Is the government right to help people buy homes?
But should the government be propping up the property market? We ask two experts.
YES: KATE FAULKNER, MANAGING DIRECTOR OF DESIGNS PROPERTY
H2B can help to solve three key problems: the flatlining economy, the lack of homes to match new household growth and the sluggish home-moving market (which means the economy is missing out on growth from the thousands of pounds homeowners spend every time they move house).
H2B solves the catch-22 of lenders not being able to lend enough mortgages at 90 to 95% loan to value (LTV) and does so while property prices are still a lot lower than they were in most areas at the height of 2007. If first-timers have to wait for the property and lending market to recover, then prices could move out of their reach within a matter of years.
All buyers have to take out repayment mortgages, so start reducing the mortgage pretty much from day one.
The equity loan part of the scheme also helps to generate a higher supply of new-builds. The developer Barratt already plans to buy more land and has seen an 18% uplift in demand following the H2B launch, giving it the confidence to deliver more homes. It's also taking on 600 new employees and apprentices as a result.
The Montague Report stated every £1 spent on building in an area is estimated to generate £2.84 back into the wider economy. So the money for the first part of the scheme should help towards housing need, economic and job issues and gets over the lack of funding.
Critics of the scheme claim if property supply doesn't increase, then this funding will cause a housing bubble. To date, the scheme is generating demand that equates to 15,000 additional new homes over the next 12 months (according to the House Builders Federation), or a 10 to 15% increase on current building levels.
This would add something like 2% more homes being sold in the next year – not enough to support a housing bubble. It's unlikely buyers, lenders, surveyors and the Homebuy agents you have to apply to for a loan will support property prices back into a bubble.
A more realistic problem is someone buying through Help to Buy in an area where prices continue to fall who then struggles to re-mortgage after the five-year loan period is up. However, history of the Shared Ownership Scheme suggests that repossessions of schemes like this are lower than 'normal' buyers.
There is no doubt the H2B scheme should not be long term. Loans should only be granted to those who under normal lending circumstances would be given 90 to 95% LTVs so over the next three to five years the loans are 'free' and they should be able to migrate back to a 'normal' lending market.
Many of those who criticise the H2B scheme seem to forget that one of the biggest threats to our economic and property market recovery is getting back to normal lending under a 5% interest rate without crashing the housing market through huge increases in repossessions and people being forced to sell when they're still in negative equity.
NO: HENRY PRYOR, INDEPENDENT BUYING AGENT AND PROPERTY EXPERT
The government's ill-conceived H2B initiative is already inflating the next housing bubble. While laudable in intention, the policy – and in particular the mortgage indemnity guarantee element due to start in January – is interfering in an otherwise open market.
Here's the problem: if you give more money to 10 people looking to buy the six properties that are for sale, all that happens is that the six buyers will bid more to outbid the four losers who don't have as much.
The six lucky sellers get more money, the four unlucky buyers cry foul and demand the government do something about rising prices. More money may help a few people spend more money on their next home but it won't help build any new homes.
There are around 800,000 homes currently for sale across the UK. In April, just 72,000 sold, according to HM Revenue & Customs. By the end of the year, roughly 900,000 will have sold over the year but more than 2 million will have been marketed.
Put your home on the market today and there's a less than 50% chance of selling it by Christmas.
The price these homes change hands for is not dictated by the supply or demand, the price is determined by the availability of credit. Give those who want to buy more money or access to more and they will spend it. If they don't have it, then the market will fall to a level that they can afford – then it's up to sellers if they want to sell.
There will come a time when we are going to run out of people to help to buy the homes at the bottom of the ladder and the market will collapse. The Treasury Select Committee produced a scathing report on H2B in April.
It was worried on two scores: first, that once it was running and the market would get used to government help, it would be impossible to turn off the tap; and, second, that the scheme will keep house prices artificially high. This keeps them more expensive for those very people the government says it is trying to help – those who can't afford today's prices.
The taxpayer is on the hook for any losses that the Chancellor's £130 billion 'Monopoly' gamble may suffer. “House prices can't fall” may be the start of a Treasury prayer but let's remember that lenders don't believe this, which is why the government is having to step in.
Instead of letting the market cleanse itself, the government has decided to meddle. In three years' time (or whenever Help to Buy is eventually withdrawn), values will fall back as fewer people are able to afford the higher prices. That's the 'pop' sound when a bubble bursts.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.
Mortgage indemnity guarantee
An insurance policy taken out by a lender to protect itself from the risk of the borrower, falling behind with payments or if the lender has to repossess the property and sell it for less than the outstanding mortgage secured on it. Lenders impose MIGs on borrowers or property they perceive to be risky and although the MIG acts as a form of additional security for the lender, the borrower pays for it, even though it offers the borrower no additional security whatsoever.
Loan to value
The LTV shows how much of a property is being financed and is also a way to tell how much equity you have in a property. The higher the LTV ratio the greater the risk for the lender, so borrowers with small deposits or not much equity in the property will be charged higher interest rates than borrowers with large deposits. The LTV ratio is calculated by dividing the loan value by the property value and then multiplying by 100. For example, a £140,000 loan on a £200,000 property is a LTV of 70%.