House-Buying Incentives – Wrong Target, Wrong Intention

It certainly sounded a little too good to be true when the Chancellor announced, in this year’s spring budget, that the Help To Buy scheme – designed to allow people with as little as 5% deposits – would extend not just to cash-strapped first time buyers, but also to all comers, including second home owners and buy-to-letters. So maybe we shouldn’t be too surprised that it’s being wound back now?

When the next phase of the scheme comes in next January, second home buyers will be ineligible for the equity loans. Which will probably come as good news to the good people of Cornwall, who can no longer afford houses in their own towns because of the price pressure from off-comers. And the price ceiling of £600,000 will also help to keep a lid on the inflationary potential.

The Conditions Tighten

Today’s announcement followed a meeting between the Chancellor and the country’s biggest lenders, together with the largest housebuilding firms. And although you can’t expect the builders to be happy, they’ll probably have guessed that the blow was coming.

The chancellor has been getting a bit of flak since March for stoking up housing demand to excessive levels. Who says so? Everyone from the International Monetary Fund to the Confederation of British Industry and also Sir Mervyn King, the former governor of the Bank of England. That’s who.

The chief economist at the Institute of Directors has declared: “The housing market needs help to supply, not help to buy, and the [proposed] extension of this scheme is very dangerous….Government guarantees will not increase the supply of homes, but they will drive up prices at a time when it seems likely that house prices are already over-valued.”

The Council of Mortgage Lenders is more worried about what will happen when the three year scheme is rolled up and the price crutch is pulled away. Won’t that just leave a large overvaluation of the property market with no visible means of support, it asks? Good question.

Booming Demand

Mr Osborne’s response is that the new regime won’t allow borrowers access to more money than they can afford to repay. The same strict income tests that apply to everyone else will apply, he says. But a lot of the fine print – such as what fees the lenders will pay to the government for the guarantee – have still to be discussed in detail.

Either way, one thing is for sure. The CML says that gross mortgage lending in June was 2% more than in May, and 26% more than a year ago. The £14.7 billion of net new money advanced was the biggest amount since October 2008. And gross lending for the second quarter of 2013 was around £42 billion – also the highest level since the end of 2008.

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