by Radhika Madhani
In Wednesday’s budget George Osborne revealed his Help to Buy scheme. On the face of it,this looks great: financial assistance for homebuyers, and a supposed boost to the economy through the stimulation of the property market. But a closer look will reveal that the chancellor has developed a scheme to help the wealthy and create unaffordable housing in the property market.
Help to Buy has two key parts. The first relates to government proposals to loan up to 20 per cent deposits for borrowers, providing they put in at least 5 per cent of the deposit through their own means (thus allowing for a 25 per cent deposit in the mortgage application process).
This deposit assistance will apply to new-build properties in England worth up to £600,000, and will come into effect in April this year. The second part of the scheme relates to a mortgage guarantee designed to support £130 billion worth of loans. Coming into effect next year, this guarantee will place a £12 billion guarantee on the taxpayer for mortgages between 80 and 90 per cent loan-to-value (LTV), and will apply to first-time-buyers (FTBs) and existing borrowers.
Looking at the scheme as a whole, Help to Buy is a real missed opportunity in reforming the property market. Presently, those wishing to buy their own homes face the problem of high property prices, high interest rates (at least when compared with the Bank of England’s current base rate of 0.5%), high LTV requirements, and stringent and complex affordability calculations used by lenders in assessing borrowers’ ability to repay the mortgage. Help to Buy fails to address all of these problems.
The first part of Help to Buy will obviously encourage more people to buy their own properties. With the government providing up to 20 per cent deposits to borrowers, there will of course be an increase in mortgage applications.
But unless this demand is matched in supply, Help to Buy will actually have a severely damaging impact on the economy. It is a basic economic principle that increased demand without increased supply will lead to a rise in prices. Yesterday the chancellor failed to announce a government commitment to build enough houses to stimulate the economy, and without these new homes we can expect a huge increase in property prices that will distort the market even further, especially in the London property bubble.
Property values will be unnecessarily pushed up, and far from helping FTBs and families, Osborne’s budget will actually create an unaffordable housing market. The economic rationale behind the government’s decision is almost impossible to understand, and we have here a clear example of an ill thought out, incompetent, and potentially disastrous policy.
The second part of Help to Buy, the mortgage guarantee, raises major concerns should a borrower default on mortgage payments. In this situation, it is the taxpayer who will foot the bill and not the banks.
Given that Barclays paid out £40 million in bankers’ bonuses yesterday, and tried to bury this news by announcing it on one of the busiest financial days of the year, this seems like a grossly unjust burden to place on the taxpayer. Once again the government has prioritised banks above taxpayers, and it is these wealthy financial institutions, and not the Treasury, that will have the luxury of choosing which loans to retain for themselves and which credit risks to pass on to the public purse from a potential sub-prime mortgage market. That the chancellor trusts the banks to make such decisions is in itself telling of how closely and shamelessly allied this government is with wealthy bankers.
It is not yet clear whether this mortgage guarantee applies to buy-to-let (BTL) properties and other existing security properties (properties that are used as security for the loan). The chancellor himself is unable to answer this question, which suggests that BTL properties may well indeed be covered by Help to Buy.
House prices are set to shoot up, and in an unaffordable housing market, BTL mortgage rental equations and affordability calculations will mean that only the wealthy will be able to take advantage of Help to Buy.
Rather than being an innovative scheme to assist first time buyers and struggling families onto the property market, Help to Buy will instead allow existing property owners to purchase more properties and expand their BTL portfolios – using taxpayers’ money to fund this acquisition. The public purse will be used to subsidise further property gains by the wealthiest in our country, and Labour has rightly dubbed this a ‘spare house subsidy’.
While this government lends a generous helping hand to the richest in society, it is taxing those in social housing with the appalling bedroom tax. George Osborne is facilitating the wealthy in acquiring more private property, and at the same time is taxing the poorest in council and housing authority-owned properties for having ‘spare’ bedrooms in their properties.
The dreadful cuts to housing benefit, changes to council tax benefit, and the shambolic rolling out of universal credit will all lead to a widening of the gap between the rich and the poor, and the announcements of yesterday’s Budget will make this bad situation worse. ‘
Help to Buy will fail completely to have any positive impact on social equality to create Osborne’s “aspiration nation”, but it, along with most of the budget, has succeeded in doing one thing – demonstrating that for this Tory-led government, the priority will always lie in helping the rich, and not the poor.
Radhika Madhani is a Labour party campaigner and worked for 6 years in financial services in the mortgages sector