U.K. Should Consider Lowering Help to Buy Cap, IFS Report Says

Prime Minister David Cameron’s government should consider lowering the 600,000-pound ($975,000) cap on its Help to Buy program as the policy risks driving home prices higher, the Institute for Fiscal Studies said today.

While there is no evidence of a house-price bubble, London was more at risk than the rest of the country and warranted “careful monitoring,” the IFS said in its Green Budget, published today.

“Help to Buy will likely exert an upwards pressure on prices,” it said in a chapter on house prices written by Daniel Chandler and Richard Disney. “The government should consider targeting the policy on first-time buyers and/or reducing the cap on eligible property values in order to increase the policies’ impact on affordability.”

Government programs to boost credit combined with a strengthening economic recovery have led to a surge in property prices, with values in the capital up 12 percent over the past year. Chancellor of the Exchequer George Osborne argued yesterday that Help to Buy was addressing the failure of the financial system, though he said that demand for homes may continue to outstrip supply for the next decade.

Help to Buy, which began in April with incentives for buyers of newly built homes, was extended in October to enable purchases of any property costing as much as 600,000 pounds with a down payment of as little as 5 percent.

London Risk

While values remain below their peak nationwide, rising prices will continue to stretch their relationship with earnings and the risk of a bubble developing “was clearly highest in London,” the IFS said. A report by the EY Item Club this week showed London’s housing market is beginning to show “bubble-like conditions.”

“If the risk of a bubble becomes a major concern, the government may want to consider two modifications,” the IFS said. Halving the Help to Buy cap to 300,000 pounds “would, in addition to targeting the policy on first-time buyers, be likely to have the greatest impact on the London market,” where the average price is more than 300,000 pounds,’’ it said. “A more significant change” would be to restrict mortgage guarantees to newly built homes, it said.

Osborne told a House of Lords committee yesterday that “despite quite a lot of predictions by people that it would only be used for 600,000-pound homes in London, that turns out not to be the case,” and that it was being used by families buying their first home.

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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