If you’ve ever had any doubts as to what politicians believe is Britain’s top economic priority, yesterday’s Budget made it very clear.
It’s house prices. Ever since the crisis began, government and Bank of England policy have been directed primarily at propping up house prices.
Never mind that the housing bubble was a key part of the problem in the first place. Never mind that price falls would be the most effective way to get all these first-time buyers they keep pretending to care about, on to the property ladder.
And never mind that the main reason the US is enjoying some semblance of a recovery is that its own housing bubble was allowed to collapse.
It’s all about winning votes. The chancellor, George Osborne, knows that if he is to have any chance of keeping his job after 2015, house prices have to at least stay stable.
So what’s he planning? And will it work?
The latest government boost for housebuilders and estate agents
The government has already tried various schemes to boost homebuilding and mortgage lending. But its latest moves are the most ambitious.
‘Help to Buy’ comes in two parts. Firstly, the existing FirstBuy shared-equity scheme is being expanded. FirstBuy currently applies to first-time buyers on less than £60,000 a year.
Provided they have a 5% deposit, it allows them to borrow 20% of the value of a new property from the government. The loan is interest-free for five years, then starts incurring interest. This scheme is now being extended to anyone buying a new-build home (to live in, not to rent out) up to the value of £600,000.
The second part of the scheme will be launching from next year. This one applies to both new and existing homes. Again, buyers need at least a 5% deposit. But in this case, the government will act as guarantor for up to 20% of the purchase price in total. In other words, the taxpayer will stand behind the most vulnerable bit of the loan.
The idea is that if someone puts down 5% of the price, and the taxpayer then guarantees as much as another 15%, then lenders won’t be as reticent about dishing out mortgages. It also means that buyers don’t have to raise such substantial deposits.
The government estimates that up to £130bn-worth of home loans could be “supported” by Help to Buy, over three years. As Nils Pratley points out in The Guardian, that’s “equivalent to the current annual volume of mortgage lending.” And because this money is in the form of guarantees, it won’t “show up as extra government debt”.
How do you feel about guaranteeing your neighbour’s mortgage?
In short, the government is trying to bring back the 95% loan-to-value mortgage. And it’s putting your money and mine at risk in doing so.
You can probably guess what our general feelings are about this scheme. As my colleague Phil Oakley put it in a nicely-worded email rant this morning: “I am very annoyed that my taxes are underwriting the profits of housebuilders and keeping the banks solvent.”
And as for monetary policy, “in the meantime, we get a man in from Canada to run the Bank of England, who has just done what exactly? Oh yes, he’s stoked a housing bubble and has probably been asked to do a similar job over here”.
I suspect a lot of you might agree with Phil. I know I do.
So how successful will this scheme be? It does depend on the uptake, which is something that many people seem to be ignoring. A lot of property types are talking about a “new bubble” in concerned tones, but we all know they’re really just trying to panic buyers into the market.
The fact is, the FirstBuy scheme hasn’t been a roaring success as yet. The extension beyond new houses might help. But I suspect that the loan element is what puts people off. If a property is unaffordable, getting a loan from the government isn’t really going to help that much.
As for the guarantee scheme – that might have more clout. However, , it’ll involve the government fiddling around with the very regulatory regime that was meant to prevent careless lending in the first place.
As trade magazine Money Marketing points out, banks have to hold “around eight times more capital at loans over 90% LTV than for loans under 60%”. So for this to be attractive, those rules have to be relaxed. Which seems to be going down the same road that got us here in the first place.
In all, I’d wait to see what demand is like when this launches. But I wouldn’t be tempted into the buy-to-let market off the back of this scheme. As for buying a house – that’s a personal decision based very much on your own circumstances.
But bear in mind that if you can only put down a 5% deposit on a house – you are the one who is first in line to take the hit if prices fall and you can’t repay your mortgage. So regardless of what help the government offers today, make sure you could pay your monthly bills if interest rates went a lot higher.
As for savers – the people who are basically funding all this – how can you protect yourself as the government slowly whittles away at your wealth with low interest rates, high inflation, and hare-brained taxpayer guarantees? I look at the problem of financial repression in the latest issue of MoneyWeek magazine, out tomorrow – if you’re not already a subscriber, you can subscribe to MoneyWeek magazine.
• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .
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