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
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A good apprenticeship is about more than box-ticking

The political apprenticeships arms race, promising ever increasing numbers of apprenticeships but with little focus on quality, is helping nobody. 

The political apprenticeships arms race, promising ever increasing numbers of apprenticeships but with little focus on quality, is helping nobody. Playing a numbers game often means the quality and the personal touch that turns a placement into a career opportunity can be lost. The government has set a target of three million new apprenticeships by 2020. In London Boris Johnson set a target for 250,000 apprentice starts, but fell short by over 100,000. Both targets miss the point; any target should focus on outcomes, not just numbers through the door.

Policy makers need to step back from the rigid frameworks and see what works on the ground.  For me this involved eating a bacon sandwich, which is arguably a risky exercise for politicians.  I was seeing how the owner of the Bermondsey Community Kitchen and Café, Mike, has transformed the space above his café into a training kitchen teaching young unemployed people the skills they need to gain qualifications to work in restaurants.

The posters on the wall spell out the choices available to the young people. They make it explicitly clear that there is an alternative to a life in prison, which some of the trainee chefs have already experienced, with pictures of celebrity chefs including Jamie Oliver, Delia Smith and Gordon Ramsay outlining how they worked their way to where they are now. None of the young people have had an easy start in life. Barriers they face include autism, lack of literacy skills, insufficient funds to pay the fare to the café and criminal records. But Mike and the team running the kitchen are determined to give them the chances every young person deserves. From City & Guilds qualifications, work placements and ensuring they have a job at the end of the process, this is the type of grass roots project that the government could learn from. With two groups of eight students over three half days, this is skills training that is about as personal as it gets. The young people are enthusiastic about the course, the practical skills they are learning and optimistic about the future.

The project is funded partly through the café, but mainly through grants and donations (including pots and pans from Raymond Blanc and funding from trusts as well as the local council). Mike has plans to expand. He wants premises with space for a nursery so young mothers who might otherwise struggle to complete a course can attend, he has a vision for two or three more similar enterprises across Southwark. I have no doubt he will achieve this but the challenge for policy makers is making it easier for people like Mike who are delivering flexible qualifications and delivering better results. Bureaucratic processes, lengthy forms and refusals would have put less determined people off. As the funding for skills is devolved, there is both an opportunity and a challenge to look at how innovative models can be supported. Unless more is done to ensure groups that might be defined as ‘hard to reach’ get opportunities, there will always be significant numbers falling through the gaps in a sometimes impersonal system.

Over 60 per cent of the apprenticeships in London focus on low level qualifications with little prospect of employment upon completion. Many skills based apprenticeships fail to match demand, the booming construction industry for example is crying out for skilled workers and with all parties agreeing new homes are a priority its surprising to learn that in London only 3 per cent of apprenticeships are in construction.

Apprenticeships need to focus on leading to work, and work that is skilled and pays enough to live on. They should be about opportunity not opportunistic employers. In a report published in October 2015, Ofsted was critical of apprenticeships saying too many of them ‘do not provide sufficient training that stretches the apprentices and improves their capabilities. Instead they frequently are being used as a means of accrediting existing low-level skills, like making coffee and cleaning floors.’

The new apprenticeship levy charged to businesses with a wage bill over a certain amount could be a useful way of enhancing opportunities but the definition of apprenticeship needs to be refined. On a recent visit to the iconic Brompton Bikes factory, the London Assembly Economy Committee was told that although the firm has to pay the new levy as a result of its size, they have a bespoke way of training their apprenticeships so they have the skills to get jobs with Brompton Bikes at the end of the process. Because this tailored training doesn’t meet the narrow government criteria they aren’t formally accredited apprenticeships and thus Brompton are unable to claim any funding back from government despite their excellent work.

I am increasingly frustrated that the most exciting and inspiring projects I visit don’t always meet the criteria for funding. We are doing something wrong if people are asked to fit something that works into a form that meets criteria rather than rewarding their successes. Instead huge amounts of public money are being put into funding low quality low skilled apprenticeships that sometimes appear to be more about avoiding the minimum wage. This is not just a waste of money; it is a waste of the lives of the young people. As the Bermondsey fishmonger we bumped in to on the way out of the café told us, sometimes what works is smashing the box, not ticking the box.