Will “Help To Buy” Allow A Foot In The Door In The Property Market For Those Cash Strapped Buyers or Is it just Wishful Government Policy?
Currently I’m trying to sell my share of a co-owned property with my brothers. It’s never an easy task when two of us wish to retain ownership. Unsurprisingly they value the property which implies Melrose in the Scottish Borders is a UK property black spot. This got me to thinking about houses prices and the policies introduced by the UK government to promote housing.
The coalition government through schemes like “Help To Buy” wishes to stimulate the residential housing market and encourage funding for 1st time or deposit strapped buyers. There is an acute shortage of affordable housing in the UK especially in the South East and London. Allowing property prices to fall is an obvious answer for affordability however politically this sits awkwardly with wishing to maintain the value of most people’s largest asset.
In the UK the market has not suffered drops in valuation like the US or Spain due to concerted government efforts to maintain their value. Supply also remains tight and the British love of home ownership remains. Will the policies help those wishing to buy? Not if the unintended result of these measures leads to rising prices forcing those most targeted back out of the market again.
In 2008 the house-building industry in the UK found out it wasn’t so much part of the construction market but a sub-section of the mortgage finance market. Mortgages in turn were reliant on the availability of cheap and loose credit from the world’s financial system supposedly regulated by individual countries’ treasuries, central banks and regulators. The house-building industry in the UK metaphorically suffered a “cardiac-arrest” as production collapsed as credit availability ceased flowing during 2008.
In the US, home of the sub-prime mortgage crisis, residential property suffered a similar fate. The US witnessed a substantial fall in values in many areas of 40%- Florida as an example. Financial institutions were bailed out, merged and recapitalised to deal with the financial losses. Quasi-US government housing agencies Fannie Mae and Freddie Mac were nationalised and became explicit government sponsored entities. These federal government entities today guarantee more than 90% of mortgages in the US. At least the market is now recovering in a public/private provided market with a shale gas boom helping GDP and the tax take too.
Countries like Spain and Ireland also fared badly and remain in trouble or heavily indebted as a result of building booms and reckless lending of bailed out now nationalised banks by their Governments, the EU, IMF and ECB but that’s another tale.
The UK “Help To Buy” plus other related schemes for 1st time buyers along with supressing the base rate to 0.5% maintains confidence and the illusion of wealth in most people’s main asset depending on the location of course.
The emphasis and effort in the UK to support the housing market and valuations of recent years as much as possible is more than just pride of ownership and helping builders and land owners with planning gain. It is precious recovery and growth to avoid the perils of a stagnant or deflating economy which pushes the politicians to keep pursuing policies which help confidence and the illusion of property wealth. The consumer won’t spend on discretionary items if their main asset is falling in value and salary increases remain meagre.
Financial repression and market manipulation could result in rising rates and inflation eventually through the difficulties of weaning an economy of years of quantitative easing and low interest rates however it is a position the present government and probably the next will take. How much of a problem rising rates may become for highly leveraged borrowers if they haven’t reduced borrowing during this period of low interest rates remains tomorrows problem as with the spectre of inflation.
The goal is consumer confidence through a reviving residential housing market, not just in London or expensive properties, but across the country and the housing market in general.
For those 1st time or cash strapped buyers needing government assistance and support let’s hope that the Chancellor or Treasuries of other counties too pursuing QE can keep hold of interest rates long enough for them to build up some savings to manage the inevitable higher rates of the future. The economy and politicians’ reputations depend on it.
LDC
July 2013