Help to Buy won't bring a sub-prime crisis to Britain – but it does move us closer to one

Boosting house prices is a funny way to solve the housing crisis, writes Preston Byrne.

As I write, a banner atop my Gmail account announces: “Help to buy... 5% deposit, 20% government loan, only 75% mortgage needed.” Gmail, of course, makes money by scanning user e-mails for key "phrases that a customer would use when referring to… products or services” and delivering the appropriate advertisements. The all-seeing eye of Google will long ago have figured out that (1) I am a renter, (2) I am a yuppie and (3) I have a keen interest in the Help to Buy program – admittedly, not yet as a consumer but as a writer.

Given Britain's seemingly insatiable demand for housing, I am therefore not at all surprised that this advert has appeared. The reasons should be plain enough. Housing is tremendously expensive, and “Help to Buy” is a convenient tagline for what are, in fact, two separate government programs to make it easier to access:

  1. An “equity loan” component where the Exchequer will top up a 5 per cent deposit with an additional 20 per cent of equity on a new-build mortgage worth up to £600,000, and
  2. A “mortgage guarantee” component which is in effect a state-backed insurance policy made available to banks lending into the sector where up to 80 per cent of their lending will be backed by the government for a period of up to 7 years after a relevant loan is originated.

Opinions on the wisdom of the scheme diverge widely. For its part, the Government “insists” that the scheme is benign, as the “intervention in the housing market is a prudent one,” “the scheme will run for only three years", and it will help “families who aspire [see what they did there?] to buy a newly built home, and the construction industry, too." Furthermore, as far as the mortgage guarantee is concerned, the Government argues that “evidence shows that loans are unlikely to default” after the seven-year lifetime of the guarantee has elapsed. Friendly media therefore gush that the program might “be [the] start of [a] renewed mortgage market”, and one which is “very welcome and will provide a real option for people currently unable to buy” at that.

The scheme is not without its detractors, who tend to take the view that the program is fuelling an already overheated housing market. One industry commentator describes it as “absolutely insane… building a sub-prime mortgage sector just as they did in the US,” and others accuse the government of creating “another housing bubble pushing prices up at the expense of buyers.”

The arguments on either side have their merits; in my view, neither is entirely correct. As to the Government, arguing that the scheme “only lasts three years” is a touch misleading; the taxpayer bears the downside risk on the mortgage guarantees over a seven-year timescale, a fact which acquires particular relevance when we consider that house prices in the United States, awash in cheap credit, took a mere four years to decouple from their underlying assets, grow exponentially and then collapse. On the equity loan side, the taxpayer eats the loss of the capital value of the each loan in its first six years (when it is interest free); interest thereafter is 1 per cent above RPI, hardly a market rate. As to the scheme's detractors, talk of sub-prime mortgages and housing bubbles are simply not appropriate analogies: the American securitisation markets did and continue to operate on a scale multiple orders of magnitude larger than the £130bn of guarantees and £3.5bn of equity lending entailed in Help to Buy.

The truth lies somewhere in the middle. As subsidy, Help to Buy is likely to capitalize not only into the value of eligible new-build property, but also into the prices of existing housing stock to the extent that such housing is substitutable with the new-builds. As house prices rise, consumers will need to borrow more in order to enter into the market – and in the current low-interest rate environment, they will be pushed to pick variable- rather than fixed-rate mortgages.

Here the American comparison is more apt. In Bush's America, a low interest-rate environment encouraged borrowers to take advantage of adjustable-rate mortgages which would be prohibitively expensive in a higher interest-rate environment. However, as put by Adam Levitin and Susan Wachter, these “(were) a poor financing choice given that rates were likely only to adjust upwards in the future,” with the consequence that “housing finance was becoming relatively cheaper, even as it was becoming riskier.” And this, of course, risks, though does not necessarily ensure, a housing bubble: in another paper, Levitin and Wachter argue that “the (U.S. housing) bubble was, in fact… a supply-side phenomenon, meaning that it was caused by excessive supply of housing finance.”

Whether Help to Buy will constitute “excessive” supply remains to be seen; it is impossible to predict with certainty what the eventual macroeconomic outcome of the scheme will be, so I will not attempt it here. We do, however, know some things for certain: Help to Buy has been linked to a “surge in optimism over house prices,” though not a bubble; where interest rates are currently at historic lows, inflation is risinglaying the groundwork for interest rates to follow. What we are left with is a situation that bears some hallmarks of the American housing crisis, though not all of them.

This is not to say government has no role to play in easing the housing supply crisis: to the contrary, liberalising planning law would go some way to doing so without injecting mispriced credit into the market and incentivising highly leveraged house purchases which borrowers – including millions of yuppies with Gmail accounts – would, if interest rates were higher, be ill-able to afford. Given what we know about the American experience, though, if a long-term solution to the housing crisis is the Government's objective, Help to Buy seems a very funny way of going about it.

Photograph: Getty Images

Preston Byrne is a fellow at the Adam Smith Institute.

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The joy of only winning once: why England should be proud of 1966

We feel the glory of that triumphant moment, 50 years ago, all the more because of all the other occasions when we have failed to win.

There’s a phrase in football that I really hate. It used to be “Thirty years of hurt”. Each time the England team crashes out of a major tournament it gets regurgitated with extra years added. Rather predictably, when England lost to Iceland in Euro 2016, it became “Fifty years of hurt”. We’ve never won the European Championship and in 17 attempts to win the World Cup we have only won once. I’m going to tell you why that’s a record to cherish.

I was seven in 1966. Our telly was broken so I had to watch the World Cup final with a neighbour. I sat squeezed on my friend Colin’s settee as his dad cheered on England with phrases like “Sock it to them Bobby”, as old fashioned now as a football rattle. When England took the lead for the second time I remember thinking, what will it feel like, when we English are actually Champions of the World. Not long after I knew. It felt good.

Wembley Stadium, 30 July 1966, was our only ever World Cup win. But let’s imagine what it would be like if, as with our rivals, we’d won it many times? Brazil have been World Champions on five occasions, Germany four, and Italy four. Most England fans would be “over the moon” if they could boast a similarly glorious record. They’re wrong. I believe it’s wonderful that we’ve only triumphed once. We all share that one single powerful memory. Sometimes in life less is definitely more.

Something extraordinary has happened. Few of us are even old enough to remember, but somehow, we all know everything that happened that day. Even if you care little about the beautiful game, I’m going to bet that you can recall as many as five iconic moments from 50 years ago. You will have clearly in your mind the BBC commentator Kenneth Wolstenholme’s famous lines, as Geoff Hurst tore down the pitch to score his hat-trick: “Some people are on the pitch. They think it’s all over. It is now”. And it was. 4 - 2 to England against West Germany. Thirty minutes earlier the Germans had equalised in the dying moments of the second half to take the game to extra time.

More drama we all share: Geoff Hurst’s second goal. Or the goal that wasn’t, as technology has since, I think, conclusively proved. The shot that crashed off the cross bar and did or didn’t cross the line. Of course, even if you weren’t alive at the time, you will know that the linesman, one Tofiq Bakhramov, from Azerbaijan (often incorrectly referred to as “Russian”) could speak not a word of English, signalled it as a goal.

Then there’s the England Captain, the oh-so-young and handsome Bobby Moore. The very embodiment of the era. You can picture him now wiping his muddy hands on his white shorts before he shakes hands with a youthful Queen Elizabeth. Later you see him lifted aloft by his team mates holding the small golden Jules Rimet trophy.

How incredible, how simply marvellous that as a nation we share such golden memories. How sad for the Brazilians and Germans. Their more numerous triumphs are dissipated through the generations. In those countries each generation will remember each victory but not with the intensity with which we English still celebrate 1966. It’s as if sex was best the first time. The first cut is the deepest.

On Colin’s dad’s TV the pictures were black and white and so were the flags. Recently I looked at the full colour Pathe newsreel of the game. It’s the red, white and blue of the Union Jack that dominates. The red cross of Saint George didn’t really come into prominence until the Nineties. The left don’t like flags much, unless they’re “deepest red”. Certainly not the Union Flag. It smacks of imperialism perhaps. In 1966 we didn’t seem to know if we were English or British. Maybe there was, and still is, something admirable and casual about not knowing who we are or what is our proper flag. 

Twelve years later I’m in Cuba at the “World Festival of Youth” – the only occasion I’ve represented my country. It was my chance to march into a stadium under my nation’s flag. Sadly, it never happened as my fellow delegates argued for hours over what, if any, flag we British should walk behind. The delegation leaders – you will have heard of them now, but they were young and unknown then – Peter Mandelson, Trevor Phillips and Charles Clarke, had to find a way out of this impasse. In the end, each delegation walked into the stadium behind their flag, except the British. Poor Mandelson stood alone for hours holding Union Jack, sweltering in the tropical sun. No other country seemed to have a problem with their flag. I guess theirs speak of revolution; ours of colonialism.

On Saturday 30 July BBC Radio 2 will commemorate the 50th anniversary of the 1966 World Cup Final, live from Wembley Arena. Such a celebration is only possible because on 16 occasions we failed to win that trophy. Let’s banish this idea of “Fifty years of hurt” once and for all and embrace the joy of only winning once.

Phil Jones edits the Jeremy Vine Show on BBC Radio 2. On Saturday 30 July the station celebrates the 50th anniversary of the 1966 World Cup Final live from Wembley Arena, telling the story of football’s most famous match, minute by minuteTickets are available from: www.wc66.org