The recently announced Help to Buy scheme could trigger a house price bubble as high loan to value lending raises the risk of borrower defaults, however the limited term of the stimulus and housing market fundamentals offsets these risks, Moody’s Investors Service has said.
In this week’s Budget, chancellor George Osborne announced the three-year Help to Buy plan which will involve the government partially guaranteeing up to £130bn of high LTV loans for home purchases.
The ratings agency said that it anticipates the majority of high-LTV lending will be eligible for the scheme.
Moody’s said: “Although high-LTV lending raises the risk of borrower defaults, and the scheme could trigger a house price bubble, the limited term of the stimulus and housing market fundamentals offsets these risks.
“High-LTV lending is currently significantly below long-term trends, and house prices are currently flat at 2009 levels, according to the Nationwide Building Society. Our previous analysis demonstrated that the demand from growth in households is outstripping the limited supply arising from lacklustre homebuilding. These fundamentals will support any rise in house prices.”
The scheme, aimed at boosting high LTV residential mortgage lending will start in January 2014 and will run through to 2017. The scheme will partially guarantee the equivalent of 2.8x3 of all high-LTV mortgage loans originated in 2012.
Moody’s said: “That scale is significant and points to the UK government’s intention to support the housing market over the next four years. The scheme’s limited term reduces the risk of over-stimulating the market.”
The partially guaranteed loans will be available for the purchase of new or existing homes worth up to £600,000. This limit is over three times the UK’s median property price and covers over 90 per cent of the market, according to data from the Office of National Statistics.
In addition, there is no limit on borrower income, so the scheme will be available to most properties and borrowers, Moody’s said.
Given housing market fundamentals in the UK, the scheme is credit positive for residential mortgage-backed securities because it will increase the availability of high-LTV mortgage loans and spur home-price appreciation, Moody’s said.
Mortgage lending in the UK has been restricted with the onset of the global financial crisis, and lenders have been particularly reluctant to offer high LTV mortgage loans.
