MacroScope

Britain’s Help to Buy unites analysts about its dangers

May 29, 2013

Even if they can’t agree how much Britain’s Help to Buy mortgage guarantee scheme will boost the housing market, analysts in the latest Reuters poll are united by an understanding of its dangers.

The government’s Help to Buy programme, unveiled in its March budget, is designed to boost mortgage lending and help buyers with small deposits get on the property ladder.

The poll predicts Britain’s house prices will rise at their fastest pace in four years in 2013, and data from Hometrack show London property was snapped up in April more quickly than at any time since October 2007 – adding to concerns Help to Buy might start a new house price bubble.

Analysts are largely split into two camps. On the one side, there are those who think Help to Buy will provide just a modest uptick in housing market activity. But even so, it doesn’t necessarily follow that the wisdom of the programme is sound:

The Help To Buy mortgage guarantee scheme may well give the market more of a boost from 2014. While measures to support the market are welcome, the scheme will encourage households to leverage up.

With high indebtedness being one of the root causes of the recent bust, it is questionable whether such behaviour should be encouraged. But with households engaged in debt reduction, the scheme may in any case be less successful than some of its proponents hope. - Peter Dixon, Commerzbank

On the other side, Help to Buy poses a real danger of forming a new housing market bubble.

Help to Buy is a reckless scheme that incentivises the banks to lend precisely to those individuals who, absent the scheme, would not and should not be offered credit. In our view, it risks inflating a second bubble in the UK housing market, and we have adjusted our forecasts to reflect that risk. - Andrew Brigden, Fathom Consulting

Even if a housing bubble looks unlikely in the short-term, as Finance Minister George Osborne told Parliament in March, that is still something authorities need to watch out for:

There is concern that the Help to Buy mortgage guarantee scheme could eventually fuel a housing price bubble, but we suspect that is unlikely in the near term given still modest looking growth prospects. However, it is something that policymakers will need to keep a very close eye on further out and they must be prepared to quickly pull the scheme at the first sign of any housing price bubble developing. -Howard Archer, IHS Global Insight.

That might be easier said than done. If the last 15 years have taught us anything, it’s that regulators and governments have found asset bubbles ¬†difficult to identify, let alone puncture.

In his inaugural budget in 1997, newly-installed finance minister Gordon Brown declared: “I will not allow house prices to get out of control and put at risk the sustainability of the future.”

Few would argue he succeeded, as the average house price tripled under his tenure as Chancellor.

Bubble-bursting is politically difficult. As happened endlessly in both the UK and U.S. last decade, surging house prices were instead touted as a sign of economic virility, rather than imbalance.

The question is whether George Osborne and the Bank of England would be willing to make that call, especially in a country starved of meaningful economic growth for so long.

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/