It bothers me that most people believe that property in the UK is grotesquely overpriced. And it bothers me that almost everyone we consider to be thoughtful considers Help to Buy to be a horrible bubble builder. There is almost no such thing as a consensus that turns out to be correct.
So with that in mind, John Stepek and I thought we had better look again and see if Help to Buy is actually a good thing rather than a bad thing. We have joined up with the Panorama team to ask a few survey questions of you all on house prices and to look at the various issues of Help to Buy (you can watch Adam Shaw presenting that show on Monday) and we have also had a roundtable on the matter in the office (subscribers can read this in the magazine tomorrow – Adam came to that too).
But I’m sorry to have to say that so far none of it has changed our minds much. The main point made in H2B’s favour is that houses are very affordable at the moment – thanks to ultra-low interest rates, the Nationwide affordability ratio is near a 30 year low. So the only thing stopping people getting on the housing ladder – or for that matter moving up it – is the high deposits required by the banks.
If loan to value ratios were the same as they normally are, we are told, all would be well. Transactions would rise (low transactions are a major problem for anyone who wants to move these days) the whole market would be kick started and at least some of the whining from first time buyers would come to an end.
So what this second phase of H2B does is to try and achieve all that by taking away the deposit problem without introducing any new problems. It provides the banks with a 20% buffer that encourages them to lend at reasonable rates to those with only a 5% deposit, but then insists on strict affordability criteria.
The Treasury doesn’t stipulate what these are or should be, but it is much discussed that RBS is stress-testing up to interest rates of 7%. Borrowers need to be able to meet their payments even if mortgage rates hit 7% and be spending no more than 55% of their post-tax income on their mortgage.
Finally, in terms of safeguards, there is the Bank of England’s Financial Policy Committee: it is charged with assessing the impact of the scheme and its parameters every year. If it looks like it is causing trouble, the FPC will shut it down.
So there you go, say the scheme’s fans. H2B simply solves a blockage in the system – it doesn’t let people who can’t afford houses buy houses, but it does let people who haven’t got deposits buy houses. It also isn’t available to anyone who owns another property so can’t be exploited (as bad government policy usually is by the well off*).
This all sounds fine. But I am not sure it is. There’s a reason why the banks won’t lend to people with tiny deposits. Their balance sheets are still a mess and they know that house prices are too high. So they can’t afford to take the risk. It doesn’t seem to me to be a good idea for the taxpayer to take it for them.
But more important is the fact that UK houses are still in bubble territory. That isn’t necessarily the case in much of the north or the less accessible bits of the country (in some places we are all but back to fair value) but it is the case in the south east.
When interest rates rise, house prices will fall (if you aren’t sure on the mechanics of this you will have to read this week’s magazine). The people getting in to the market via Help to Buy at the moment should be able to afford their payments even with rates at 7%. But they might find that cold comfort when they find themselves in negative equity and stuck in their apparently affordable home for rather longer than they hoped.
It seems deeply unkind to us to encourage new buyers into an overpriced market just to free things up for everyone else. Surely there are better ways to get transactions going again. How about leaving the market alone for a while and letting prices continue their fall in real terms (as per the last five years). Or how about slashing or abolishing stamp duty? Transactions in anything tend to rise when transaction costs fall.
*Unfortunately this isn’t quite true. I have already been told of well-off home-owning friends sending their less well-paid partners off to get H2B mortgages on flats they then intend to let out (regardless of their mortgage lender’s rules)
You can read our latest property roundtable in this week’s issue of MoneyWeek magazine, out on Friday. And look out for the Panorama on the subject on Monday, 11 November at 8:30.