George Osborne is coming under pressure to define how and when he will scale back Help to Buy subsidies, as fears grow that the scheme is undermining affordability by pushing house prices into a bubble.
Economists who previously supported the scheme are urging the chancellor to begin to head for the exit – saying it has already served its purpose.
Kate Barker, a former Monetary Policy Committee member who sits on the board of the housebuilder Taylor Wimpey, said the past year’s house price recovery had changed her views on Help to Buy.
“I thought it was a helpful and understandable intervention for a government to make at that particular point in the mortgage market,” she said. “But it does raise the question of when they should stop doing it.”
All of the UK’s main housing market indicators have registered a rise in property price inflation over the past year with the most recent estimates of annual growth ranging from 5.6 per cent on the Land Registry index to 10.9 per cent according to the Nationwide Building Society.
Michael Saunders, UK economist at Citi, said that, while he had previously defended the scheme, its job was done. “With the economy growing strongly and unemployment falling rapidly, we believe that such stimulus is no longer needed.”
These warnings have come as the OECD think-tank that represents wealthy nations and three former chancellors have also urged Mr Osborne to rethink the second stage of the scheme, which provides government guarantees on mortgages for homeowners with very low deposits.
There has been something of a love-hate relationship between the economics profession and the mortgage guarantee element of Help to Buy since it was announced in the 2013 Budget.
In normal times, the vast majority of economic opinion opposes government subsidies for mortgages.
One complaint is that any subsidy ultimately benefits homeowners, not purchasers. Raising demand for property increases house prices and can eliminate any assistance to those wanting to buy. This serious drawback was compounded by the government announcing the policy before its implementation, thereby encouraging property prices to go up before any buyers who had a small deposit and wanted to use the scheme had the chance to participate.
Worse, says Danny Gabay of Fathom Consulting, the policy gave implicit government support to high and rising house prices, fostering a “buy now before it’s too late attitude” that has pushed prices nationwide far above sustainable levels.
“A simple belief that prices could rise again, even from elevated levels, coupled with recognition that the government was sanctioning greater mortgage lending, was enough to do the trick,” he said.
In response, Treasury aides argue that the lack of availability of mortgages for those with less than a 20 per cent deposit was a failure of the normal lending market and the scheme merely restored balance.
The government points to data showing most of the lending under both the equity part of Help to Buy and the mortgage guarantees has largely gone to areas of the UK with the lowest house price inflation and has been concentrated on relatively cheap homes. The average value of a property bought under the mortgage guarantee has been £148,000 so far.
The argument between the two sides cannot be conclusive, as neither the rapid rise in overall house price inflation nor the more benign regional pattern of Help to Buy lending is conclusive proof of the scheme’s effect on the housing market.
It is significant, however, that many previous supporters say the scheme now needs to be phased out to stop house prices taking on a life of their own. Sir Jon Cunliffe, deputy governor of the Bank of England, said this month that house prices were now the “brightest [warning] light” on the dashboard.
If there is a growing movement in favour of scaling back Help to Buy, history does not suggest a painless death.
In his 1988 Budget, Nigel Lawson announced that any cohabiting couples who bought property after August that year would no longer get double mortgage interest tax relief. The move prompted a stampede into the market by couples, friends and vague acquaintances to take advantage before it was too late, creating the late 1980s housing boom that soon became the early 1990s bust.
Help to Buy has similar features because if there is a widespread perception that it will soon be abolished, the incentives to use the scheme before abolition will be extremely high for those who have only a small deposit. If they wait and the scheme is scrapped, they might lose any opportunity to buy for many years.
Concerns such as these make a rapid exit difficult, and suggest that Help to Buy might have a longer shelf life, much as mortgage interest tax relief had. It was first restricted in 1974 when Denis Healey was chancellor and not finally abolished for another 26 years by Gordon Brown in 2000.