and the deposit gap. Buyers need a 5% deposit and the government puts in a further 20% equity loan.
It has been a great success and already resulted in over 12,500 reservations, which in turn is leading to an increase in house building. This part of the scheme can in no way be accused of creating a bubble.
The numbers are tiny in the context of the UK housing market (932,000 transactions in 2012), and new build represents only about a 10th of the total market.
The mortgage guarantee part of Help to Buy, due to start in January, applies to new and second-hand homes across the UK and clearly has the potential to have a much wider market effect.
The Treasury and Bank of England must keep a close eye on its impact. Large price increases - and the risk of later decreases - are in no-one's interest, including house builders who need market stability to allow them to increase capacity and begin to tackle the country's long-term crisis of housing undersupply.