There’s been rather a lot of fuss this morning about the Chancellor’s new Help to Buy scheme – largely revolving around whether it will help guarantee buy-to-let mortgages and those for second homes.
While these questions are undoubtedly interesting (the answer, so far as the Treasury is concerned, is there will be an exemption on buy-to-let; second homes are more of a grey area), they miss the more fundamental point. With Help to Buy, the Government is moving into radically new, and potentially dangerous, economic territory.
There have been other housing schemes before: during this crisis there were projects to try to get more first-time-buyers on the housing ladder; during the Thatcher era the Right to Buy scheme gave the opportunity to those in council housing to buy their home. However, crucially most of these schemes were limited in their scope and scale. Never has there been a mortgage support scheme designed to support all households.
But the double-pronged Help to Buy scheme is. Consider it: the average house price in the UK is, according to the Office for National Statistics, £234,000. The limit on Help to Buy is not merely double this but almost triple it, at £600,000. For that, you could buy a decent property in any part of the country.
If you’re looking to buy a new build property and are short on a deposit, the first part of it, equity loan, could help. If you are after an existing property, the mortgage guarantee element can help – provided you meet the eligibility criteria, which are still a little unclear.
The significant thing is that for the first time the UK Government is moving into territory previously inhabited by the United States with its two mortgage guarantee schemes, Fannie Mae and Freddie Mac. Those two institutions helped indirectly support the housing market in the US by guaranteeing mortgages issued by US loan companies and, of course, had to be bailed out in the financial crisis.
If indeed Britain’s scheme gets implemented as advertised, and if UK banks themselves participate (an unanswered question at present), then Help to Buy could well become a large and significant part of Britain’s economic firmament. Indeed, the organisation the Government will use to run the scheme, UK Asset Resolution, which is currently administering the mortgage books of Northern Rock and Bradford & Bingley, could become a UK equivalent of Fanny & Freddie.
The key difference is that the Government is insistent that this is a temporary scheme, whose existence will be reassessed by the Financial Policy Committee in three years’ time. But then again, when Fannie Mae was established by the Roosevelt administration in 1938 it was never anticipated to last longer than a few years.
Another difference is that Help to Buy will guarantees only a specific portion of a loan, whereas Fannie Mae guaranteed a whole loan. But then set against this is the fact that Fannie was never explicitly supported by the US Government, whereas Help to Buy is.
So, lots still to unpick. What’s increasingly clear, though, is that this is a definite shift from the UK Government. It is determined to boost mortgage lending and home-owning in Britain and is taking radical steps to do just that.
Here’s a Treasury infographic on how the scheme works: