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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Donald Tusk is merely calling out Tory hypocrisy on Brexit

And the President of the European Council has the upper hand. 

The pair of numbers that have driven the discussion about our future relationship with the EU since the referendum have been 48 to 52. 

"The majority have spoken", cry the Leavers. "It’s time to tell the EU what we want and get out." However, even as they push for triggering the process early next year, the President of the European Council Donald Tusk’s reply to a letter from Tory MPs, where he blamed British voters for the uncertain futures of expats, is a long overdue reminder that another pair of numbers will, from now on, dominate proceedings.

27 to 1.

For all the media speculation around Brexit in the past few months, over what kind of deal the government will decide to be seek from any future relationship, it is incredible just how little time and thought has been given to the fact that once Article 50 is triggered, we will effectively be negotiating with 27 other partners, not just one.

Of course some countries hold more sway than others, due to their relative economic strength and population, but one of the great equalising achievements of the EU is that all of its member states have a voice. We need look no further than the last minute objections from just one federal entity within Belgium last month over CETA, the huge EU-Canada trade deal, to be reminded how difficult and important it is to build consensus.

Yet the Tories are failing spectacularly to understand this.

During his short trip to Strasbourg last week, David Davis at best ignored, and at worse angered, many of the people he will have to get on-side to secure a deal. Although he did meet Michel Barnier, the senior negotiator for the European Commission, and Guy Verhofstadt, the European Parliament’s representative at the future talks, he did not meet any representatives from the key Socialist Group in the European Parliament, nor the Parliament’s President, nor the Chair of its Constitutional Committee which will advise the Parliament on whether to ratify any future Brexit deal.

In parallel, Boris Johnson, to nobody’s surprise any more, continues to blunder from one debacle to the next, the most recent of which was to insult the Italians with glib remarks about prosecco sales.

On his side, Liam Fox caused astonishment by claiming that the EU would have to pay compensation to third countries across the world with which it has trade deals, to compensate them for Britain no longer being part of the EU with which they had signed their agreements!

And now, Theresa May has been embarrassingly rebuffed in her clumsy attempt to strike an early deal directly with Angela Merkel over the future residential status of EU citizens living and working in Britain and UK citizens in Europe. 

When May was campaigning to be Conservative party leader and thus PM, to appeal to the anti-european Tories, she argued that the future status of EU citizens would have to be part of the ongoing negotiations with the EU. Why then, four months later, are Tory MPs so quick to complain and call foul when Merkel and Tusk take the same position as May held in July? 

Because Theresa May has reversed her position. Our EU partners’ position remains the same - no negotiations before Article 50 is triggered and Britain sets out its stall. Merkel has said she can’t and won’t strike a pre-emptive deal.  In any case, she cannot make agreements on behalf of France,Netherlands and Austria, all of who have their own imminent elections to consider, let alone any other EU member. 

The hypocrisy of Tory MPs calling on the European Commission and national governments to end "the anxiety and uncertainty for UK and EU citizens living in one another's territories", while at the same time having caused and fuelled that same anxiety and uncertainty, has been called out by Tusk. 

With such an astounding level of Tory hypocrisy, incompetence and inconsistency, is it any wonder that our future negotiating partners are rapidly losing any residual goodwill towards the UK?

It is beholden on Theresa May’s government to start showing some awareness of the scale of the enormous task ahead, if the UK is to have any hope of striking a Brexit deal that is anything less than disastrous for Britain. The way they are handling this relatively simple issue does not augur well for the far more complex issues, involving difficult choices for Britain, that are looming on the horizon.

Richard Corbett is the Labour MEP for Yorkshire & Humber.