Five problems with Help to Buy!

row of housesOne of the biggest surprises of the Budget was the launch of the new Help to Buy scheme - designed to help first-time buyers and home movers who can afford a mortgage, but don't have the deposit required by lenders.

The scheme is split into two components – an equity free loan of up to 20% of the property's value for those buying a newly built property, and a new Mortgage Guarantee Scheme, where the Government will back mortgages for those with just a 5% deposit.

This is explained in detail in our article Is this the solution for the property market?

Is it any good?
On the positive side it is great to see the Government focusing on the housing market, and trying to help aspiring homeowners get onto the ladder.

But of course, the devil is in the detail, or lack of it. After an initial wave of enthusiasm, experts have begun to question the Help to Buy scheme, both in terms of actual mechanics of the initiatives, and the principles behind them.

Here are five problems that have already been raised about Help to Buy:

1. It could create a house price bubble
It's no secret that the UK isn't building nearly enough houses to meet demand. But rather than focusing its attention on the supply side of the problem, the Chancellor has chosen to increase demand by making it possible for people who currently can't afford to buy, to get on the ladder.

It's basic economics that if you increase demand without increasing supply, prices will rise. Is this really something we want to encourage in the UK – another artificial house price bubble, this time underwritten by the Government? Because rather than making property more affordable, it ultimately makes it more expensive. Many argue it is a dangerous strategy, with Paul Johnson, director of the Institute for Fiscal Studies, telling ITV News this week that there "is a risk that this will push prices up rather than making things more affordable."

2. It could help rich people to buy a second home
The Treasury published a list of those who would be entitled to benefit from the Help to Buy scheme, specifically the Mortgage Guarantee element, which is available on properties up to £600,000. Firstly, many would argue that we don't need to be subsidising mortgages for those who are buying a property worth over half a million pounds.

But more importantly, the details didn't rule out people using the scheme to buy a second home. And despite repeated questioning the Government has failed to offer clarity on this issue.

It has now also been suggested that the scheme could be used by existing homeowners to remortgage their own property, rather than genuinely helping aspiring first-time buyers to get onto the ladder.

Clearly, this is not the intention of Help to Buy, and it is likely the Government will need to tweak its eligibility criteria to rule out people exploiting it who don't really need help. At worst, it looks like Osborne is helping wealthy people to get richer and, at best, it suggests that he doesn't have a grasp on the details of one his flagship schemes.

3. State should focus on social housing
Many argue that when it comes to housing the State should put their biggest focus on increasing the supply of social housing, to provide a roof over the heads of some of the most vulnerable in society, rather than getting embroiled in the lending market.

Of course, the Coalition would argue that they are also putting funds towards social housing but it's nothing on the scale of Help to Buy, which could potentially help to underwrite £130bn of mortgage loans.

Then there is the matter of principle as to whether the Government should really be subsidising the mortgage industry at all – or encouraging it to lend to borrowers that it would currently deem too risky. We have been down that road before!

4. The taxpayer could be liable for losses
What if the scheme stokes a house price bubble that then bursts, leading to a property price crash? We could see borrowers defaulting on their repayments and lenders being forced to repossess and sell. If house prices fall and they sell at a loss, it will be the taxpayer picking up most of the liability.

Of course, this is a worst case scenario but if we have learnt anything in the last six years, it's that house prices can go down as well as up. A similar state-backed scheme in the US has needed a whopping $189bn of taxpayers' money since the financial crisis began, according to Reuters.

5. It may not lead to cheaper deals anyway
At the time of writing only Lloyds Banking Group and Royal Bank of Scotland were reported to have agreed to use the Help to Buy Mortgage Guarantee Scheme. And given that they are partly owned by the taxpayer, you'd expect nothing less.

So the success of the scheme working – and leading to lower 95% mortgages – depends on the uptake of lenders, and the extent to which they reduce their prices to account for the Government guarantee.

In fact, it isn't just the lending risk that makes 95% deals so expensive. Financial regulations force banks to hold over six times more capital against 95% lending as they do if they lend to a borrower with a 40% deposit. It has been reported that the regulator is looking at offering banks some relief from these capital adequacy rules – and it could be this technicality that makes or breaks the initiative.