4 Help to Buy
Help to Buy: mortgage guarantee
scheme
45. At the 2013 Budget the Government introduced
a new 'Help to Buy' scheme which it said would "increase
the supply of low-deposit mortgages for creditworthy households,
increase the supply of new housing and contribute to economic
growth".[114]
Help to Buy comprised two schemes:
Help to Buy: equity loan, where the Government
provides an equity loan worth up to 20 per cent of the value of
a new build home, repayable once the home is sold; and
Help to Buy: mortgage guarantee, designed to
assist householdswhether first time buyers or notwho
are creditworthy, but lack a sufficient deposit either to enter
the housing market or to move within it.[115]
46. The Government outlined the broad details of
how the mortgage guarantee element of Help to Buy would work in
a paper Help to Buy: mortgage guarantee scheme outline
which was published alongside the 2013 Budget. The scheme offered
a government guarantee to lenders who offer mortgages to people
with a deposit of between 5 per cent and 20 per cent of the purchase
price of the property.[116]
More specifically, the Government stated that it would provide
lenders with the option to purchase a guarantee on the top-slice
of the mortgage which would result in the Government compensating
the mortgage lender for a portion of the net losses suffered in
the event of repossession.[117]
The guarantee would apply down to 80 per cent of the purchase
value of the guaranteed property.[118]
There was to be no income cap constraints and Government support
would be available on homes with a value up to £600,000.[119]
The Government was, however, unable to clarify at that stage whether
the scheme would be open to households wishing to purchase a second
property. The Government stated at the time of the 2013 Budget
that the mortgage guarantee scheme was intended to be temporary,
scheduled to run for three years from January 2014.[120]
47. The Treasury Committee took evidence on the Help
to Buy: mortgage guarantee proposals as part of our inquiry on
the 2013 Budget. In our subsequent Report we described the guarantee
scheme as "a sizeable intervention in the UK market"
which "makes the Government an active player in the mortgage
market". Furthermore, our Report stressed that "the
appropriateness of the taxpayer amassing contingent liabilities
in this way needs careful scrutiny". We raised a number of
specific concerns about the Government's proposals, namely around
the impact of the scheme on house prices; the appropriateness
of the taxpayer amassing contingent liabilities in this way; potential
losses to the Exchequer; and the risk that a temporary three year
scheme could end up becoming permanent.[121]
48. The Committee highlighted the risk that "existing
constraints on the supply of new housing ... will mean that the
primary effect of easier credit, at least in the short-to-medium-term
may be to raise house prices". We said we found "the
Chancellor's assertion that increased demand for home ownership
and rising prices, resulting from the mortgage guarantee scheme,
will trigger a corresponding supply response, unconvincing, at
least for the short term". We acknowledged that a corresponding
supply response "would be likely in a well-functioning market,
but pointed out that the UK "housing market contains severe
supply constraints".[122]
49. We also expressed concern that the taxpayer would
provide compensation to mortgage lenders for a portion of any
net losses suffered in the event of repossession. The Government
told us that expected losses under the scheme would be covered
by the commercial fee charged to participating lenders. However,
we pointed out that "no details of the proposed level of
the fee nor how it will be structured in practice are yet available",
which the Committee said meant it was "therefore unable to
assess the likelihood that the Chancellor will be correct when
he says expected losses under the mortgage guarantee scheme will
be covered by the commercial fee". We went on to note that
"recent history tells us that the housing market is volatile
and the level of repossessions difficult to calculate" making
it "extremely difficult to price the fee in such a way that
sharply curtails Exchequer risk".[123]
50. Another area of concern which we highlighted
in our Report on the 2013 Budget was the risk that the Help to
Buy mortgage guarantee scheme, whilst intended to be a temporary
scheme of three year's duration, could end up becoming a permanent
scheme. The Government had justified its "temporary"
intervention in the mortgage market on the basis that the current
scarcity of high loan-to-value lending was primarily a cyclical
issue rather than a symptom of a longer-term structural change
in the mortgage market. However, the Committee expressed concern
that "the Government has provided little evidence to support
this assertion" and drew attention to the possibility "that,
should the current scarcity of high loan-to-value mortgages reflect
structural rather than cyclical factors, the pressure for Government
to extend the scheme in three years time will be immense".
The Committee cautioned that "the unintended and unwelcome
outcome could be that a scheme designed to deal with a supposedly
temporary problem in the UK housing market becomes a permanent
feature of the UK housing market".[124]
51. We focussed on these areas of concern in our
evidence on the Spending Round with the Chancellor of the Exchequer.
The Chancellor defended the introduction of the mortgage guarantee
scheme as a necessary supplement to the funding for lending scheme
which he said had "helped with the pricing of mortgages",
but had "not helped with the availability of high loan-to-value
mortgages for first-time buyers":
The purpose of this [mortgage guarantee scheme]
is to repair an impaired mortgage market, which is clearly not
functioning properly. If you look at the comparison over the years,
the number of first-time buyers is half what its average has been.
The average deposit that the first-time buyer needs has gone up
from 36% of income to 79% of income. That is not functioning.
It is a block on aspiration. It is also a block on home building
[...].[125]
I do not think the fears that the Committee has
expressed are justified. This is a three-year scheme, which is
targeting a specific problem that has arisen because of a financial
crisis, and we are stepping in to repair that bit of the financial
transmission mechanism. One thing we have learnt over the past
five or six years is that more effort has been required than anyone
anticipated to repair broken financial transmission mechanisms,
whether that is the funding for lending scheme or the work that
we have undertaken with the banks or indeed, now help to buy.[126]
52. We asked the Chancellor what estimate the Treasury
had made of the impact of the guarantee scheme on house prices
as well as the likely supply response from the introduction of
the scheme. On the first point, the Chancellor told us that the
price estimate was "provided by the OBR", but that the
OBR had not changed their house-price inflation forecast as a
result of the proposed introduction of the guarantee scheme. The
Chancellor said that the OBR estimated that "house-price
inflation is going to rise broadly in line with long-term average
rate-of-earnings growth", before telling us that "like
all things, you want moderation in house prices. As the OBR says,
you want house prices to rise broadly in line with long-term average
rate-of-earnings growth. You do not want house-price bubbles,
nor do you want housing crashes". The Chancellor, when asked
whether he was concerned about a potential housing bubble, told
us that:
the best thing that I can do is to quote the
director-general of the CBI, John Cridland, and I certainly agree
with him. He said "clearly there are dangers in the long
term of asset price bubbles, but we are a very long way from that".
I do not think the situation at the moment looks like an asset
price bubble.[127]
We questioned the Chancellor on what action, if any,
the Government would take with respect to the guarantee scheme
if house prices rose faster than earnings and whether the scheme,
in such an eventuality, might be shortened. He told us that:
It is sensible to have a three year scheme. I
do not want to create uncertainty with institutions that are being
asked to deliver this that it might suddenly end early. [128]
53. The Chancellor went on to defend the Government
against the charge that the scheme would merely increase house
prices:
The ITEM Club has also taken the view that "the
risk of higher prices does not appear to us to be a major concern".
Interestingly, the response from the home buildersthe crucial
word is "builders"is that they think that impaired
mortgage finance has been the principal constriction on the supply
of new building, and they think that, as a result, that will help
enormously with the construction of new homes. Also, planning
applications, because of the planning reforms that we have introduced,
are up 10% in the last year. [129]
The Chancellor subsequently reiterated this point,
telling us that there was "plenty of evidence from the home
builders that one of the biggest impairments to supply has been
mortgage finance".[130]
He said that the Government had "not put forward an estimate
for the number of new homes that will be built", but that
"as we develop the details of the [mortgage guarantee] schemeit
is not operational until the end of this yearI am happy
to look at those estimates".[131]
54. We also discussed safeguards to ensure that the
scheme could not simply be extended by the government of the day
after three years. The Chancellor told us that the guarantee scheme
would "come to an end after three years".[132]
He stressed that the guarantee scheme was "a time-limited
scheme" and that it was "not something that we want
to see as a permanent feature of our financial landscape".[133]
The Chancellor explained that there was "a sort of double
lock in that the FPC [Financial policy Committee] will also be
invited to give a comment if the Government of the day proposes
to extend the scheme. There will be a clear red card in the system".[134]
He explained the rationale behind the "double lock":
The reason the lock is there is because people
have been concerned that, if the scheme becomes a permanent feature
of the mortgage market, and the Government is therefore a long-term
player in the mortgage market, it could contribute years hence
to ... asset-price inflation ... the scheme is absolutely intended
to end after three years. This is only something I have put in
to reassure those who feared that it would become a permanent
feature of our financial system.[135]
We questioned the Chancellor further about the "double
lock" and, in particular, whether the FPC would indeedas
had been intimated at the time of the 2013 Budgethave a
veto over any proposed continuation of the guarantee scheme after
three years. He told us that he "would set out in greater
detail later this year" how the "double lock" would
work in practice, but that:
The way I envisage it working is that a Chancellor
would say, "I am considering extending this scheme",
and would write to the FPC about that and get the FPC's views
on whether or not that was sensible ...
In the hypothetical situation in which a Chancellor
said, "I'm going to extend the scheme", that is when
the FPC's warning lights, if they wanted to activate them, would
come into effect.[136]
The Chancellor defended the proposed 'double lock',
telling us that he had given the FPC "a pretty powerful weapon"
which gave them the ability "to alert everyone to the fact
that this is not something that they think is sensible".
When asked about whether the Government could simply override
a FPC objection to the extension of the scheme, he told us that
an extension would "politically ... be extremely difficult
to do if the FPC was recommending against it",[137]
before reminding us that:
Parliament is sovereign in our country, but Parliament
and Governments have a strong aversion to doing things that our
independent Financial Policy Committee says are not a good thing.[138]
55. The Treasury Committee expressed serious reservations
about the Help to Buy: mortgage guarantee scheme at the time of
the 2013 Budget. We highlighted the risk that, without a corresponding
supply response, the scheme could serve merely to drive up house
prices. We also expressed concern about the appropriateness of
the taxpayer acquiring contingent liabilities in this way and
questioned the Government's assertion that the commercial fee
to be charged to participating lenders could be priced accurately
so as to ensure the taxpayer did not suffer losses. We also warned
that the political pressure to extend the guarantee schemedesigned
to run for three yearscould be immense, particularly if
the current shortage of high loan-to-value mortgages turned out
to be to be structural and not the cyclical problem which the
Government said that it was seeking to address.
56. The Government's response to our Report on
the 2013 Budget has done little to allay our concerns that the
primary effect of the guarantee scheme, at least in the short
to medium-term, could be to raise house prices rather than stimulate
new supply. Furthermore, we continue to believe that the government
of the day will face strong incentives to extend the scheme, with
the attendant risk that the mortgage guarantee scheme becomes
a permanent feature of the UK mortgage market. Following Committee
scrutiny it transpires that the so-called "double lock"whereby
we initially understood that the FPC would have a veto over the
continuation of the scheme after three yearsis not a lock
at all. Our understanding is that the government of the day, if
it chose to extend the scheme, could do so despite any objections
raised by the FPC. The Government should provide more precise
information on the operation of the so-called "double lock"
and, in particular, re-examine the case for giving the FPC an
explicit veto over the continuation of the scheme.
57. In a recent speech, Dr Mark Carney, Governor
of the Bank of England, emphasised that the Bank now had the tools
to take action around risks from the housing market:
[
] the Bank of England is acutely aware
of the risk of unsustainable credit and house price growth and
will be monitoring it closely.
The important thing to recognise is that we now
have tools other than interest rates that can be used to contain
risks in the property and financial sectors. These so-called macroprudential
tools were not available to us before the crisis and we are now
fully prepared to deploy them if that were needed. The Bank of
England is now in a position, for example, to supervise lending
to specific sectors more intensively, to make recommendations
to banks and building societies to restrict the terms on which
new credit is provided, or even to raise capital requirements
on mortgage or other types of lending.[139]
58. As the Governor of the Bank of England recently
noted, the FPC has both powers of recommendation, and powers of
direction, to counter risks from the housing market. We note that
the FPC can issue recommendations to the Treasury, and we would
expect it to do so if it believed that the mortgage guarantee
scheme should finish early.
114 HM Treasury, Budget 2013, p 38, para 1.100 Back
115
HM Treasury, Budget 2013, pp 38-39, para 1.104 Back
116
HM Treasury, Budget 2013, p 39, para 1.103 Back
117
HM Treasury, Help to Buy: mortgage guarantee scheme outline,
March 2013, p 9, para 3.2 Back
118
HM Treasury, Help to Buy: mortgage guarantee scheme outline,
March 2013, p 9, para 3.4 Back
119
HM Treasury, Help to Buy: mortgage guarantee scheme outline,
March 2013, p 11, para 3.8 Back
120
HM Treasury, Help to Buy: mortgage guarantee scheme outline,
March 2013, p 11, para 3.12 Back
121
Treasury Committee, Ninth Report of Session 2012-13, Budget
2013, paras 157, 159, 175 Back
122
Treasury Committee, Ninth Report of Session 2012-13, Budget
2013, paras 170-171 Back
123
Treasury Committee, Ninth Report of Session 2012-13, Budget
2013, para 158 Back
124
Treasury Committee, Ninth Report of Session 2012-13, Budget
2013, para 175 Back
125
Q 297 Back
126
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127
Q 304 Back
128
Q 321 Back
129
Q 292 Back
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Q 310 Back
134
Q 301 Back
135
Q 313 Back
136
Q 311 Back
137
Q 318 Back
138
Q 320 Back
139
Bank of England, Crossing the threshold to recovery, Speech given
by Mark Carney, Governor of the Bank of England, at a business
lunch hosted by the CBI East Midlands, Derbyshire and Nottinghamshire
Chamber of Commerce and the Institute of Directors at the East
Midlands Conference Centre, 28 August 2013, pp 9-10 Back
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