Chancellor should discard dangerous Help to Buy in the upcoming budget
With the annual Budget due later on this month, pressure is growing on the Chancellor to address the rapidly booming property market, where demand levels are substantially outstripping supply and subsequently prices are being inflated out of the reach of many householdís finances.
Market analysts have argued that the governmentís flagship Help to Buy scheme, that was implemented last year in order to restore consumer confidence in the property market, has contributed heavily to the soaring levels of demand in the country, and have called for the initiative to now be removed in order to prevent the market from ëoverheatingí.
On reflection, it can be argued that the scheme has succeeded in its purpose; previous approval levels that were stagnant for so long after the recession rose by 42% between January 2013 and 2014, whilst monthly approvals increased to 77,000 in the same month, which is just 33% off their pre-recession peak back in 2006.
The big question now is with interest rate rises on the horizon, increases in wages remaining slow, and deposit and mortgage requirements remaining low, is it responsible to carry on with the Help to Buy scheme on the governmentís part?
The strongest and perhaps most radical argument that advocates of the schemes removal have forwarded is that it will incur a ëhousing bubbleí later on down the line, that will mirror and perhaps be even harder than the one incurred by the financial crisis back in 2008.
Indeed, there are many trends and activity in the market at this present time that are symptomatic of the causes of the previous crash in the property market; Monthly mortgage approvals are beginning to climb to their 1990ís and 2000ís peak point of 95,000 whilst a huge number of people who would not be able to afford a home in normal circumstances are entering onto the property ladder through capitalising on the Bank of Englandís historically low base rate of 0.5%.
The 5% deposit and 95% loan to value mortgages that the scheme brings along with it also run the risk of disaster later on down the line when rates rise, and people who are currently just about affording their monthly repayments will suddenly being faced with substantially larger and financially unattainable housing costs.
Alarmingly, the trend of building up capital wealth through property is resuming, despite its apparent failure and contributory role to the original crash just 7 years ago. As mortgages become more readily available, the Help to Buy is encouraging people to adopt the mentality of hedging their bets on the trajectory of their homes value, and essentially attach their financial wellbeing in the future to their property rising to a high enough point that they can pay off their mortgage and live comfortably afterwards.
Many supporters of the Help to Buy scheme have continually argued the same notion; that despite a recent boom in activity within the property market that nevertheless it is far off its recession peak. Whilst this is true, it will not be for long under current trajectory, and politicians must act now and read the writing on the wall, because all the signs point to the property market returning to its pre-recession carnation of itself.
One only has to look at the upwards trajectory and severity in property price increases last year across the country to see that they are moving too fast. Halifax recently reported that houses rose by 7.8% across the country last year, whilst Nationwide estimated this to be an ever higher 8.7%. Estate agent organisations have forecasted this year to see rises as steep as they have been for a decade, whilst the Office for National Statistics have identified that housing costs are now actually higher than they were back at their peak in 2007.
This upwards trend has not just been limited to just one area, and Nationwideís annual data for the property market in 2013 clearly displays that all areas of the country are seeing price inflation from soaring levels of demand. Nationwide identified that they increased 20.2% in London, 16.5% in Northern Ireland, 14.8% in the South East, 14.3% in Yorkshire and Humberside, 13.9% in the South West, 12% in Wales, 11.2% in the West Midlands, 6.6% in the North West and 6.1% in the East Midlands. The signs are clear.
This collectively indicates that a return to pre-recession levels in mortgage approvals and property prices is imminent, and this is hugely worrying because it has clearly been ascertained in retrospect that the previous condition of the property market was poor, risky and doomed to fail.
The people in the biggest danger right now are those who have acquired a high loan to value mortgage with a low deposit and have undertaken huge levels of secured loan debt that they are repaying on an interest only basis. These people will have contributed nothing towards their mortgage repayment by the time rates rise, and will be faced with monthly interest payments that are out of their finances reach unless they drastically improve in the next few years.
There is also the issue of negative equity, which is a risk that will always be incurred when deposit requirements are as low as they are now. This is because in the future, if property prices drop, people will be unable to rely on their asset anymore as a financial investment, and this in turn will substantially reduce their quality of life.
Ultimately, the UKís reactionary tradition must prevail now and both the Bank of England and the government should not be encouraging people to spend money they do not have in the pursuit of homeownership; instead they should adopt the approach of accepting the schemes success in achieving its aim and modifying it so that it does not incur the same crash as last time. Capital wealth is fine is levels of supply keep the property market stable, but at the moment, it is discouraging income wealth and it is this conflation that runs the biggest risk considering the flimsy complexion of the property market at this present time.
Outside of the property market risks that the scheme is tempting at present, it can also be argued that it is beginning to function in a manner that is counterproductive to the reason it was implemented in the first place.
Help to Buy, in its mortgage guarantee phase at least, was intended to help young aspiring homeowners who could afford monthly payments but not the high deposits that purchasing a property comes with, to enter onto the ladder. Its entire purpose was to make the process of acquiring a home for young people more financially attainable, and it can be argued that it is beginning to incur the reverse due to soaring levels of demand at a far higher rate than supply.
The issue of house building is perhaps a more important area that the Chancellor should address in his budget, because the reality is that levels of demand are completely outstripping supply, and this is the primary reason why property prices are rising so fast. As they continue to rise, the original people who were intended for the scheme will find themselves either having to take out a substantially higher degree of debt via their mortgage than they would prior to the schemes implementation, or will simply be unable to enter onto the property ladder because prices have risen too fast. In this sense it seems counterproductive, and indeed the notion of people taking out even higher levels of debt to purchase property that they can barely afford now, let alone when rates rise, is alarming indeed.
When you factor in that when the average property price exceeds £300,000 that people will have to pay higher stamp duty and it is clear to see that Help to Buy is nearing the end of its sell by date. It is simply risking far more than it is improving, and politicians should surely take note of the previous demise in the property market and its causes when shaping policy towards the housing market at present.
It is for this reason, that the Chancellor should address this issue in his budget, and should remove the Help to Buy scheme, as having restored the property market to a credible extent, and most definitely brought consumer confidence back into it, there is no need to pursue with it when the money is far more needed in other areas, particularly in house building.
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