Tuesday, 10 September 2013

No seriously, the help to buy scheme really is mental

First off lets be clear, the various government Help to Buy schemes are and will make a lot of people a lot of money. House builders obviously, but you too could cash in if you:

1)      Borrow as much as you can to buy a house in London and the S.E. of England within the next 18 months.
2)      Live in it for 24-30 months
3)      Sell it and buy somewhere cheaper outside London and the S.E. of England
4)      Use the profits to travel the world for a year or two
5)      That’s it.

Now bearing in mind the scheme hasn’t fully kicked in yet i.e. its not boosting house prices as much as it's about to, lets do some sums. If you bought (and remember the more you can borrow i.e. the bigger your income cos this is about helping the already well off, the more you’ll make) a £300,000 house, all you’d need is a £15,000 deposit. If the current rate of house price growth was maintained, after 30 months you’d be something like £54,000 up on paper. Nice. And I guess making the housing market more accessible does generate the broader economic benefit of freeing up the labour market/making labour more mobile. Despite that though the schemes are still feckin’ mental and profoundly unfair.

Lets bring some additional reality into play now. Most people get a 2 year fixed price mortgage (really, right now you should try and get a 5 year fixed – please don’t consider that professional advice BTW). Except, depending on who you talk to interest rates are now expected to start rising from late 2014 onwards and even more likely to start doing so from 2015/16. Then you look at the details of the government schemes and see that after 5 years of being a freebie they start charging 1.75% in year six and then retail price inflation plus 1% thereafter.

This means:
1)      Government policy is to help people who can’t afford a mortgage get a mortgage
2)      The cost of these mortgage will start rising from 2014/15 onwards
3)      It’ll really start rising when the charges kick in
4)      Pay rises are pants and lag house prices. A lot.

Now I guess one way of dealing with the government charges is to remortgage i.e. borrow more and use that to repay the government, except that’s to assume asset prices only ever go in one direction (see here for a list of companies that made this same assumption). Alternatively, you're taking a punt that banks will be more willing than they are now to do higher LTV mortgages.

Really, what we appear to be contending with is a government whose policy is to increase risk/enable people to go bust from 2018 onwards i.e. they are planting a cheeky wee economic time bomb at the same time as boosting already questionable house prices by helping voters borrow to buy something they can't afford. This will also direct money towards unproductive assets i.e. houses rather than say new factory equipment.

It is truly mental.

P.S. A thing that's always struck me about the left is they're very good at critique, but pants at proposing an alternative. Here's one. Instead of giving free guarantees to the middle classes worth tens of thousands of pounds, give them to housing associations instead or establish a big pot of debt for them so they can build tens of thousands of new social housing. This would push down on rental costs, create state assets and give more people decent homes. The current proposals do none of these things.

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