Surely the lesson of the 2008 sub-prime mortgage crisis was not that we need more sub-prime mortgages? George Osborne disagrees, but far more importantly, so do first home buyers. Royal Bank of Scotland and Halifax say they had received a total of 2,384 applications for the Government’s help to Buy Scheme in the last month, potentially worth £365m in mortgages.
However, whilst ‘Help to Buy’ appears to have been an initial success in the eyes of the consumer, the real danger it presents is potentially devastating. It will drive up house prices by increasing demand but not the supply of housing, and so overall access to the market will not improve.
Britain already has artificially high house prices as a result of a lack of supply since the 1980s and of a reckless culture of high percentage mortgages granted by seemingly risk averse banks in the early 21st century. The consequence of this is that even before Help to Buy, there is a distorted housing market, and therefore one very vulnerable to external shocks.
If there’s one thing we must take away from the housing market crash, it is that driving up house prices by encouraging unsustainable demand will lead to disaster, and Help to Buy makes this a real possibility. To their credit, banks are applying more rigorous credit checks than they did pre-2008, with up to half of all Help to Buy applications likely to be rejected on the basis of risk, according to The Telegraph. As such, the economy seems to be in safer, more responsible hands now than it was in the early 2000s, where banks were betting against their own investments and sub-prime mortgages reached up to 125% of the value of the house being bought.
But if the government does inadvertently create a housing market bubble by driving up demand again, by rewarding high risk borrowing instead of sensible saving, then it is setting itself up for a fall. Thatcher’s first Help to Buy policy of allowing people to buy their own council homes was brilliant: and would have been an unmitigated success if the money generated had been reinvested in to building new homes. As such, money generated from the economic boost Help to Buy will generate must be used to increase supply in the market, and thus prevent a bubble. We must learn from history, else face the awful consequences of a sub-prime crash all over again.