Is the government taking a gamble on housing policy?
Yes, says Ian Mulheirn, they involve taking a lot of risk onto the public sector balance sheet; while Nick Jopling says it will increase housing supply
Director at the Social Market Foundation
Housing is overpriced because of the effects of a credit bubble. Using taxpayers’ money to prop up prices because the market isn’t able to is a strange policy solution.
Banks and lenders are unwilling to lend at very high loan-to-value rates, implicitly suggesting that there will be a fall in house prices and that they don’t want to take the hit when that happens.
This scheme involves taking a lot of risk onto the public sector balance sheet. Not only does it put the taxpayer at risk, it puts first-time buyers at risk.
It will entice people who don’t have much money into a housing market which by general consent is extremely highly priced and risks giving people a leg-up into negative equity. There is a risk that first-time buyers will see this as a government stamp of approval. Along with the perception that house prices never fall it could give people a false sense of security.
Clearly we have a problem with overpriced housing and with not enough houses being built. Interest rates will rise once we are out of the worst of this crisis, at which point house prices will start to fall or flatline, making things more affordable.
But we also need liberation of planning laws. The major problem with supply is that there are restrictions on building houses in places where people want to live. Of course you can describe access to finance as part of the problem. We’ve just come out of a massive credit bubble. What do you expect?
Executive property director at Grainger
The UK is in desperate need for more homes. Most people accept this. So why aren’t any being built? It’s a combination of the burden of the planning system and an anaemic mortgage market.
The government seems to be doing everything it can to speed up the planning system, albeit in the face of ardent opposition.
The Mortgage Indemnity Guarantee scheme will increase mortgage lending by shifting some of the risk from borrower and lender to the housebuilder first and then the government second.
As proposed, the scheme will require the housebuilder to top-up purchasers’ deposits, and the government would guarantee an additional amount.
In the event that the homeowner is unable to keep up with mortgage payments and the property is repossessed, the housebuilder’s deposits will be used to cover the loss. Should losses exceed the funds deposited by the house builder, the government guarantee will kick in as a last resort.
The scheme should lead to increased mortgage lending, which should in turn lead to more houses being built, as the scheme will only be available for purchases of newly built homes. Some claim it could increase housing supply by 10 to 15% in the first year and 25 to 30% in subsequent years. A significant amount when we are facing all-time lows in housing construction.
The government has clearly weighed up the pros and cons and decided the prize is worth the risk.