In Defence of Liberty

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Mortgage Miscopies

The British government’s ‘Help to Buy’ scheme aims to assist potential home-buyers with purchasing their home. Prior to the 2008 financial crisis, first-time buyers typically needed less than 40% of their income as a deposit, but this has reached a new plateau of 80% in recent years.

First-time buyers now need greater deposits than they used to. (Photo: HM Treasury)

First-time buyers now need greater deposits than they used to. (Photo: HM Treasury)

The first phase of this scheme applied only to first-time buyers and new homes, allowing them to place a 5% deposit on houses worth up to £600,000, and borrow 20% of the house’s value from the government, interest-free for the first 5 years, and the remaining 75% from a mortgage lender. The second phase applies to first-time buyers and home movers, purchasing any home. The deposit will still be 5% of houses worth up to £600,000, but the government will provide a guarantee to the lender for 15% of the house’s value, shielding them from losses. The scheme’s aim is clear: help home-buyers and reduce rents. The scheme will be available for three years, with £12bn set aside for guarantees.

The ratio between average earnings and average house prices has staggered upwards since 1996, before floating downwards since 2008 to a resting point of about 5.5. Through averaging, it’s easy to believe house price surges are necessarily a nationwide issue. According to the BBC, the annual increase of UK house prices has been 6.84%, raising the average value to £242,415, but this is not seen nationally. Annually, house prices in Bath and North East Somerset have enlarged by only 0.9%, whereas sale values in Poole have dropped by 8.7%. In these local authorities, the local averages hover above the national mean.

Average house prices have outstripped average earnings. (Photo: Nationwide)

Average house prices have outstripped average earnings. (Photo: Nationwide)

Extensions and Foundations

This second phase of ‘Help to Buy’ means new homes becomes disconnected from state subvention, meaning older homes can be bought with government-supported deposits.  The scheme may be restricted to three years, but since subsidies are relative to house prices, it establishes a positive feedback loop: subsidies will lead to greater sale prices, which in turn necessitate greater subsidies. The government claims that ‘Help to Buy’ “does not incentivise irresponsible lending”, but granting guarantees to riskier loans with smaller deposits can be irresponsible.

The state equity loans may not be beneficial to their recipients. Brick by brick, the fees for the government deposit loan will tower, and as borrowers will be charged 1.75% of the loan’s value, with the fee increasing 1% above inflation for every year thereafter. It is inessential that this scheme will ease the coagulated credit flows. Money loaned once cannot be loaned again, and so ‘Help to Buy’ will incentivise mortgage lending whilst further starving credit to companies.  Annually in England, there have been less than 120,000 house-building starts since 2008, and always below 190,000 per year over the past decade. Planning laws erode the flow of new houses, as The Economist notes: “Britain’s builders complain that a painfully slow planning process prevents them from building at the rate needed to keep up with demand.”

Firm lending has been declining, whilst household lending has resiliently risen. (Photo: Economist)

Firm lending has been declining, whilst household lending has resiliently risen. (Photo: Economist)

‘Help to Buy’ extends mortgage demand without laying the foundations for greater supply.

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This entry was posted on October 8, 2013 by in National Politics and tagged .
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