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Help to buy schemeThe government’s extended Help to Buy scheme launched last week amid hopes that it would bring further growth to the private housing market and wider construction industry.

Within days of the launch, the Royal Bank of Scotland reported that it had taken 10,000 calls on mortgages - almost double the number it would usually expect to take. However the scheme, a government guarantee to partially cover mortgage losses, has also sparked fears that it will fuel an artificial "bubble" in house prices.

With economic recovery still fragile with unemployment and inflation concerns, Glenigan economist Tom Crane warns that bringing forward the second phase of Help to Buy could be help in the wrong place.

He said: “In March this year there were fears of a triple-dip recession and output in the construction industry had fallen by 6% from March 2012. The government’s austerity regime was under fire and public spending reductions were hitting certain sectors of the construction industry hard.  

“News delivered by Chancellor George Osborne in his March Budget that the first phase of Help to Buy would help homebuyers get a mortgage and encourage new build housing was therefore welcomed, as was the extension of the Funding for Lending scheme that aims to enable banks to pass on cheap credit to individuals and businesses.”

Fast forward seven months to October and the economy appears to have “turned a corner”; business sentiment is increasing and UK growth forecasts have been revised upwards by the IMF even as they downgraded the outlook for global growth. The construction industry appears to have stabilised despite reductions in government spending, with slow but reasonably steady output growth. 

Since March, the private housing sector has raced ahead. The first phase of Help to Buy was a success, with 15,410 reservations for new-build housing made over the first six months of the programme. This number of houses is equivalent to 23% of the units of private new build housing Glenigan tracked as starting on site across the same six months. The wider housing market also appears rejuvenated, with rising house prices and levels of activity. 

In August, the last month for which Glenigan has a complete set of data, private housing output was 15% higher than a year before and starts were up by 6%. House prices were 5.4% higher and mortgage lending was 15% higher than a year ago. Private housing starts in 2014 are forecast to be at their highest level since 2007. 

Tom said: “The equity loan stage of Help to Buy has had a positive impact on the housing market and should be continued. However the likely impact of extending support to the wider housing market is less clear. 

“Hopefully the additional borrowing power for prospective purchasers will encourage more owners to consider a house move and put their property on the market, thereby lifting market turnover with benefits for new house sales and the wider economy. But there are concerns that the measure will simply feed through to higher house prices.

“Furthermore, extending help for homebuyers to the purchase of existing properties risks undermining one of the current attractions of buying a newly built home.”

In contrast to the housing market, lending to businesses in August was down by 3.6% on the previous year. Glenigan data indicates that banks are choosing to pass credit from the Funding for Lending scheme onto homeowners, rather than onto businesses which are still seen as a risk. Despite improving economic conditions, small and medium enterprises in particular cannot expand and drive growth without access to credit.

Tom said: “The housing market is an important driver for the economy, but it is not the only one.  Business confidence is rising, but recovery is still not a foregone conclusion. 

“It is important that the government ensures that newly optimistic firms have access to funding, which will drive investment and encourage them to take on new staff.

“This would lead to a wider recovery in the construction industry with increased new orders for industrial and commercial building; and increased consumer confidence from a prolonged recovery that will feed back in to the housing market.” 

For further information on the private housing market, contact Tom Crane on 0800 373 771 or email tom.crane@glenigan-old.thrv.uk

Do you think Help to Buy will boost private housing construction or risk another price bubble? Get involved in the debate on our social media channels.

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