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.

Photo: Getty Images
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Our treatment of today's refugees harks back to Europe's darkest hour

We mustn't forget the lessons of the Second World War in the face of today's refugee crisis, says Molly Scott Cato.

In the 1930s, thousands of persecuted people fled Europe. Our own press ignominiously reported these as "Stateless Jews pouring into this country" and various records exist from that time of public officials reassuring readers that no such thing would be allowed under their watch.

With the benefit of historical hindsight we now know what fate awaited many of those Jews who were turned away from sanctuary. Quite rightly, we now express horror about the Holocaust, an iconic example of the most shocking event of human history, and pledge ourselves to stop anything like it happening again. 

Yet as Europe faces its worst refugee crisis since the Second World War we are witnessing a deafening cacophony of xenophobic voices in response to people fleeing their own present-day horror. We must therefore reflect on whether there is an uncomfortable parallel in the language being used to describe those seeking asylum today and the language used to describe Jews seeking refuge in the 1930s.

Our response to the current refugee crisis suggests we feel fearful and threatened by the mass movement of desperate people; fearful not just of sharing what we have but also of the sense of disorganisation and chaos. Does the fact that these refugees are from Syria, Libya, Iraq and Afghanistan, and so not part of our continent, provide an excuse to allow them to be bombed at home or drowned during their desperate journey to safety?

We are not helped by the poorly informed public debate which—perhaps intentionally—conflates three quite different movements of people: free movement within the EU, irregular or unauthorised migration and the plight of the Middle Eastern refugees. While our misguided foreign policy and unwillingness to tackle change may give us a moral responsibility for those fleeing famine and conflict, our responsibility towards refugees from war zones is clear under international law.

Due to our commitments to the UN Refugee Convention, the vast majority of Syrian refugees who reach our territory are given asylum but the UK has taken fewer Syrian refugees than many other European countries. While Germany admitted around 41,000 asylum-seekers in 2014 alone, the UK has taken in fewer than 7000.

The problem is that any sense of compassion we feel conflicts with our perception of the economic constraints we face. In spite of being the fifth largest economy in the world we feel poor and austerity makes us feel insecure. However, when actually confronted with people in crisis our humanity can come to the fore. A friend who spent her holiday in Greece told me that she saw local people who are themselves facing real poverty sharing what they had with the thousands of refugees arriving from Turkey.

A straightforward response to the growing sense of global crisis would be to restore the authority of the UN in managing global conflict, a role fatally undermined by Tony Blair's decision to go to war in Iraq. Our role should be to support UN efforts in bringing about strong governments in the region, not taking the misguided ‘coalition of the willing’ route and running foreign policy based on self-interest and driven by the demands of the oil and arms industries.

We also need EU policy-makers to show leadership in terms of solidarity: to co-operate over the acceptance of refugees and finding them safe routes into asylum, something the European Greens have consistently argued for. The EU Commission and Parliament are in clear agreement about the need for fixed quotas for member states, a plan that is being jeopardised by national government’s responding to right-wing rather than compassionate forces in their own countries.

Refugees from war-torn countries of the Middle East need asylum on a temporary basis, until the countries they call home can re-establish security and guarantee freedom from oppression.

The responsibility of protecting refugees is not being shared fairly and I would appeal to the British people to recall our proud history of offering asylum. Without the benefit of mass media, the excuse of ignorance that can help to explain our failure to act in the 1930s is not available today. We must not repeat the mistakes of that time in the context of today’s crisis, mistakes which led to the deaths of so many Jews in the Nazi death camps. 

Molly Scott Cato is Green MEP for the South West of England.

Molly Scott Cato is Green MEP for the southwest of England, elected in May 2014. She has published widely, particularly on issues related to green economics. Molly was formerly Professor of Strategy and Sustainability at the University of Roehampton.