Help to Buy: More evidence of a property boom (and why it’s a bad news story)

Help to Buy is boosting demand more than supply of new houses

David Cameron at an Altrincham housing development in September when he unveiled the scheme (AFP/Getty Images)

Critics of the Government’s Help to Buy scheme warned last night that it could fail to make housing more affordable amid fresh signs that the market is overheating.

Figures published today show that the number of surveyors reporting increasing house prices has risen to an 11-year high as the measure fuels demand. The Royal Institution of Chartered Surveyors (Rics) called for urgent action to prevent “soaring” demand outstripping the supply of homes for sale.

Rics said almost three-fifths (57 per cent) of surveyors reported price rises during the month, the highest since June 2002. Simon Rubinsohn, its chief economist, said: “More and more first-time buyers are in a position to enter the market. In spite of this, the amount of homes up for sale is still nowhere near enough to keep up with demand and, in order for the market to function correctly, this imbalance urgently needs to be addressed.”

Labour and some Liberal Democrats expressed fears that Help to Buy will inflate another dangerous housing bubble, after figures showed there were more than 2,384 applications for mortgages totalling £365m in its first month. But David Cameron insisted the scheme’s critics had been proved wrong.

The Opposition believes the measure could be self-defeating because the savings for people taking out government-backed 95 per cent mortgages could be wiped out by the rise in house prices fuelled by the scheme. “The prices of those properties are going to get more out of reach and this concept of affordability will just be a mirage,” warned Chris Leslie, the shadow Chief Secretary to the Treasury.

He called on the Bank of England to launch an immediate review of the scheme rather than waiting until next year, and said the £600,000 limit for properties being bought should be cut. Labour argues that homebuyers would need to earn more than £100,000 to qualify for such a big mortgage and that state help should be directed lower down the income scale.

It is understood that the Bank’s Financial Policy Committee, which is closely monitoring Help to Buy, will consider whether the ceiling should be halved to £300,000 if there are signs the housing market is overheating.

Labour suspects the £600,000 limit is partly designed to create a pre-election “feel-good factor” in the South-east, a Conservative heartland with many key marginal seats.

The only regional breakdown of the scheme so far shows that 21 per cent of the 1,075 applications to RBS were from home-buyers in the South-east, dwarfing the 3 per cent in the North; 4 per cent in Wales; 7 per cent in both Greater London and the West Midlands; 8 per cent in Yorkshire and Humberside, the South-west and the East Midlands and 14 per cent in the North-west. The Treasury said the 21 per cent figure for the South-east reflected its higher population.

Although Downing Street trumpeted the initial results, Liberal Democrats warned that “one swallow does not make a summer”. Vince Cable, the Business Secretary, who has consistently warned about another housing bubble, said: “There are preliminary numbers. My view about the scheme is that, if it succeeds in stimulating new homes, it will be a success. If, on the other hand, it drives up prices it will not be. However, safeguards have now been put in place and the Bank of England will be monitoring the scheme closely.”

The Institute of Directors (IoD) shared Labour’s fears that the scheme might not make housing more affordable. Graeme Leach, its chief economist, said: “Yes, more people will get on the housing ladder, but they will pay more for the privilege, because we have a situation where if we try to stimulate demand for the housing market in the UK, there are so many restrictions on supply that it just drives up the price. What the housing market really needs is help to supply, not help to buy. This is a drug that politicians could get hooked on and it will be very difficult to get them off it.”

But Mr Cameron, who held a Downing Street reception for some of the families to benefit from Help to Buy, hailed its “extraordinary start”. He added: “Seventy-five families every day have taken steps to achieving their dream of home ownership. There were some who wondered if it would only be confined to the South of England. That hasn’t been the case. Some people thought it might only benefit those buying relatively expensive properties. Again, that’s not the case.”

The Government’s figures show that more than three-quarters of the applications are from first-time buyers and from outside London and the South-east. On average, people have asked to borrow about £155,000 for houses worth about £163,000, below the UK average price of £247,000.

How it works

Help to Buy gives lenders the option to purchase a government guarantee on mortgages on new-build and existing homes, where the borrower has a deposit of 5 to 20 per cent.

It is open to first-time buyers and existing homeowners and is aimed at people who have a reasonable income but struggle to raise a deposit.

The Help to Buy equity loan for new-build homes provides a loan worth up to 20 per cent of the value of a new home, interest free for the first five years.