Last month, I wrote about how the conservative Scottish Tories were lobbying the Central Government to underwrite 95% loan-to-value ratio (LVR) mortgages in order to help UK first home buyers (FHBs) achieve their “dream” of home ownership.
It seems the Scottish Tories prayers have been answered, with the 2013 UK Budget, which was handed down overnight, delivering a £130billion state-backed mortgage guarantee scheme aimed at delivering 500,000 subsidized mortgages. From the Daily Mail:
A state-backed mortgage guarantee scheme worth £130billion will see the market flooded with 500,000 cheap loans.
The Government is to subsidise deposits and provide state backing for loans to help homebuyers get on the property ladder or move up.
But there were warnings that the scheme risks creating a house price bubble.
The Help to Buy scheme will offer loans to top up the deposits of those buying newly built properties worth up to £600,000 who can only put up 5 per cent of the loan themselves.
The Treasury will add an extra 20 per cent of the house value to enable them to get a mortgage. The first five years of the loan will be interest free. After that it will attract a 1.75 per cent payment, which will rise annually by inflation plus 1 per cent.
Borrowers will be able to apply from April 1 and be able to repay the loan at any point. This part of the scheme is worth £3.5billion.
The second, bigger, part – available from next January – will guarantee £130billion of mortgages on any property, not just newbuild, worth up to £600,000.
The scheme will be available for mortgages of between 80 per cent and 95 per cent of the home value.
So for someone able to muster a 5 per cent deposit, the Government would put in 15 per cent, to enable the homebuyer to access an 80 per cent mortgage loan.
If a borrower’s property is repossessed, the Government will bear a proportion of the losses, with the lender taking the rest…
On top of this, the Chancellor announced that more Funding for Lending cash may be made available to the banks, which could also push rates down lower.
While the smaller subsidy for newly constructed dwellings has some merit, the larger subsidy guaranteeing £130billion of mortgages on any property is madness. Anyone with even a basic understanding of economics would recognise that with the UK’s highly rigid planning system choking supply, such a scheme would be counter-productive and simply cause home prices to rise, making affordability much worse, whilst leaving the taxpayer exposed to any future house price crash.
Thankfully, not everyone has been caught-up in the madness:
…a spokesman for Priced Out, which campaigns for more affordable housing, said the scheme will ‘push house prices even higher and will help create a bigger housing crisis in a few years’ time’.
David Orr, of the National Housing Federation, said: ‘If we don’t tackle the fact we’re still not building enough homes, we’ll just create another housing bubble that will continue to push house prices up and out of reach of the majority.’
Many years ago, former Bank of England Monetary Policy Committee member, Kate Barker, found restrictive land-use policies to be the main cause of severe housing unaffordability in a report commissioned by the Blair Labour government. Planning Minister, Nick Boles, also recently characterised the unaffordability of housing as “the biggest social justice problem we have.”
It’s a shame that the UK Government has learned nothing and continues in vain to resort to demand-side stimulus in order to solve the affordability problem, rather than pulling-back on stimulus and working to free-up the UK’s highly rigid planning system, which unnessessarily restricts land supply and forces up prices.
