The new housing boom is dangerous

Critics fear that Help To Buy could leave the housing market in an even more troubled state

The signs that the housing market is in full-blown recovery just keep coming.

The Government’s Help To Buy initiative has been credited with an outlook that is at its brightest in 14 years; home reservations that are up 40% with the developer Bovis; and values that are at their highest level in three years.

“All signs seem to be that after a long wait the property market is on the move. Virtually all recent housing market indicators and indices have suggested that housing transactions are back firmly in positive territory. A major catalyst for this has been the Government’s stimulus measures,” said Jeremy Duncombe, director at Legal & General Mortgage Club.

Help To Buy is formed of two parts. The first phase, already launched, allows buyers with a 5% deposit to purchase a new-build homes worth £600,000 or less. The second part is due tom come in April 2014 and will enable buyers with a deposit of 5% to buy any home worth less than £600,000 not just new-builds. 

Yet a scratch beneath the surface reveals the danger of sustaining a housing market on Government intervention. And not everyone believes it’s a good idea.

House prices are too high

In the past, many people saw rising house prices as good news. But attitudes have altered since the economy was crippled a few years ago, in part by buyers being offered credit for property that they couldn’t really afford.

The gap between the average house price and earnings increased after the late 90s, peaking in 2007. At the same time ownership has declined, a trend that is especially pronounced among people aged 25-34-years-old, dropping by a third.

Critics are worried that Government help for buyers could push values higher and the gap between earnings and price back up. 

In turn this locks more aspiring first-time buyers out of the market and leaves the market ever more dependent upon state funding.


“It is vital that there is a clearly defined exit strategy right from the start for the Help to Buy: mortgage guarantee initiative. It cannot become a permanent feature of the market beyond the time when the country is in economic recovery mode,” said Paul Broadhead, head of mortgage policy at the Building Society Association.

“Care is needed to prevent the actions taken today inadvertently causing a distorted housing market in three years time - a market where state intervention has artificially hiked prices.”

[Are UK house prices really set to rocket this year?]

Not enough houses

Part of the reason that house prices are rising is because demand is outstripping supply, particularly in London.

Demand for housing in the capital is still set to outstrip supply by nearly half in the coming decade, according to analysis by Knight Frank.

The Government hopes that its various initiatives, including Help To Buy, will get developers building more homes.

But not everyone is convinced. “There remains a question mark as to how much additional activity will be stimulated specifically by this programme,” Simon Rubinsohn, Royal Institution of Charted Surveyors (RICS) chief economist recently said.

“RICS expect housing starts to climb to around 115,000 this year which compares with fewer than 100,000 in 2012. This will, nevertheless, still leave the level of house building way short of projected household formation and suggests that rather more will need to be done to address this key challenge for the country.”

In fact, the Government needs to do much more to stimulate house building, according to housing charity Shelter’s director of communications, policy and campaigns, Kay Boycott.

She said: “If the Government really wants to help ordinary people to buy a home of their own it should scrap this scheme in favour of a bolder plan of action to build homes that families on average incomes can actually afford.”

Alongside the first phase of Help To Buy, lenders have also relaxed lending criteria for buyers in the past couple of years - again allowing borrowing with a deposit of only 5-10%. 

The two factors have helped first-time buyers return to the market in recent months, raising the question of whether the extra Government help coming next is really needed and could be better used to tackle the more pressing issue of building more homes.

10. Budleigh Salterton, Devon; £330,436 average house price
Originally the hamlet of Salterton on the Rolle Estate, Budleigh Salterton developed as a resort in the early 19th century. It’s now an ... more 
10. Budleigh Salterton, Devon; £330,436 average house price
Originally the hamlet of Salterton on the Rolle Estate, Budleigh Salterton developed as a resort in the early 19th century. It’s now an assortment of cottages and Victorian villas, alongside impressive early 20th Century residences. This five-bedroom cottage is on the market at £800,000. Fulfords less 
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Yahoo Finance UK
Fri, May 31, 2013 16:00 BST