Osborne gives details on second part of 'moronic' mortgage scheme

The chancellor will today set out details of the second half of the Help to Buy scheme - the mortgage scheme economists love to hate...

by Emma Haslett
Last Updated: 27 Aug 2013
Chancellor George Osborne will today outline details of the second part of Help to Buy, the government scheme designed to help first- and second-time buyers to get onto/move up the property ladder.

The scheme, introduced as part of this year’s Budget, provides the finance for borrowers who want a 95% mortgage. It’s a scheme of two halves: the first, under which mortgage customers can borrow 75% of the value of a home from a commercial lender while the government provides a 20% loan, came into effect in April.

The second, under which the government doesn’t actually lend anything, but guarantees the entire 95% loan, isn’t due to come into effect until January next year – but the chancellor has today gathered lenders and housebuilders to thrash out the details.

Among the proposals are, apparently, plans to exclude people with poor credit ratings, as well as (predictably) immigrants. Borrowers will also be made to sign a declaration stating that they have no financial interest in any other property anywhere else in the world.

The scheme may be one of the government’s most successful, generating nearly 7,000 reservations and (according to calculations by the FT), over £1.3bn of sales. But economists haven’t been as impressed as the general public.

Just before his departure, former Bank of England governor Mervyn King (who is now off Manhattan to take up a visiting professorship) warned there ‘is no place in the long run for a scheme of this kind’ because it risks creating another housing bubble.

‘We had a very healthy mortgage market, with competing lenders attracting borrowers before the crisis,’ he said.

‘We need to get back to that healthy mortgage market. We do not want what the United States have, which is a government-guaranteed mortgage market – and they are desperately trying to find a way out of that position.’

Others have been less polite: last month, Societe Generale’s global strategy team chief, Albert Edwards, called the scheme ‘truly a moronic policy that stands head and shoulders above most of the stupid economic policies I have seen implemented during my 30 years in this business’.

Interestingly, given the cries of ‘bubble’ emanating from much of the City, a new report has suggested that the value of London property could actually be at risk of falling.

Research by Fathom Consulting and Development Securities suggests that if the Federal Reserve’s ‘Qexit’ is less than smooth, house prices in central London could plummet.  

Apparently, the three key factors driving the market are the value of the pound, the performance of equity markets and the ‘safe haven’ phenomenon - ie. foreign buyers see London as a safe place to put their cash.

But because London property is currently ‘more over-valued than we’ve ever found it to be before’ (house prices average £1.5m, 6.5 times the national average), economic wobbles abroad could have serious impacts at home.

As Fathom director (and former Bank of England economist) Danny Gabay says: ‘The market could inflate yet further… but you are vulnerable to a correction.’

So the Russian, Asian and Far-Eastern buyers who have put their cash in London property on the assumption that prices can only go up could be in for a nasty surprise, thanks to US Fed chief Ben Bernanke. Globalisation at its finest…

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