Help To Buy – the next big scandal / disaster??

Is this where we are in the life cycle of the housing bubble??:

Housing Bubble graph Oct 2013


It’s a funny old world.

A major and seemingly accurate criticism of ‘New Labour’ was that their economic “success” up to the time of the financial crisis of 2007 was dependent on a house price and private debt boom.  The Tories have made much of this although they were pretty quiet at the time.

When the Tories came to power they made a big deal about getting the public debt (caused by the financial crisis) down and how dangerous a debt fuelled expansion would be.  The subsequent cuts in government spending and public sector lay-offs resulted in it taking us longer to ‘recover’ from the crisis than it took to fight the second world war.   Most of us based in the real world wondered why it wasn’t possible to use loans (with an effective interest rate of zero) to kick start the economy by building or improving infrastructure and building homes. This would have immediately increased employment, increased tax income, decreased welfare benefits and hence reduced the debt at a faster rate as well as start to tackle the housing crisis. (The reality is that debt has in fact gone up under the Tories)

Strangely and suddenly (less than two years before the next election) we now have “Help to Buy”, a debt fuelled policy that will stimulate demand for non existent houses – there are two possible outcomes, either the policy will fail to help first time buyers (perhaps they will be too worried about taking on 95% mortgages for houses that they know they cannot really afford) or we will see house price inflation and another bubble, i.e. a debt fuelled expansion. It may only be in London and the south but what happens when the bubble bursts.  The banks and this time directly the tax payer will be landed with another batch of worthless sub-prime mortgages. Except this time when the unreformed, still too big to fail, banking sector comes to the tax payer for bailing out, the kitty will be empty and the  consequences are likely to be catastrophic.


What “Help to Buy” means:

  • Stimulating demand by increasing debt while doing nothing to increase supply (relying on delayed reaction of property developers who may just carry on waiting for the prices to rise further)
  • So just churning the existing housing stock
  • Prices rise so that first time buyers have to borrow even more to buy over priced houses they cannot afford – insanity
  • Prices rise so lower income “hard working people” forced out of the market – only the well off benefit.
  • Creating an economy not built on sustainable growth but on debt
  • High loan to value ratio (i.e. 95%) is single biggest predictor of mortgage defaults
  • Govt & state-rescued banks are luring naive first time buyers into imminent negative equity & debt servitude – a disaster waiting to happen
  • Independent experts agree house prices currently probably >25% overvalued. if house prices fall that much UK banks will need to be rescued by >£500 billion – a mother of all financial crises.
  • Government is encouraging first time buyers to take on bigger mortgages than in the previous boom – 95% v 83%
  • Generally, with house price / earnings ratios where they are now, a crash has to come within 18 mths or so
  • Climbing up a (housing) ladder with a huge sack of debt on your back is an accident waiting to happen
  • Off-balance sheet financing to subsidise banks & make houses (more) unaffordable. What’s not to like?
  • In 3 years if Help To Buy expires and base rate is 2-3% (or higher), then will the Tories pay the bill or the unlucky First Time Buyers or the taxpayers?
  • In 3 years time when Help to Buy ends ends and interest rates are normalised what will happen to the First Time Buyers?
  • Emigration is the only real option for first time buyers. Germany with low inflation, rent controls, low house prices sounds like a paradise.


As it is quite possible that I am the only person who reads this blog I have not bothered to provide references for the above points, but believe that I can do so if required.  Just use the reply box below to ask (click the comments link at the top right if the box is not visible). Please let me know if you disagree with my logic or any of the data.


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One thought on “Help To Buy – the next big scandal / disaster??”

  1. We need a return to RENTED social housing, not more ‘home owners’ who will be tied to a MORTgage for the rest of their working life. House prices are way too high and until we get back to a fair cost for a modern, well insulated etc. etc. property we should shun this help to buy. A trap I agree and thanks for sharing Candida.

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