Chancellor George Osborne warned that 'mad' Help to Buy scheme could drive up house prices

But ministers insist rules over £12bn mortgage guarantees would ensure only 'responsible lending'

Political Editor

George Osborne was warned today that his flagship scheme to revive the housing market was "mad" because it could drive up house prices and recreate a dangerous property bubble.

Click image to enlarge graphic

But ministers insisted the £12bn of mortgage guarantees under their Help to Buy scheme, available from next January, would not repeat the mistakes which sparked the financial crisis because the rules would ensure only "responsible lending".

In April, a loan scheme was  extended from first-time to all buyers, who need only a 5 per cent deposit, with 20 per cent coming from a government loan and a 75 per cent mortgage from a bank or building society. Almost 7,000 reservations of new build homes through the scheme were made in its first four months, boosting the market. The British Bankers' Association said the number of mortgage approvals for house purchases rose to 37,278 in June, up from 36,290 a month earlier to a 17-month high.

On the day Mr Osborne unveiled his plans to underwrite £130bn of mortgage lending, the Institute of Directors (IoD) rang the alarm bell. Graeme Leach, its chief economist, said it would be "difficult politically" for the Government to phase out mortgage subsidies in three years' time as the Treasury promises.  He said: "The housing market needs help to supply, not help to buy, and the extension of this scheme is very dangerous. Government guarantees will not increase the supply of homes, but they will drive up prices at a time when it seems likely that house prices are already over-valued. There is a real risk that the housing market will become dependent on the underwriting by government.  The world must have gone mad for us to now be discussing endless taxpayer guarantees for mortgages."

The Chancellor's allies dismissed the IoD's criticism as "hysterical" and "publicity-seeking." But it echoed previous warnings about the possible impact on house prices by Lord King, the recently-departed Governor of the Bank of England, the Office for Budgetary Responsibility  and the International Monetary Fund.  Lord King said the scheme was "too close for comfort" to a general guarantee for mortgages.

Paul Smee, director general of the Council of Mortgage Lenders, said the market is now "open for business" and government support had created more favourable conditions, but insisted it would not move from "famine to feast in one easy step." However, he called for "a clear exit strategy from the scheme so at the end of its three-year life, we don't see a drought coming on after a period where there is much activity."

The Treasury announced yesterday  that buyers would have to verify their income and would not be able to "self-certify" as in the past. Buyers would not be helped if their credit history does not meet the Financial Conduct Authority's standards, so anyone with a county court judgment of more than £500 against them in the past three years would be barred. So would foreign buyers with no credit history in  Britain, and borrowers could have no interest a property anywhere else in the world. People will not be able to use the scheme to buy a second home and it applies only to properties worth up to £600,000.

After a breakfast meeting with the Chancellor at 11 Downing Street to discuss the January launch, Mark Clare, chief executive of Barratt Housing, said that the number of homes Barratt is building is already up "over 20 per cent" on two years ago, due to the Help to Buy scheme.  Pete Redfern, chief executive of Taylor Wimpey believed the second phase will "benefit the whole market, particularly existing homeowners who want to move up the housing ladder but have been unable to do so".

Mr Osborne said: "Help to Buy is about getting behind those who aspire to own a home. The mortgage guarantee will support an increase in high loan-to-value mortgages for people who can't afford large deposits, and it will also boost housebuilding."

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
ebooks
ebooksA special investigation by Andy McSmith
2015 General Election
May2015

Poll of Polls

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Tradewind Recruitment: Phase Co-ordinator for Foundation and Key Stage 1

Negotiable: Tradewind Recruitment: Phase Co-ordinator for Foundation and Key S...

Tradewind Recruitment: SEN Teacher

Negotiable: Tradewind Recruitment: SEN Teacher We have a fantastic special n...

Tradewind Recruitment: History Teacher

Negotiable: Tradewind Recruitment: My client is an 11-18 all ability co-educat...

Tradewind Recruitment: Year 6 Teacher

£100 - £150 per day: Tradewind Recruitment: Year 6 Teacher Birmingham Jan 2015...

Day In a Page

Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

Isis hostage crisis

The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

The runaway buccaneers and the ship full of gold

Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Maverick artist Grayson Perry backs our campaign
Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

Assisted Dying Bill: 'I want control of my life'

This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
Move over, kale - cabbage is the new rising star

Cabbage is king again

Sophie Morris banishes thoughts of soggy school dinners and turns over a new leaf
11 best winter skin treats

Give your moisturiser a helping hand: 11 best winter skin treats

Get an extra boost of nourishment from one of these hard-working products
Paul Scholes column: The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him

Paul Scholes column

The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
Frank Warren column: No cigar, but pots of money: here come the Cubans

Frank Warren's Ringside

No cigar, but pots of money: here come the Cubans
Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

Isis stands strong as its numerous enemies fail to find a common plan to defeat it

The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

Virtual reality: Seeing is believing

Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
Homeless Veterans appeal: MP says Coalition ‘not doing enough’

Homeless Veterans appeal

MP says Coalition ‘not doing enough’ to help
Larry David, Steve Coogan and other comedians share stories of depression in new documentary

Comedians share stories of depression

The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
Has The Archers lost the plot with it's spicy storylines?

Has The Archers lost the plot?

A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
English Heritage adds 14 post-war office buildings to its protected lists

14 office buildings added to protected lists

Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Scientists unearthed the cranial fragments from Manot Cave in West Galilee