Is The Chancellor’s Help to Buy Scheme Going to Push Up House Prices?

One of the main components of the Chancellor’s Budget speech was the announcement of the Help to Buy scheme. This initiative will result in the government guaranteeing high loan to value mortgage loans and is designed to help both first time buyers and home movers secure large mortgages.

However, the Office of Budget Responsibility has questioned the Chancellor’s scheme, believing that it is more likely to push up house prices than to address the shortage of homes in the UK. We look at George Osborne’s scheme and why experts believe it may not help the mortgage market.

Help to Buy scheme may drive demand for large mortgages without affecting the supply of homes

Appearing before parliament’s Treasury select committee, top officials from the Office for Budget Responsibility (OBR) have said the Help to Buy scheme was more likely to drive up house prices than address the shortage of housing in the UK.

Stephen Nickell, who takes the lead at the OBR on forecasting the economy, said: “The key issue is: is it just going to drive up house prices? By and large, in the short run, the answer is yes.” In the medium term, higher prices would stimulate housebuilding “a bit . . . probably not very much”, he added.

Robert Chote, the head of the OBR, added that he suspected the effects of Help to Buy “would have shown up in prices than in quantities”.

The Help to Buy scheme announced by the Chancellor in his Budget speech will provide government loans to buyers of new build homes and mortgage guarantees for people with small deposits. The three aims of the initiative are to increase the supply of high loan to value mortgages for creditworthy households, to increase the supply of housing and to contribute to economic growth.

“The problem with the Help to Buy scheme is that it is likely to increase the demand for property and high value mortgages without addressing the issue of the supply of homes,” said Islay Robinson, CEO of London mortgage broker Enness Private Clients. “Guaranteeing mortgage loans also has the added risk of leaving taxpayers exposed to losses,” he added.

Larry Summers, the former US Treasury secretary, told the Financial Times he was ‘surprised’ by the chancellor’s announcement of the Help to Buy scheme. “I did not understand why a government whose central preoccupation has been, for three years, the preservation of the government’s creditworthiness would see a substantial step into loan guaranteeing as somehow consistent with the focus on preserving the government’s creditworthiness,” he said.

The Financial Times reports that ‘Mr Osborne later defended the scheme, citing statements from housebuilders, which said they would build more homes in the UK because of the scheme.’ However, official figures from the National Audit Office have questioned the Chancellor’s assertion, believing that the government has vasstly overestimated the number of new homes that will be built over the next ten years.

“The National Audit Office believe that only 108,000 new homes will be built in the UK over the next decade, not the 140,000 claimed by the government,” added Mr Robinson from the London mortgage advisor. “Unless more new homes are built, giving borrowers easier access to large mortgage finance will just result in more people searching for properties. This, in turn, will drive up prices.”

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