4,000 reservations for 'moronic' government mortgage scheme

Consumers love the government's Help to Buy scheme, the body behind it says - but experts aren't quite so enamoured.

by Emma Haslett
Last Updated: 07 Aug 2013

Help to Buy, the government’s attempt to help first-time buyers on to the housing ladder by subsidizing and/or guaranteeing 95% mortgages, has got off to a ‘flying start’, says the Home Builders Federation, the body which came up with it in the first place. 500 people a week are making reservations under the scheme, apparently, which adds up to about 4,000 reservations over the two months it’s been active.

Help to Buy, outlined in the Budget to replace two previous government housing measures, isn’t straightforward. The first part, introduced in April to replace a scheme called FirstBuy, allows borrowers with a 5% deposit to borrow just 75% of the value of the house by providing a 20% equity loan from government. (That effectively creates a state-owned lender not unlike US lenders Fannie Mae and Freddie Mac. And we all remember what happened there.)

The second part will come into effect in January to replace NewBuy (itself only introduced last year), which provided a government guarantee allowing first-time buyers to borrow up to 95% of the value of a home. Only this version is for all buyers, not just first-timers. Still confused? Yep…

You can see why it’s been popular among borrowers – for renters with ambitions of owning a property, it’s too good to resist. Housebuilders love it too – not only has it driven up demand, but they no longer have to put up 10% equity of their own, which they used to have to under FirstBuy.

Among the non-housebuilding contingent, though, it’s come under some heavy criticism. Housebuilders have a habit of ‘landbanking’: building up huge swathes of land, but only building on (or ‘building out’, as they put it) a certain amount, thereby keeping supply relatively low.

It’s understandable – if they built more homes than they could sell, they’d be left with a lot of empty houses. But some have accused them of restricting supply to keep prices artificially high. With Help to Buy, there have been suggestions that they’ve been merrily making the most of the additional demand without increasing the amount they’re actually building – thereby pushing up their margins. Not exactly in the spirit of the government’s intentions.

Then there’s the issue of foreign and second-home buyers. In April, the Chancellor made assurances that the scheme couldn’t be used by homeowners looking for a nice holiday cottage in Cornwall, so that’s a relief – although there aren’t many details on how the government plans to prevent that.

Foreign buyers, on the other hand, could still benefit from the scheme. In the Commons yesterday, Labour MP Ann McKechin asked whether ‘British taxpayers’ money will be used to guarantee mortgages of foreign citizens who buy property here’. The response from the PM was less of a reply, more of a brush-off: ‘The Chancellor will set out details of this in the announcements he plans to make.’ Right.

The biggest criticism, though, was voiced again on Tuesday by Albert Edwards, head of the global strategy team at French banking giant Société Générale, who pointed out that by offering 95% mortgages, the government is driving young people further into debt – or ‘indentured servitude’, as he put it.

Edwards doesn’t seem to be a man who minces his words. In a research note he said Help to Buy is ‘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.

‘It ranks above some of Alan Greenspan’s very worst blunders,’ he added. Crikey.

The irony is that given the number of reservations, Help to Buy probably counts as one of the government’s most 'successful' economic policies to date. It’s just a shame that it’s one of its most bonkers, too…

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