The fallout from the UK’s £130 billion of government mortgage guarantees (dubbed the “Help to Buy Scheme”), announced in the recent UK Budget, continues.
Last month, the Office of Budget Responsibility (OBR) – the Government’s favoured economic forecaster – slammed the proposal, arguing that it would simply inflate house prices without significantly contributing to new home construction. From the Guardian:
The government’s favoured economic forecaster said the Help to Buy scheme – which was one of the biggest announcements in the chancellor’s budget speech – would push up asking prices instead of encouraging housebuilders to start building new homes…
The OBR said on Tuesday that the scheme would do little to boost the construction industry but was likely to inflate property prices.
Prof Stephen Nickell, a member of the OBR, told the Treasury select committee: “The key is: is it just going to drive up house prices? By and large, in the short run the answer to that is yes. But in the medium term will the increased house prices stimulate more housebuilding, and our general answer to that would probably be: a bit. But the historical evidence suggests not very much.”
The committee’s chairman, Andrew Tyrie, noted that the scheme was supposed to last three years, so any medium-term benefits would emerge only as the programme was being wound up.
The OBR also correctly pointed out that there would be minimal construction response, and affordability would remain stretched, as long as the UK planning system remained highly restrictive:
The OBR chairman, Robert Chote, said strict planning laws limited housebuilders’ ability to build more homes, so the Help to Buy scheme was more likely to push up prices than increase the supply of new housing.
“If you were to note the fact that the planning system remains an important reason why the supply of new housing is relatively inelastic [and] the need of housebuilders for working capital, I suspect that more of it would have shown up in prices than in quantities”…
On Monday Darling told parliament that house prices would carry on rising unless more houses were built. “The irony is we are not prepared to build houses but we are prepared to stoke the finance of a bubble in housing prices, and that seems to me to be absolutely wrong.”
Now a Treasury committee has warned that British taxpayers could face “large losses” under the Help-to-Buy scheme, whilst also condeming the the scheme for bestowing on Treasury a vested interest in maintaining high house prices in order to reduce budgetary risks. From The Telegraph:
In a damning critique of the Budget’s Help to Buy initiative, the cross-party committee has outlined a two-page list of questions to Government demanding answers over the policy’s impact and rationale…
Addressing the taxpayer’s role as a mortgage guarantor, the Committee warned that the Government will find it “extremely difficult” to price the fee charged to participating lenders in a way that sharply cuts the risk to the Treasury.
There were also worries that the Treasury now has a “financial interest” in keeping house prices from falling, in order to limit losses to the taxpayer…
But if lenders do start to show less forbearance towards struggling homeowners, a rise in repossessions and a subsequent fall in house prices could mean the Treasury ends up facing “large losses” on the mortgages it has guaranteed, the Committee said.
There was also concern around the “lack of clarity” on whether the mortgage guarantee can be used for buying a second home. MPs “struggle[d] to see the rationale for the taxpayer to stand behind” such loans. They added that it was by no means clear that a scheme which may have the effect of supporting house prices would be in the interests of first-time buyers, whom the Government has said it wants to help.
…it [also] warned that the pressure for the Government to extend the scheme beyond the allotted three years will be “immense”.
For its part, Britain’s central bank, the Bank of England, has also stepped-up efforts to reflate the UK housing market. In August 2012, it launched the “Funding-for-Lending” (FFL), an £80 billion scheme aimed at forcing down the price of business loans and mortgages.
While the above central bank and government schemes are seemingly unconscionable, they are at least predictable from a short-term political and economic perspective. Last month it was revealed that between 630,000 and 800,000 home owners in the UK are facing negative equity Meanwhile, the UK economy has become increasingly dependent on debt to drive growth, whereas incomes have been falling in real terms. And with Government finances already over extended, the authorities are endeavouring to ‘kick the can down the road’ by encouraging home buyers to leverage-up into housing once more, even though it is what helped get it into this mess in the first place.
While the moves should work to stimulate UK growth in the short-term, and might even help to re-elect the central government, doubling down on housing now risks a much bigger debt hangover (and bust) in the future. Treasury and the OBR are, therefore, right to be concerned.
