The Conservative Government's help-to-buy scheme may be well intentioned, but it runs the risk of fuelling a housing bubble as property values rise and banks lend more aggressively because of lower risk. This threatens to produce a repeat of the economic catastrophe seen in 2008.
Prime Minister David Cameron's programme unveiled for the fourth quarter of 2013 allows homeowners to purchase with just five percent down instead of the customary twenty, with the government guaranteeing the remaining fifteen percent to the lender.
The average purchase price of people using the plan is £160,000 supported by incomes that average £45,000. Using these numbers, a purchaser or couple would previously have needed £32,000 (20%) down with a loan of £128,000, just under three times their income.
The new plan allows for a down payment of just £8,000 with a £152,000 loan, almost 3 ½ times annual income. If the purchaser defaults, the government directly pays the lender £24,000 or 15% of the property value.
As with anytime the government messes with private enterprise the plan has unintended consequences! The annoying thing is that these consequences are completely predictable and yet the government goes full steam ahead, perhaps to make a good impression before the next election in sixteen months time from now.
By stimulating the housing market with a flood of new buyers the overall market price will increase, thus pricing existing imminent buyers out of the market. Subsequently the effect will be to shift those who can't afford from the very bottom of the ladder to a couple of steps up.
The next problem is the risk factor. 20% is a huge investment for most people. In the example given it is 70% of the buyer's annual income. But with the government guaranteeing three-quarters of the down payment, the investment becomes less than 20% of annual income for the buyer. This lower investment de-incentivizes the buyer to stay invested since the investment they stand to lose is significantly less should things go bad on them.
Finally there is the issue of taxpayer money at risk. The government seems to forget when they do something like this they risk not their money but the taxpayer's. Every time a loan defaults the taxpayer gives the bank, on average, 24,000. Thus, potentially the programme is costing all of Britain a lot of money.
Prime Minister Cameron though remains optimistic saying "thousands more realise their dream of home ownership. The new year is often a time when people look to make those big life-changing decisions like moving home or taking that first step on the housing ladder. But too many people have found themselves frozen out of the market in recent years as a result of the size of the deposit required. That is why as part of our long-term economic plan we introduced the Help to Buy scheme, so hardworking people with sufficient earnings can get on, fulfil their aspirations and enjoy the security of owning their own home."
Nice! The security of owning your home at the with other taxpayers carrying the risk! Cameron's flowery words sound so utopian, so inclusive, so liberal, so devoid of understanding of the consequences that could result, whether he is secretly aware of them or not.
Shadow housing minister Emma Reynolds is unimpressed: "Any help for first-time buyers struggling to get on the property ladder is to be welcomed. But rising demand for housing must be matched with rising supply if this scheme is to bring the cost of housing within the reach of low and middle income earners. Instead, under this Government, house-building is at its lowest level since the 1920s."
Now that's the kind of observation you would expect from a socialist! But it is not the government's responsibility to build houses itself. If people can afford homes the builders will make them. If not, and if the government stays out of it, then prices will fall until there are enough buyers.
No doubt Ms. Reynolds, far from initiatives for new private housing, envisions a slew of council house estates to provide somewhere to live for all the minions who are victims, as she sees it, of failed Tory policies.
The likelihood is that prices will be forced upward and that some householders will have bitten off more than they can chew. As a result government money will have to be diverted to the banks--you can just see how that will sit with the electorate.
The higher housing market will then become unsustainable, people will find themselves underwater in their loans, and a whole new housing crisis will be ready to kick-off. Politicians will meanwhile blame one another.
Government needs to leave the marketplace alone. Only when that happens will prices reach their proper levels and people will pay what they can afford, with lenders loaning money based on appropriate risk. But government will never leave the money alone.
