‘Political Genius’ Housing Plan Spurs Bubble Talk: U.K. Credit

Chancellor of the Exchequer George Osborne’s plan to boost the U.K. housing market is winning his Conservative Party votes at the risk of creating a property bubble, economists say.

Help to Buy is designed to let cash-strapped buyers purchase a home with a deposit of as little as 5 percent of the value of the property. The first phase -- interest-free loans for buyers of newly built homes -- began in April and has already stoked the strongest housing market since the financial crisis. Guarantees meant to spur 130 billion pounds ($204 billion) of mortgage lending will be available for all homes starting in January.

“It’s political genius but economic lunacy,” said Stewart Robertson, an economist at Aviva Investors in London, which manages about $430 billion. “Have we learned nothing? You can already use language like ‘booming’ about the housing market. It may win you votes, but at what cost?”

Rising house prices are spurring consumer confidence and growth in a country where two thirds of homes are owned rather than rented. That’s boosting support for Prime Minister David Cameron, with less than two years to go before the next general election. Ten-year gilt yields reached a two-year high of 2.75 percent on Aug. 19 as investors bet the Bank of England will increase its benchmark interest rate sooner than Governor Mark Carney projects.

‘Great Politics’

A home-value gauge compiled by the Royal Institution of Chartered Surveyors rose to the highest in almost seven years in July. Halifax, the mortgage unit of Lloyds Banking Group Plc, estimates values rose for a sixth month to an average 169,624 pounds. Mortgage lending rose 29 percent from a year earlier to the highest level since the collapse of Lehman Brothers Holdings Inc. in 2008, the Council of Mortgage Lenders said yesterday.

Since Help to Buy began, 10,000 reservations for new homes have been made, according to figures published on the Department for Communities and Local Government website this month.

Rob Wood, an economist at Berenberg Bank and a former Bank of England official, forecasts house prices will rise 15 percent by the end of 2014.

“If you want an economic recovery in the U.K. you want to push up house prices, but it is a dangerous way of doing it and stores up problems in the future,” he said. “It’s not sound economics but great politics. It will be very difficult for the government to get out of it.”

‘Moronic’ Plan

The program, announced in the March budget, is designed to help people who lack enough cash for a deposit, with the government lending 20 percent of the value of a newly built home up to 600,000 pounds, interest-free for five years. The lender provides 75 percent, meaning the purchaser has to raise a down payment of 5 percent compared with about 20 percent previously.

The second phase, set to run for three years, will provide 12 billion pounds of government guarantee to encourage lenders to offer mortgages with loan-to-value ratios of up to 95 percent. The program applies to new and existing homes and excludes buyers of second properties.

The initiative, which follows the Funding for Lending Scheme run by the Bank of England, has drawn a warning from the International Monetary Fund for its potential to stoke home prices and been described as “moronic” by Societe Generale SA analyst Albert Edwards for encouraging Britons to add to already high debt levels. U.K. households owed about 1.3 trillion pounds on their mortgages in June, according to the Bank of England.

‘Incredibly Dangerous’

“It’s incredibly dangerous to persuade new buyers to take on high loan-to-value mortgages,” said Robertson at Aviva. Critics also say the plan is pushing prices further beyond the reach of first-time buyers.

Bank of England projections suggesting the benchmark interest rate can remain at a record low 0.5 percent for the next three years are being increasingly challenged in financial markets. Three-month short sterling futures maturing in September 2016 were at 2.15 percent as of 11:30 a.m. today. Investors demand 84 basis points more yield to own 10-year gilts than equivalent German debt, close to the widest spread since June 2010.

“The Help to Buy mortgage guarantee forms part of a package of measures to increase confidence and certainty in both the supply and demand for housing,” the Treasury said in an e-mailed response to questions. Carney told Sky News television this month the BOE’s Financial Policy Committee “would not expect to extend” the program if it puts financial stability at risk.

Gathering Speed

Further evidence the economy is gathering pace emerged today. The Confederation of British Industry said its index of factory orders rose to its highest in two years in August, with further improvement expected over the next three months.

The strengthening recovery and rising house prices have helped boost the Tories’ popularity. An ICM Research Ltd. poll for the Guardian newspaper on Aug. 13 showed 40 percent of voters believe Cameron and Osborne are more capable of managing the economy than the opposition Labour Party, up from 28 percent in June. In the survey of 1,001 voters conducted Aug. 9-11, Labour had a three-point lead in terms of voting intention over the Tories with 35 percent to 32 percent. Labour was about 10 points in front at the start of the year.

“Politically, it’s a masterstroke,” Alan Clarke, an economist at Scotiabank in London, said of Help to Buy. “Economically, given the choice between that and stagnation, some growth is better than none.”

(To be sent this column daily, click here. For more credit-market news, TOP CM.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE