George Osborne's £130bn Help to Buy' scheme is the latest move by the government to get the housing market moving. It may well succeed, but at what future price? Although the full details have yet to be disclosed, there are two basic parts to this scheme.
The first is a shared-equity programme, which, for three years from 1 April, will be open to buyers of new-build properties worth up to £600,000. Homebuyers with a 5% deposit could benefit from a government loan for up to 20% of the property's value. That leaves them having to raise just 75% from commercial lenders at what the government hopes will be competitive rates.
For the first five years the government loan will be interest-free; after that buyers will pay an annual fee of 1.75% of the loan, which will increase each year in line with retail price inflation, plus 1%. In exchange for the loan the government gets a 20% stake in the property. This scheme, like the existing NewBuy scheme, is being targeted at first-time buyers, with buy-to-let landlords and second property owners excluded.
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The second part of the scheme is a mortgage guarantee, which from January will cover purchases of all property types up to the value of £600,000. The idea is that homebuyers with at least a 5% deposit will be more easily able to secure a loan from participating lenders because the government will guarantee a chunk (up to 15%) of the mortgage. The state will then be liable for some of the losses if the borrower defaults.
So who will the winners be? Homeowners with small amounts of equity who are struggling to remortgage may find it easier to do so under the mortgage guarantee scheme, as it appears not to exclude remortgaging with a different lender. As for first-time buyers with a decent deposit and a good credit history, there are already good mortgage deals around a two-year fixed rate, for example, can be as low as 1.74%. If you only have a small deposit, both parts of the scheme should open up more deals from lenders.
But that misses the big issue: that the government is trying to encourage buyers to join an already inflated property market. The risk of this scheme providing another short-term boost to house prices is heightened by the lack of incentives on offer to housebuilders to build more houses to meet any extra demand.
As Nick Pearce, director of the Institute of Public Policy Research, notes in The Daily Telegraph, "the housing bubble remains inflated, and subsidising mortgages based on the presumption of rising prices simply props it up further". That's why we see little here to cheer.
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