Help to Buy: Impossible to switch off?

When George Osborne unveiled his Help to Buy scheme in last year’s Budget, there was a collective sigh around the City.

Of all the lessons learnt during the crisis, surely the clearest was that mortgage guarantee schemes, such as the one the Chancellor was proposing to set up, could lead to even more dysfunction in the housing market. After all, the US was forced to bail out its own mortgage guarantee organisations, Fannie Mae and Freddie Mac, in the teeth of the crisis. Now, here was a Conservative Chancellor attempting to set up what looked a lot like a British version of those mortgage giants.

Sure, the Help to Buy mortgage guarantee scheme is technically temporary, but then again Fannie and Freddie were also intended as strictly temporary organisations when Roosevelt set them up in the midst of the Great Depression. In much the same way, economists at Lombard Street Research expect Help to Buy’s mortgage guarantee scheme to become a permanent part of the landscape, as house prices remain out of reach for many families for years.

It’s no surprise, then, that so many of the great and the good have come out against the scheme. The former Bank of England Governor Lord King told Sky News last year that it was “too close for comfort” to those American mortgage giants; and now a trio of former Chancellors –Nigel Lawson, Norman Lamont and Alistair Darling – have told the FT the scheme needs to be rethought.

Is their concern borne out by the evidence? It depends on how you look at it. In strict statistical terms, the scheme has had only a minimal direct impact. According to the Department for Communities and Local Government, just under 20,000 homes were sold under the new-build (less controversial) part of Help to Buy over the past year – a mere 2% of total transactions. We don’t yet have figures for the mortgage guarantee element, but it’s thought to be similarly small.

The bigger question concerns the indirect impact of the scheme – the signal it has sent to those in the market. Consider it this way: the Government has come out and signalled in about as direct a way as it can that it will go out of its way to support lending to homebuyers – even when the banks feel wary about doing it on their own. This may not count as a direct guarantee, but as economic smoke signals go, it could hardly be clearer: the Government will go to extraordinary lengths to encourage home ownership.

Think about it. Help to buy is designed to support those who don’t have big deposits. So, as you can see below, the vast majority of people using the new-build side of it have only a 5% deposit.

That in turn has resulted in a shrinking of deposits put forward by buyers across the marketplace. See, for instance, the ever rising LTV measure from the latest RICS survey of the housing market:

The worry is that this has, in turn, given banks and prospective buyers the impression that such support will be in place permanently. This is moral hazard of the highest degree, and it is precisely what went wrong with the Fannie, Freddie and the mortgage market in the US.

The difficult thing is not imposing such policies: it is withdrawing them. Which is why it will be interesting to see how forceful the Bank of England will be in attempting to remove the scheme later on this year. The worrying question is whether what really mattered with Help to Buy was not so much the scheme itself as the signal it sent to homeowners – something the Bank of England is entirely powerless to reverse.