Is Help to Buy Causing a Housing Bubble?

We are pleased to see the latest data on Help to Buy proving positive for the housing market and showing aspects of the scheme are working. Help to Buy is the Government mortgage support programme.

Its primary aim is to aid people in buying their first homes and raising the right deposits.

The scheme is split into two parts.

The Scheme - Part 1

Firstly, Help to Buy 1 is available on new-build homes only and will offer borrowers a 20 per cent interest-free Government loan for five years.

The loan is accompanied by a 75 per cent bank loan, bringing the total deposit required to just 5 per cent.

The scheme began in April last year and has flown off the shelves with massive take-up from desperate first-time buyers.

It has been so successful that in the last year 74 people a day have accessed Treasury loans to get a mortgage.

The new figures  from the Department for Communities and Local Government show 2,929 borrowers bought homes through Help to Buy 1 in March.

In total 19,394 borrowers have benefitted from this type of support.

Indeed it has been so successful that the Government has extended the scheme’s end date from 2016 to the end of the decade, 2020.

This has caused some alarm among sceptics who believe it is very difficult to stop Government schemes once they have started.

Fannie Mae and Freddie Mac were only meant to be temporary interventions in the US housing market in the 1930s but dominated the sector for the next 80 years.

Their role in the financial crisis was pivotal and many experts see a similar role with Help to Buy. For example, income tax was a only ever intended as a short-term tax to fund the Napoleonic wars but is now takes up nearly half of many people’s salaries.

The Scheme- Part 2

Many of the concerns around Help to Buy revolve around the second part of the scheme and we share the concern over possible future problems.

Help to Buy 2 allows anyone to buy any home worth up to £600,000 with a 5 per cent deposit, the only exceptions are foreign buyers and those looking to buy second homes.

It works by the Treasury backing up to 15 per cent of the loan. So the bank will offer a 95 per cent deal but the Treasury will insure up to 15 per cent.

This allows banks to carry less risk and lend on lower deposits helping more on to the housing ladder.

Economists have slammed the scheme for tipping the housing market into bubble territory when it is already performing strongly.

There is now double digit house price growth for the first time in four years as the market is growing faster than at any time since before the crash.

House prices are booming in certain areas of London and the south-east while the economy is growing strongly too.

We were delighted to see strong growth of 0.8 per cent in the first quarter of 2014 showing the recovery is well underway and resilient.

It is a tale of two Help to Buys and while both help borrowers in the short-term we are concerned they are artificially fuelling a bubble.