U.K. Chancellor of the Exchequer George Osborne defended his program to boost home ownership, rejecting concerns that it may create a house-price bubble.
“It’s a three-year scheme,” Osborne told Parliament’s Treasury Committee in London today. “I don’t want to create uncertainty that it might suddenly end early. It’s hard to see given the current financial climate that it would fulfil the fears that the committee has expressed.”
Osborne introduced the Help to Buy program in March in an effort to revive the U.K. economy by lifting people onto the housing ladder and spurring homebuilding. The initiative has drawn a warning from the International Monetary Fund for its potential to stoke home prices and been described as “moronic” by a Societe Generale SA analyst for encouraging Britons to add to already high debt levels. Recent reports show the housing market is reviving, with both demand and prices increasing.
Bank of England policy maker David Miles said today he doesn’t expect the government measures will prompt banks to revive the “crazy” mortgage offers they had before the financial crisis.
“I find it very hard to believe that the Help-to-Buy scheme might mean that lenders might respond by offering 100 percent loan-to-value ratio mortgages to people who had no proof of their income at teaser rates,” he said. “It doesn’t make much sense to me.”
The program is designed to help people who lack enough cash for a deposit, with the government lending 20 percent, interest free, of the value of a newly built home. It means buyers with a down payment of as little as 5 percent can buy a property. Mortgage guarantees meant to spur 130 billion pounds ($197 billion) of lending will extend to all properties next year. Osborne said details of the guarantee program will be announced in the next two weeks.
“You don’t want house-price bubbles,” Osborne said. “We want it to be a scheme that works and provides help to those who can’t access higher value mortgages.”
The optimum is for house prices to increase in line with long-term earnings, as forecast by the Office for Budget Responsibility, he said.
Osborne reiterated that he intends the plan to end after three years, and said the Bank of England’s Financial Policy Committee would have to approve any extension.
“This is a time-limited scheme, it is not something we should see as a permanent feature of our financial landscape,” he said.
Osborne said Mervyn King, whose term as Bank of England governor ended last month, raised no objections to the plan and supported efforts to get credit flowing again. “If he had said ‘I strongly object to this scheme,’ that probably would have killed it,” he said.