Disastrous House Price Crash Could Be Caused By
Government’s Funding for Lending Scheme
One of the UK’s leading economists has warned of a potentially disastrous house price crash and points the finger at the Government home buying scheme for being the cause of another unsustainable property bubble.
Chief Economist at the Institute of Directors (IoD), Graeme Leach, said the introduction of the new Help-To-Buy scheme, under which UK taxpayers are underwriting thousands of new mortgages for property purchases, means the world must have gone mad.
Mr Leach said “The Funding for Lending scheme is very dangerous because it will drive up property prices at a time when it seems likely that (property) prices are already over-valued.”
The scheme is one of Chancellor George Osborne’s financial initiatives where the Government will underwrite mortgage loans allowing new and first time borrowers up to 20% of a property’s value as part of their deposit, effectively giving the Government a proportionate stake in the value of the mortgaged property.
The scheme was launched in April 2012 for new-build properties worth up to £600,000 (GBP), but Mr Osborne has since explained how it would be extended to existing homes from January 2014 in order to continue to boost the UK housing market. The Government loans are interest free and are intended to last for just five years.
A laddering process will mean that homeowners can make repayments on the loan for the five year period, at a proportional value linked to any increase in the property price.
The Funding for Lending Scheme aims to boost mortgage availability by reducing the risk for mortgage lenders, with the Government underwriting any default by borrowers.
When the scheme is withdrawn any rise in property prices that has taken place will be undermined, with potentially disastrous results.
However, guarantees will only be available to borrowers who can afford the mortgages and who can raise an initial 5% deposit and people with impaired credit ratings will be excluded.
It will not be available to use to purchase a second home, nor will it be able to be used in conjunction with any other state run scheme.
Mr Osborne met major house-builders and mortgage lenders, including Persimmon, Taylor Wimpey, Lloyds Banking Group and Barclays, at 11 Downing Street this week, and it is estimated that up to £12 Billion (GBP) of interest-free loans will be offered on £130 Billion (GBP) of new mortgage lending.
Former Bank of England Governor, Lord King, expressed doubts about the wisdom of the scheme earlier this year and his views are mirrored by many financial experts in the City.
The candid remarks made by Mr Leach, underlined those worries; “The housing market needs help to supply, not help to buy and the extension of this scheme is very dangerous. Government guarantees will not increase the supply of homes, but they will drive up prices at a time when it seems likely that house prices are already over-valued. When the scheme is withdrawn any rise in prices that has taken place will be undermined, with potentially disastrous results. There is a real risk that the housing market will become dependent on the underwriting by government, making it very difficult politically to shut the scheme down. This should be of great concern. The world must have gone mad for us to now be discussing endless taxpayer guarantees for mortgages. Instead of trying to pump-up prices, the Government should focus on relaxing planning laws and reducing Local Authority charges on developers to make it easier to build more homes.“
Mr Leach’s comments came as it emerged that the number of mortgages approved by banks to homebuyers soared to a 17-month record high in June 2013.
The British Bankers’ Association (BBA), have calculated that 37,278 mortgage loans worth £5.7 Billion (GBP) were approved for residential property purchases in June 2013.
This marks the highest figure for mortgage lending for residential property purchases seen since January 2012, when the prospect of the ending of a stamp duty concession for first-time buyers prompted a flurry of UK housing market activity.
The BBA said approvals for property purchases and remortgaging are up by a third compared with a year ago and various Government schemes are likely to free up more housing chains in the coming months.
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