Help To Buy Extension Sparks New Warnings

Experts Divided Over Help-To-Buy

Updated: 12:45pm UK, Tuesday 23 July 2013

By Tadhg Enright, Business Correspondent

The Chancellor says that Help-To-Buy will "fix a broken housing system" but critics claim it risks creating another bubble at taxpayers' expense.

Anyone looking to buy a new home will have noticed Help-To-Buy branding on the hoardings outside new developments across the country.

It offers buyers the opportunity to buy a new home with a deposit of just 5%. 

An additional 20% of the property's value is provided by way of a five-year, interest free loan to the buyer leaving a shortfall of 75% to be made up by a mortgage lender which is a lot less risky.

Homebuilders attending a round-table discussion at Downing Street toasted its success in boosting business.

Some 7,000 new homes have already been reserved as part of the scheme.

The economic filip of such schemes is that building new homes creates jobs for builders as well as the ripple effect that any new home purchase has across the economy when new owners invest in fixtures, fittings and furniture too.

And from January, the offer will be extended to purchasers of existing as well as new homes with the Government guaranteeing up to 15% of their mortgages up to a maximum property value of £600,000.

Good idea? It depends who you talk to. 

Chief among those raising red flags was the former governor of the Bank of England, Lord King, whose parting shot was a warning not to allow Help-To-Buy become a permanent fixture.

Over the weekend I met Brunel University's Professor Moorad Choudhry to talk about prospects for the economy at large and he also felt the need to raise his concerns about the plans.

He said: "I'd like to ask why is the Government subsidising house purchases. That is something we got out of years back when we unwound tax relief on mortgages interest.

"If I inject cheap money into the stock market and it rises, that's not genuine growth. It's conceptually similar to subsidising anything and it's a false growth."

I also interviewed the former government economic advisor Vicky Pryce that day and she thought it was a fabulous initiative which would, in Keynesian style, raise the fortunes of the entire economy.

Ask anyone with a rudimentary understanding of property economics and they will tell you that if you boost the budget of the average homebuyer, that enables them to stretch that little bit further and offer that little bit more to get the place they want.

Economists at the estate agents Savills have already increased their forecasts for property price increases over the next five years from 11.5% to 18.1% by 2018.

Director of Savills residential research, Lucian Cook said:  "A combination of low interest rates and stimulus measures means there is capacity for improved price growth over the next three years or so.

"Help-to-Buy goes further than any of its predecessors in being aimed at all buyers, not just first time buyers, but we believe its primary impact will be increased transaction levels and that higher than expected price growth is a secondary impact."

It will give first-time buyers and ordinary homeowners seeking to trade up a greater ability to compete with property investors who are barred from the scheme but in the southeast where there is a shortage of housing, increased competition can only lead to increased prices.

Mortgage advisor, Martin Wade from Your Mortgage Decisions, sees another benefit.

He said: "What is great is that it's open to existing homeowners to remortgage. We've got a lot of people out there stuck on unattractive rates but because lending criteria have changed, they are effectively prisoners of their mortgage.

"What this will allow them to do is to remortgage, free up some capital, and it will be a huge relief for tens of thousands of people who are stuck on standard variable rate mortgages with very unattractive terms."

And talking of attractiveness, Capital Economics have singled out Help-To-Buy's most potent effect: the feelgood factor. 

How do you help the disenfranchised feel like they have a real stake in life and society?  Help them to buy a home.

Capital Economics' Michael Pearce said:  "While the policy has been criticised for its ropey economics, it may be more successful politically.

"Indeed, the risk that it pushes up house prices may be positive for the Conservatives' election chances in 2015."

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