Fitch’s foibles are with the second half of the scheme, due to be introduced in January, which will provide a government guarantee on mortgages for 95% of the value of a home worth up to £600,000. A similar scheme, NewBuy, has been going since April last year – but the critical difference between the two is that NewBuy is only applicable to new homes (the clue is in the name).
Reasons behind the introduction of Help to Buy (and NewBuy before it. And FirstBuy before that. And HomeBuy before that…) are twofold: firstly, to kick-start the construction industry. Secondly, to help solve the UK’s housing ‘crisis’: according to various reports, we need to be building 300,000 more homes a year to meet housing need over the next 10 years.
But Fitch reckons all the new version of the scheme will do is encourage house builders to push up their prices, thereby increasing margins, rather than forcing them to build more homes.
‘[It will] increase margins for home builders and may do the same for banks, while creating contingent liabilities for the sovereign… the scheme will probably push up house prices, but the likely impact on the number of homes is less clear.’
Fitch isn’t the scheme’s only critic. In recent weeks, Vince Cable has taken issue with it (‘we mustn’t risk returning to the problems of the last decade when housing got out of control’) and the IMF has criticised it (‘there is a risk that… the result would ultimately be mostly house price increases that would work against the aim of boosting access to housing’).
Ex-Bank of England governor Mervyn King has also warned that it could create a US-style ‘government-guaranteed mortgage market’, while forecasting firm Fathom Consulting, run by former Bank of England economists, said it was ‘reckless’. And then there’s the rant by Societe Generale’s Albert Edwards…
During a press conference this morning, though, new Bank of England governor Mark Carney defended the scheme, saying ‘the idea it’s fuelling a housing boom doesn’t stack up in terms of the numbers’.
Interestingly, criticisms of the first half of the Help to Buy scheme, launched in April, have all but died out. That version provides a 20% loan direct from the government. So the borrower stumps up a 5% deposit, the government provides 20% of the cash and the mortgage company provides the other 75%. In its early days it was likened to Freddie Mac and Fannie Mae – and we all know what happened to them.
But there’s no doubt the scheme has been successful. In fact, there is an argument that, in its current guise, Help to Buy has already boosted the construction industry and pushed up housebuilders’ share prices, as well as helping 7,000 first-time buyers climb the first rung of the housing ladder.
So in a way, it's already achieved its desired outcome. Given all the criticism the scheme has come in for, introducing the second half of the scheme feels like a lot of effort for relatively little gain. is that the faint whiff of a u-turn we smell?