MPs warn of stability ‘threat’ from Help to Buy bubble

Extensive government support for homebuyers offered under the Help to Buy scheme risks creating an unsustainable property price bubble that poses a serious risk to financial stability, an influential panel of MPs warns today (8 October).

A report published by the Treasury Select Committee reveals concerns that Help to Buy will primarily serve to increase prices rather than stimulate supply and cites “strong incentives” to keep it going beyond its projected three-year term such that it becomes a “permanent feature of the market”.

Criticising the weakness of a so-called “double-lock” that would have given the macro-regulator within the Bank of England, the Financial Policy Committee, the power to shut the scheme down, the committee called on the government to “re-examine the case for giving the FPC an explicit veto over the continuation of the scheme”.

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According to the report, the latest government spending round failed to allay fears concerns that the Help to Buy mortgage guarantee scheme may not have the intended effect over its proposed three year life.

The committee, headed by Andrew Tyrie, states the government’s decision to bring the scheme forward by three months did not alleviate its concerns, warning that without a corresponding supply response “the scheme could serve merely to drive up house prices” and therefore risked driving a bubble in prices.

Mr Tyrie said: “The government’s response to our report on the 2013 Budget has done little to allay our concerns that the primary effect of the guarantee scheme, at least in the short to medium-term, could be to raise house prices rather than stimulate new supply.”

Yesterday, Ray Boulger, technical manager at broker John Charcol told FTAdviser that the government-backed initiative could cause house prices to rapidly rise, particularly in areas where there is currently a strong housing market.

The Select Committee report added it remains unclear whether the FPC has an advisory role to the government or whether it has the authority to cancel Help to Buy.

The report says: “Following committee scrutiny it transpires that the so-called ‘double lock’ - whereby we initially understood that the FPC would have a veto over the continuation of the scheme after three years - is not a lock at all.

“Our understanding is that the government of the day, if it chose to extend the scheme, could do so despite any objections raised by the FPC. The government should provide more precise information on the operation of the so-called ‘double lock’ and, in particular, re-examine the case for giving the FPC an explicit veto over the continuation of the scheme.

“As the governor of the Bank of England recently noted, the FPC has both powers of recommendation, and powers of direction, to counter risks from the housing market. We note that the FPC can issue recommendations to the Treasury, and we would expect it to do so if it believed that the mortgage guarantee scheme should finish early.”