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Darling Says U.K. Housing Plan Risks Stoking Property Bubble

May 14 (Bloomberg) -- Former Chancellor of the Exchequer Alistair Darling said a government plan to help people buy homes risks stoking a housing bubble unless more properties are built.

The so-called Help to Buy program may spur unsustainable gains, particularly in London and the surrounding areas, Darling told reporters today. He also said Britain may be in for a Japan-style economic slump unless the government eases its deficit-cutting plan.

“If you don’t do anything about supply then prices start to go up,” Darling, a lawmaker for the opposition Labour Party, told parliamentary journalists in London. “It is a mistake to introduce measures which I think will simply create a housing bubble, particularly in London, rather than address the underlying problem which is a shortage of housing. I do think the government will have to look at this again.”

Help to Buy, announced in March by George Osborne, the current chancellor, aims to help people struggling to raise a deposit, with the government lending 20 percent, interest free, of the value of a newly built home. Mortgage guarantees extending to all properties will be available from next year.

The program has already helped to spur the property market, the Royal Institution of Chartered Surveyors said today. Critics say the plan will lead to riskier lending, fuel demand for second homes and drive property prices higher.

House prices tripled in the decade to 2007 as the supply of homes stagnated, with buyers taking on so-called buy-to-let loans to purchase property for investment. Britons now owe a record 1.27 trillion pounds ($1.94 trillion) on their mortgages, according to the Bank of England. Household debt was equal to 153 percent of disposable income in the U.K. in 2011 compared with 115 percent in the U.S. and 88 percent in Germany, latest data from the Organization for Economic Cooperation and Development show.

Darling also said the fiscal squeeze was endangering an economic recovery and risked keeping Britain locked in a decade-long slump. Britain may “remain bumping along the bottom for a decade if not longer,” he said.

The government should resist calls to break up Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc, he said. Selling off a good bank and leaving taxpayers holding a bad bank would be “ridiculous,” said Darling, who was chancellor when the two lenders were rescued with 66 billion pounds of public money in 2008.

To contact the reporter on this story: Gonzalo Vina in London at gvina@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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