Help to Buy. Is George Osborne – the new Pied Piper?
Welcome to our first blog. I just can’t get it out of my head – this image of George Osborne as the Pied Piper, trilling the merits of his latest “Help to Buy” scheme and merrily leading unwitting house buyers into a pit of negative equity home ownership.
His recent summary introduction of “Help to Buy” Mk III (an entirely taxpayer funded Mortgage Indemnity Guarantee Scheme) will doubtless give the housing market another boost – just at a time when the new-build order books are filling up nicely.
So what is “Help to Buy” Mk III………?
It’s George’s latest wheeze that commits all taxpayers to underwrite the property market. George has gallantly promised £130 billion of our money to this, his latest wacky idea which will enable any house purchaser to apply for a 95% mortgage from participating lenders (currently those institutions we already part own), up to a maximum purchase price of £600,000. No ‘first time buyer’ restriction will any longer apply. We are told that the status and earnings of applicants will be vetted before approval will be given – well, now there’s a thing!
Is our money at risk?
Absolutely – and under any of the following events:
- Borrower default, following accumulation of arrears and capital loss upon sale of repossessed property.
- Property market falls – leading to negative equity.
- Interest rate increases – resulting spiralling repayment costs.
- Property market price bubble – boom and bust!
And what’s the risk our Indemnity Guarantees being called in? High, too high. Why? Because we taxpayers are providing guarantees in a market where commercial insurers fear to tread.
Is George leading us into another property bubble?
Whilst ‘property’ is a special type of ‘asset’, it’s still a discretionary purchase, dependent upon affordability, desirability, economic environment and market forces.
Property values are most reliably tested against purchaser income. Throughout long periods of the ‘70s’, ‘80s’ and ‘90s’, first time buyer property prices in the West Midlands* equated to around 2.6 x purchaser’s combined gross income. At the peak of the late ‘80s’ price bubble, this multiple stretched to 3.9 x but then fell back to 2.5 x by the mid-‘90s’. From that point onwards, another bubble began to form, reaching a bloated 5 x income by mid-2007. Over the following 5 years, property prices fell against purchaser income, to a low of 4 x in mid-2012 but are now on the increase, to the current level of 4.3 x – and rising.
(*The house price figures come from the O&S website and relate to the West Midlands.)
Isn’t this how the last mess started?
Well yes! Cheap and plentiful credit was the root cause of the recession and it seems to me that Help to Buy Mk III is little more than cynical prod to the public to climb back onto the personal debt wheel. And once again its we taxpayers who are called to prop up a market that is already close to historic highs. Political expediency once again champions over fundamental economics – but for how long?
Now you know why I can’t get that image of George, the new Pied Piper out of my head!
So what do you think?
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