Short term memory loss?

Posted by: Swindells FP, on April 11, 2013.

The announcement of the “Help to Buy” mortgage guarantee programme has provoked much media comment.

Credible commentary and views we have come across are those such as Martin Wolf’s of the FT (

“Under the new “Help to Buy” mortgage guarantee programme the government will aim to increase the availability of mortgages. It will provide up to £12bn in guarantees, sufficient to cover £130bn in mortgages. Under the deal, lenders will receive a partial guarantee on mortgages offered to people who buy homes worth up to £600,000 with a deposit of between five and 20 per cent of the property value. The aim of the intervention is to help those people who are now rationed out of the property market by high prices and cautious lenders.

This is good politics and horrendous economics. Since the peak of the boom, UK house prices have fallen by only 16 per cent in real terms, against some 40 per cent in the US. The ratio of median earnings to median house prices has fallen only 7 per cent from its peak. The government is encouraging people to leverage themselves up to the hilt in order to buy what is already likely to be overpriced property and, as a result of this policy, is likely to become still more so. This is irresponsible enough. But worse, the government will probably now find itself permanently using its balance sheet to support risky housing finance, as the US has done. The market cannot sensibly finance such high loan-to-value ratios. But this fundamental lesson from the crisis is now being thrown away.”

And Jonathan Eley of the same publication (

“By far my biggest misgiving is over the two schemes that extend state backing to mortgage lending. George Osborne presented this as support for aspiration, helping hard-pressed first-time buyers get on to the housing market.

I can see the appeal, from his point of view. In a country unhealthily obsessed with home ownership, rising house prices create a feel good factor that comes in jolly useful at election time. A combination of state help and dirt-cheap credit makes it fairly certain that, whatever pressure incomes may still be under, house prices will not have fallen appreciably by 2015, when Britain next goes to the polls.

Overvalued homes have other benefits, too. Look at the Office for Budget Responsibility’s predictions for stamp duty revenue; it expects to collect £7.7bn in 2013/14, then £8.4bn, £9.3bn and £10.5bn in 2016/17. Such increases aren’t game changing, but every little helps. The same goes for inheritance tax, the threshold for which is now frozen until 2019. And putting off the day of reckoning in the housing market will help Osborne get shot of those troublesome stakes in Royal Bank of Scotland and Lloyds. Imagine trying to privatise a high street bank at a time when repossessions are soaring.

Osborne’s boss recently invoked the spirit of Thatcher with his “there is no alternative” speech. He would do better to heed one of her other famous mantras: “you can’t buck the market”. House prices are high because there aren’t enough homes in the places they’re needed. The solution to that is to build more homes – creating gainful employment for many – not fiddle about with the mortgage market using policies soaked in moral hazard.

As the sub-prime experience in the US shows, encouraging people to borrow excessively to buy properties they cannot really afford is rarely a good idea in the long term. What happens if such loans go bad? Who stands where in the pecking order? Do taxpayers get paid back only once banks have got their cut?”

We have tried to find credible arguments to counter the above views but they seem to be rather sparse on the ground unless the commentator has a vested interest in the “Help to Buy” scheme’s success.


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