The UK’s Help To Buy mortgage scheme has sparked a strong housing recovery, improved construction, lifted the housing supply industry and contributed broadly to the UK’s economic recovery. Despite these positive aspects, the scheme has sparked controversy inside the banking community and in government where Vince Cable, the UK Business Secretary, has a very different view of the program than does Prime Minister David Cameron.
Recent data regarding the scheme points to the strong possibility that a housing bubble is being created by the low down-payment mortgage program. Cable suggests that this program could very easily become the newest economic nightmare with homeowners vested in over-priced properties with just 5 percent down and the government holding the bag for as much as 20 percent in equity loans before the bank has skin in the game.
On January 3, 2014, the Bank of England reported that the number of mortgages issued had reached a six year high. In November alone, 70,758 mortgages in England, the most since January 2008, were approved. These loans amounted to £11.1 billion in new mortgages.
Of great concern to fiscal conservatives is a report from the Nationwide Building Society indicating that the price of homes increased 8.4 percent in England during 2013. The report further indicates that prices were rising in every region of England. Scotland and Wales have similar Help to Buy schemes.
Housing prices have appreciated by varying degrees. The highest appreciation rate in the country is in Manchester where prices are up 21 percent this year. Brighton, Leicester and Birmingham have also enjoyed double-digit growth. In London, housing prices have risen 15 percent in 2013.
In Glasgow, Newcastle and Coventry, gains have been modest, just 2 percent this year. The Nationwide report indicated that the average price of a home in the UK was £175,826 or 5 percent below the prices prior to the downturn in 2008.
The Risk
The greatest risk is that demand will outweigh supply causing even greater price hikes. Conservatives feel the time to pull back is now. The Help to Buy has served its purpose. The program has brought new buyers to the market and boosted the construction industry.
The economy and British sterling have gained strength during the second half of 2013. Cable fears that the continuation of the program will create another bubble similar to the 2008 bubble that burst spectacularly. Cable has called for intervention by Mark Carney of the Bank of England.
The Bank has maintained interest rates at 0.5 percent since early in 2009. The fear is that today’s homebuyers are not shouldering enough risk and the interest rates are creating a false sense of affordability for buyers under the program.
Raising the interest rates will likely slow purchases but the real option would be repeal of the scheme.
Who Qualifies
Under Help to Buy, buyers still must be qualified. However, the buyers do not have to have demonstrated the ability to save. Help to Buy was initially designed for new construction purchases under a New Buy program. This initiative was expanded to now include existing homes and shared ownership schemes. For new construction and existing homes purchases, the price cannot exceed £600,000. For these purchases, no equity loan repayment is required for the first five years.
Those familiar with the 2008 housing crash in the US, where homeowners lost an average of 30 percent of their equity and where many buyers ended up with mortgages greater than their property was worth, shudder to think where this aggressive lending program could take the housing market. The smart money suggests a pullback from the Help to Buy scheme.
A contraction could come in the form of higher interest rates, requirements to repay the government guaranteed equity loans at a faster rate or an increase in the amount of the buyer’s own payment. The current shape of Help to Buy resembles a train waiting to wreck.
Hiland Doolittle.
