Housing Specification Blog

Will Help to Buy create a UK housing bubble?

August 14, 2013 Alexandra Blakeman Planning & Legislation

Today’s guest blogger is Ivan Radford from The Move Channel. He spoke to HS about the sudden rise in popularity of the government’s Help to Buy scheme.

The UK may be in the middle of a recession, but the housing market is on the up. Prices, sales and confidence have all started improving. But with rising numbers comes fears of wider inflation: is it a boom or is it a bubble? And where has all this positivity come from?

Part of it stems from the 2013 Budget, when the government introduced a new raft of measures designed to stimulate the housing market. Indeed, since the financial crash of 2008, the country saw the number of buyers plummet as house hunters were unable to afford a home. Cautious banks were not lending, leaving Britons little option other than to let their accommodation.

Soon enough, the term was coined: Generation Rent. A wave of people changing their living habits – not just for the short term, but the foreseeable future. Renting has become a way of life as well as a financial necessity, underpinned by the country’s severe housing shortage. With fewer properties on the market for people to rent, high demand and low stock pushed rents up, squeezing people’s pockets even tighter.

Enter Help to Buy. The government’s scheme helps buyers to secure funding for a property by guaranteed a 20 per cent equity loan for a new build home with a value of up to £600,000. By facilitating lending and encouraging interest in new houses, investment and construction could both get a boost: two birds, one stone.

Help to Buy has been hailed by Housing Minister Mark Prisk as an “instant hit”, with almost 7,000 reservations in the first three months. The fast take-up from the public shows the scheme has tapped into the pent-up demand for homeownership, helping to remove the bottleneck in the market. Indeed, first time buyers have surged back into the market in record numbers, according to most major indices, while property values are steadily increasing.

But some have raised concerns that the scheme is only making the problem worse. Isn’t state-backed lending what caused the last global housing crisis? And while first time buyers are buying again, is Help to Buy only helping house prices to be pushed up even higher without a genuine recovery?

Indeed, London prices have hit record highs, surpassing the previous market peaks by almost 5 per cent – and the prices keep on climbing thanks to continued foreign investment in the capital’s safe haven. The rest of the country is now seeing growth too, although a distinct North-South divide remains – a symptom of the warped state of an already distorted market.

Industry experts have warned that the scheme must only be a short-term measure rather than a long-term crutch, preventing the market from becoming dependent upon the government’s lending. The Office for Budget Responsibility, meanwhile, estimates that the scheme will only represent 2 per cent of the 3.4 million transactions taking place in the next three years – not a big enough proportion to inflate a bubble.

The next stage of the scheme will be rolled out at the start of 2014, opening up support to all buyers, rather than just first timers. While experts have raised concerns, though, more are now changing their stance to decide that the market will not overheat.

With interest rates set to start rising in 2016, inflation-adjusted prices will only increase a few percent in the next five years rather than the nominal 18 per cent, according to Savills. The firm’s research also reveals that climbing activity is also fuelled by a turnover of existing debt rather than the creation of new debt.

With a clear exit plan, climbing construction, increasingly confident first time buyers and future rises of interest rate expected, maybe Help to Buy won’t blow up a bubble after all and instead do just that: help people to buy.

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