Help To Buy Scheme Could Cause New Property Bubble

Help To Buy Scheme Could Cause New Property Bubble

Critics Warn Help To Buy Scheme Will Cause New Property Bubble

The Chancellor of the Exchequer has launched the second phase of the ‘Help to Buy’ scheme and laid out the terms of a programme that will underwrite UK residential property purchases up to the value of £600,000 (GBP) following a meeting with mortgage lenders and house-builders.

A number of groups, however, have warned that, if this scheme is allowed to drive up house prices in the UK, it will cause another property ‘bubble’ and encourage people to take on huge mortgages.

George Osborne is hopeful that the terms of the scheme will prevent another property bubble, as there are now strict income checks and other lending criteria imposed by mortgage lenders and the loan scheme will not be allowed to be used by purchasers to acquire second homes.

This means that many people with poor credit histories will be barred from the £12 Billion (GBP) Government scheme to boost lending to potential homeowners with small deposits.

The first part of the Help To Buy scheme was launched in April 2013, involves giving loans to homebuyers that can be used for a deposit on a new-build property, effectively giving the Government a second charge on the mortgage for the term of the loan. The second part of the scheme is due to come into effect in January 2014.

Until now, there has been only limited information available about the second phase, which will see the Government make available £12 Billion (GBP) of guarantees to lenders, enough, it believes, to support £130 Billion (GBP) worth of mortgages, with the buyer paying a deposit as low as 5%.

Government ministers have claimed the scheme could guarantee up to 190,000 mortgages a year over three years. However, critics of the scheme point out that, after the three-year period, it will be very difficult for any politician to withdraw this state subsidy; therefore potentially creating another significant issue in three years’ time if the scheme is allowed to wither.

Speaking on BBC TV’s Andrew Marr Show yesterday, business secretary Vince Cable revealed his concerns over the validity of the scheme, stating; “I am worried of the danger of getting into another housing bubble,” when he was asked about the extension of the Help to Buy scheme.

According to a report in the Financial Times, nearly 7,000 new-build homes have so far been reserved through the Help To Buy scheme, since its launch in April, with the scheme subsidising an estimated £1.3 Billion (GBP) worth of residential property purchases in the past four months.

The FT calculations show that the figures equate to an average UK residential property purchase price of £187,543 (GBP), and these figures commit the government to an estimated £260 Million (GBP) of mortgage lending.

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