Spending Round 2013 - Treasury Contents


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 households—whether first time buyers or not—who 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 builders—the 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] scheme—it is not operational until the end of this year—I 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 indeed—as had been intimated at the time of the 2013 Budget—have 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 scheme—designed to run for three years—could 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 years—is 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   Q 299 Back

127   Q 304 Back

128   Q 321 Back

129   Q 292 Back

130   Q 298 Back

131   Q 297 Back

132   Q 305 Back

133   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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Prepared 19 September 2013