Those familiar with the origins of the 2007/8 Housing crash will be aware of the potential dangers of cheap credit and housing bubbles. For those less familiar with the concept, a housing bubble is formed when prices rise rapidly, until they reach unsustainable levels, before declining, often leading to depressions in Economic growth, and resulting in unsustainable debt for mortgage-holders, and the negative equity trap- where mortgage holders have a mortgage that is greater than the value of the property which they hold. In 2007/8 the bubble burst as those who had been offered mortgages that they could not afford were forced to default on their loans.
Help to Buy
In March, when announcing the budget, George Osborne gave us details about the Help to Buy Scheme. He explained that the “deposits demanded for a mortgage these days have put home ownership beyond the great majority who cannot turn to their parents for a contribution,” and so the Help to Buy Scheme would aim to counter this problem. From April 2013, people could have access to “an equity loan worth up to 20 per cent of the value of a new-build home”. That loan is interest-free for five years and you only need a cash deposit worth 5 per cent of the property price (and a 75 per cent mortgage) to get it. From January 2014, the scheme will be extended to go further: “Borrowers still need a 5 per cent deposit, while the lender will be able to buy a guarantee from the Government covering up to 15 per cent of the value of the property.”
Since the scheme was launched, 10,000 people have signed up to receive a 20 per cent equity loan interest-free for five years, helping them to purchase a new-build home with a value of up to £600,000. The equity loan scheme is designed to help 74,000 homebuyers during the next three years. The second stage, will allow lenders to use government-backed guarantees to offer £130bn-worth of mortgages with smaller deposits of at least 5 per cent on both new and older properties.
The rise and fall
Official data published on Tuesday showed that house prices had risen 3.1 per cent in the year to June, up from 2.9 per cent in the year to May, reflecting strong growth in England and Wales. Data also showed that lending to first-time buyers has risen to a post-2007 high, with more than 25,000 loans being offered to them.
Critics of the scheme are calling for it to be dropped in order to prevent another housing bubble. Some experts have said that the scheme would inflate house prices to an unsustainable level, and that the long-term implications will be harmful for the British economy. Proponents of the scheme argue that it is giving a much needed boost to the economy and that it is helping first-time buyers to get onto the housing ladder. Given that the average age for first-time buyers between 2010-2013 was 30, many argue that this is a positive step in helping a generation already burdened by rising living costs and stagnant wages to buy a home.
Can we head off the danger?
The problems would arise if interest rates begin to rise, or if the housing bubble bursts. Users of the scheme could struggle with their repayments, and given that prices in the last three months have risen faster than inflation, there is an argument to support critics of the scheme. The government has said that it will monitor the scheme closely to ensure that another housing bubble does not form, and more importantly, burst. For now though, the scheme is helping people get into housing, when they otherwise may not have been able to do so, but let us hope that the scheme does not turn out to be a double-edged sword.