There were some doubts, but by and large most commentators favoured the scheme, given that what the Chancellor could do was restricted by the world economic downturn.
Two months on sentiment seems to be changing. There may not be outright hostility to the Scheme, but there is certainly more scepticism – with the Spectator describing it as ‘friendless’ and outgoing Governor of the Bank of England Sir Mervyn King warning that the Scheme should not be allowed to become permanent.
So what is the ‘Help to Buy’ Scheme? And why is it suddenly being viewed less favourably?
The basic details of the scheme are relatively straightforward:
- It is made up of two elements – an equity loan, which has been available since April 2013 and a mortgage guarantee, which will be introduced from January 2014
- If you have a deposit of 5% then you can borrow a further 20% from the Government, which will be interest free for 5 years
- The scheme applies to new build properties valued below £600,000 and the buyer must have full ownership of the property – so it does not apply to shared equity schemes
- From January 2014 the Government will make £12bn available in mortgage guarantees, which it believes will allow £130bn in extra mortgages to be taken out
- Both parts of the scheme are available to first time buyers and existing homeowners, and the mortgage guarantee scheme also applies to pre-owned properties.
On the face of it, an eminently sensible scheme: so why is the scheme now coming under fire? And are there danger signals for the wider economy?
It is unusual for a Governor of the Bank of England to criticise government policy – but with Sir Mervyn King shortly due to step down he perhaps feels more free to speak. His criticism of the Scheme stems from what he calls ‘the paradox of policy’ – that something which seems attractive in the short term may end up being counter-productive.
All experts are agreed that the ‘Help to Buy’ Scheme will push house prices up: if this is not matched by an increase in housing supply then first time buyers will still not be able to get on the housing ladder as they chase ever-rising prices.
King’s main worry, however, is that the Scheme will continue indefinitely, exposing the UK taxpayer to private mortgage debt, as happened in the USA. Despite Government assurances that the scheme will only last for three years, the Treasury Select Committee admits that pressure to continue it will be ‘enormous.’
The Scheme has also been criticised by right-wing economists, who disapprove of the Government interfering in what is essentially a private market – and one that has worked well in the past without Government interference.
The main criticism, however, is that the Scheme is once more focusing the UK economy on consumpti
