Average house price to hit £300,000

UK house prices could balloon by 30% because of the Government's 'reckless' Help to Buy scheme.

The average price of a home could shoot up from £233,000 to £300,000 if the Government's Help to Buy scheme succeeds.%VIRTUAL-SkimlinksPromo%
That's according to a new report from leading economists at Fathom Consulting who warn this rapid price inflation could be seen as soon as 2015.

By the group's calculations the scheme could push up prices by almost 30% in two years.
The experts believe what is meant to help clear a blockage in the market could make things worse in the long run and reignite the housing market bubble.

What is Help to Buy?
The Help to Buy scheme was announced in the Budget earlier this year and has been designed to help people get on and move up the housing ladder with just a 5% deposit.

It means those struggling to save up the average deposit of £60,000 or those with a home struggling to move up the ladder because of remortgage problems like negative equity will get targeted help.

The scheme is split into two parts:

The Help to Buy Equity Loan allows first-time buyers as well as home movers to borrow 20% of the purchase price of a new-build property, interest-free, from the Government. This is providing the home costs under £600,000 and the borrower already has a 5% deposit. The loan is repayable once the home is sold and only remains interest-free for five years. It's already available and replaces a previous scheme called FirstBuy which only targeted first-time buyers. £3.5 billion of taxpayer money is being set aside for this part of the scheme.

The second half of the deal is the Help to Buy Mortgage Guarantee which will get going in January 2014. It aims to increase the amount of high loan-to-value mortgages available to both first-time buyers and home movers. The Government will provide lenders with a guarantee on these high risk loans similar to how the NewBuy scheme operates, but extended to home movers as well as first-time buyers.

The Government will provide £12 billion in guarantees to lenders to encourage these new deals enabling people to buy a new build or an existing property costing under £600,000 with a deposit of only 5%.

Reckless lending
But the two-tier scheme has been branded "reckless" by the former Bank of England economists that make up Fathom Consulting.

The group believes Help to Buy "uses public money to incentivise the banks to lend precisely to those individuals who, absent the scheme, would not and should not be offered credit".

It said that the fact many couldn't buy a property was "keeping a lid" on house prices which are on average about £233,000 according to Office for National Statistics (ONS) data. The think tank uses the ONS figures as it believes they are the most comprehensive measure of house prices. ONS figures show house prices are only around 4% below their pre-crisis peak.

The report calculates that if we have a return to "loose" conditions in the market similar to what we had at the pre-crisis peak with 100% mortgages and sub-prime lending, house price inflation could be 20% higher by the end of 2015.

And it appears there is some proof of the effect schemes can have on prices. Halifax recently revealed that new-build house prices have risen by 12% over the last five years while other homes experienced just a 9% rise. Halifax puts this rise down to schemes like NewBuy.

So instead of a policy to provide a short-term fix, the group has criticised the Help to Buy scheme as wielding the potential for longer term damage.

Andrew Brigden, a senior economist at Fathom, said: "Had we been asked to design a policy that would guarantee maximum damage to the UK's long-term growth prospects and its fragile credit rating, this would be it."

The result according to this think tank is another housing price bubble which will eventually burst and land us in the same or an even worse mess than before.

Fathom consulting aren't the only ones to highlight holes in the new scheme. The Office for Budget Responsibility (OBR) has also said that it could drive up house prices, while a Treasury Select Committee has said it "is very much a work in progress" and "may have unintended consequences".
Read: Government's Help to Buy scheme slammed for more.

Being realistic
House prices are broadly flat at the moment so it is hard to envision any steep rises rocking the boat.

But as the past property boom has shown, it could well happen. House prices trebled over a decade and came crashing down in 2007.

The problem is that the increase of funds into the mortgage market isn't being met by an increase in the supply of homes. So as supply fails to keep pace with demand, house prices can only go up.

Also as the Government becomes a stakeholder in the mortgage market it has a vested interest to keep house prices up. The Treasury Select Comittee report said: "The mortgage guarantee scheme makes the Government an active player in the mortgage market and the committee is concerned that the Treasury now has a financial interest in maintaining house prices to limit losses to the taxpayer."

So there is a very real chance that Help to Buy will inflate house prices once again and cause another housing bubble.

But the scheme would have to be incredibly successful with strong demand to be able to push prices up by 30% and I am not sure that many people will go for it based on the take up levels of similar schemes like FirstBuy and NewBuy.

That said the fact that Help to Buy is open to those wanting to move onto a new home as well as first-time buyers will certainly have a significant impact.

Help to Buy is still being worked out by the Government but at the moment it looks like its success can only cause more problems.

Budget 2013: Winners and Losers
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Average house price to hit £300,000

The Chancellor has cut the price of beer. He said a planned 3p rise in beer duty tax was being scrapped and replaced by a 1p cut on a pint of beer.

While lower interest rates are intended to boost borrowing for business and keep costs down for mortgage customers, the Chancellor brings another Budget devoid of encouragement for savers. Faced with near 0% interest rates and 3% inflation, there is no help for those who need to save for the future, or those that already live on their savings in retirement.

"Low interest rates are making life ever harder for people reliant on their savings. Their spending power is being reduced and their standard of living eroded on a daily basis," said Simon Rose of Save Our Savers. "The attack on savers is short-sighted and undermines the country's prospects for investment, growth and retirement."

A major headline-grabbing measure to help struggling first-time buyers is the new Help-to-Buy scheme. Made up of two parts, the first commits £1.3bn to shared equity loans that enable first-time buyers to borrow up to 20% of the value of a new build home towards a deposit, providing they can contribute 5% themselves. The loans will be interest free for five years and be repayable on house sale. The scheme will cover all new properties up to £600,000 in value – around 90% of all new homes in the UK.

The second is a Mortgage Guarantee for lenders, intended to help all families who are struggling with deposits. The scheme will make £130bn worth of mortgages available from 2014 and enable lenders to offer loans at higher-to-loan value, which will Mr Osborne said will "dramatically increase" the availability of mortgages. The guarantee will run for three years and apply to bold old and new property. Stephen Noakes, Mortgage Director at Lloyds Banking Group, commented: "We are very supportive of innovation in the housing market and believe that the mortgage guarantee scheme, will give a much needed boost to the housing market and most importantly address the issue of accessibility. "Crucially, this scheme will not only help first time buyers but also second steppers, a key segment of the housing market that is also in need of more support and attention. Whilst the property market is likely to continue to be challenging, the fresh support announced today will have a real knock on effect across the whole of the housing market and we expect it could help around 50,000 people a year."

Payment of taxes is the "glue that holds the economy together" the Chancellor said as he reaffirmed his commitment to crackdown on evasion and the professional services that advise on it. "With more measures to rein in Corporate Tax avoiders, the Chancellor has sent a clear message that aggressive avoidance is no longer acceptable," said Martin Hook, Managing Director of research and development tax specialists, Alma Consulting Group. "This will have a significant impact on the Big 4 and other firms who market tax avoidance schemes and will need to consider the morality of the schemes that they sell and the spirit of the tax legislation."

As was widely predicted, Osborne froze the fuel duty hike due in September 2013. He announced that his repeated scrapping of this duty has saved the average Ford Focus owner £7 on every tank of petrol.

Stating his commitment to helping entrepreneurs get ahead and recognising that the cost of employing people is a huge burden to small firms, the Chancellor announced a surprise move with National Insurance relief of £2,000. Called the Employment Allowance, he said the new measure means than 450,000 small businesses – which account for one third of all companies in the UK - can employ one person earning £22,000 or four people earning the minimum wage, without paying National Insurance.

"The Employment Allowance will certainly be a massive boon for small businesses. Not least because most weren't really expecting it," said Jonathan Elliott, managing director of MakeItCheaper.com. "Put it another way, a £2,000 saving for a typical small business is the equivalent of cutting their annual energy bill in half or putting 1,250 litres of free fuel in its fleet of vehicles." Yet the Government fell short on support for new enterprises, explains John Williams from Kuber: "Noticeably absent from the Chancellor's speech was any news of extending or enhancing the Enterprise Investment Scheme (EIS). Many were hoping to see the Government offer more help to start-up companies looking for second round finances, but nothing materialised."

There was bad news for public sector workers, who will see pay increases limited to 1% in 2015/2016. The government will also revisit 'progressive pay' which sees pay increase automatically each year which he said was 'difficult to justify' given that private sector pay has been frozen or cut. The armed forces, however, will be exempt from this.

Feeling the pressure on help working families, the Chancellor made a welcome announcement that working parents will receive a contribution from the Government towards the cost of childcare. Working parents will receive 20% - equivalent to the basic rate of tax - of their yearly childcare costs, up to a total of £6,000 per child. He said the move will save a typical working family with two children under 12 up to £2,400 a year.

Also, leaked this morning was the news that the Chancellor will raise the income tax threshold to £10,000 from April 2014 – a move he said will give 2.4million people at tax cut of over £200 each a year, as well as lifting two million people out of income tax altogether.
Yet while both moves are widely welcomed, they do little to counter the austere measures of previous Budgets, explains Clare Francis, editor-in-chief at MoneySupermarket.com:"Giving with one hand may be a positive, but taking away with the other through other tax increases and benefit cuts means that people are no better off. "In fact, the cumulative effect of this and previous budget changes, combined with wage stagnation and rising living costs means millions are worse off and an increasing number of families are on the breadline, struggling to make ends meet every month."

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