Chancellor George Osborne is to give the bank greater powers to prevent the scheme, which is proving a boom for first time buyers, from causing a property bubble. Although the Bank of England has said separately that it does not think there is currently a bubble despite some economic commentators saying so.
The Bank will now advise on Help to Buy once a year from September 2014 instead of every three years as planned, and will be able to restrict access to the scheme if it is concerned about rising house prices.
The second part of Help to Buy is being introduced in January which will provide mortgage guarantees on properties worth up to £600,000. But the announcement says that the Bank’s Financial Policy Committee (FPC), which will be responsible for the annual assessment, will also have the ability to recommend that the £600,000 cap is reduced.
The FPC could also increase the cost of loans by advising the Treasury to raise the fees paid by lenders for the guarantees.
The Council of Mortgage Lenders welcomed the announcement. The CML pointed out that lenders who choose to participate in the scheme need to know that they are operating in a predictable environment. An annual review especially if it gives good notice of any changes to the fees that lenders need to pay, or the eligibility of loans under the scheme, will be essential.
‘Lenders need a predictable operating environment to participate effectively in the Help to Buy scheme. The various pieces of information that lenders need to understand if they are to participate are steadily becoming clearer, and we anticipate that the government will publish the detailed scheme rules soon,’ said CML director general Paul Smee.
‘We now have an indication of how and when the Bank of England will determine whether the scheme needs to change during its three-year proposed lifespan, and this annual review will be a key deciding factor in that. We hope that there will also soon be clarity on issues such as the government's exit strategy at the end of the scheme,’ he added.
The Royal Institution of Chartered Surveyors (RICS) said that the range of measures announced under the Help to Buy scheme to kick start the housing market were much needed. However, RICS has cautioned that Phase 2 in January 2014 will extend the scheme to include lending on second hand homes, could increase risk of a bubble, particularly in London and parts of the South East.
'This is why we recently called for a discussion on the possible use of speed bumps for the housing market including curbing excessive house price inflation. RICS also called for a concise and clear exit strategy for Help to Buy. So we are pleased by George Osborne’s announcement of new Bank of England powers to rein in Help to Buy, if they help to moderate the highs and lows of the property market and ensure fair access for all,' said Jeremy Blackburn, head of Uk policy at RICS.
'Additionally, the Bank of England is reported as promising to closely monitor the housing market and intervene if it feels there is danger of a house price bubble. Ultimately, though, housing supply is crucial to a healthy market. As we recommended in the RICS led Housing Commission, we need a plan as to how government and industry are going to close the housing deficit through boosting housing supply in all tenures whether owner occupied, market rent, affordable rent, shared ownership schemes or a genuine institutional private rented sector,' he added.
Berenberg’s chief UK economist Rob Wood said the move is good news because it reduces some of the upside risks to the housing market. But he still predicts that house prices will rise by 10% year on year in 2014 as a result of the introduction of the mortgage guarantee part of the scheme.
‘Tumbling mortgage interest rates, falling uncertainty and rising optimism are already driving a sharp upturn in the housing market. Adding a subsidy to an already improving market is not a risk worth taking, particularly when the market failure it is trying to solve, an alleged undersupply of risky low deposit mortgages, is easing anyway, as a result of other Bank of England and government schemes,’ he explained.
‘The housing recovery is not just a result of rocketing London prices, so considered in isolation this change looks like closing the stable door after the horse has bolted. The scheme cannot be reviewed until next September and reducing the £600,000 cap is unlikely to be a big deal for the bulk of the country outside London. Even then it might make little difference given that many lenders have lower self imposed caps for risky mortgages anyway. Changing the price could be important, but the FPC has said it will take a graduated approach on the housing market, so they seem unlikely to change the fees substantially and soon,’ he pointed out.
‘If this change of heart is an indicator of the direction policy is heading then it could be significant. The full details of this mortgage guarantee scheme have not been finalised yet, most significantly the fees the government will charge. They could be set high enough that the scheme has little effect. That would be sensible in our view. The housing market would still be boosted by improving mortgage availability and very low interest rates, but some of the worst upside risks would be removed. While politics may prevent a full cancellation of the scheme, fully implementing it would not be a risk worth taking,’ he added.
