Town Halls shouldn't gamble taxpayers' money on the housing market

November 14, 2012 11:12 AM

A government-backed mortgage scheme NewBuy is being rolled out throughout the country with a number of local authorities eagerly signing up – the video clip above is a report on ITV Central News focusing on the situation in Nottinghamshire. The scheme involves first-time buyers only paying a deposit of as little as 5% whilst taxpayers effectively underwrite the rest of the amount required to secure a mortgage, supposedly using the property as security.

There are many reasons why this scheme does not add up. Firstly, it is aimed at first-time buyers who cannot afford the deposits of 20% and 25% typically required by high street banks. The private sector is not willing to lend to those without substantial deposits as the default rate with these high-risk borrowers is greater. So why should the taxpayer be expected to pick up the tab when problems with default inevitably arise? Low-deposit loans to high-risk groups that were backed by government schemes exacerbated the US sub-prime mortgage crisis less than five years ago, so it’s unsettling that politicians here seem so eager to make the same mistakes again.

Having the mortgaged property as security does not ensure taxpayers’ money is safe. It assumes that house prices are rising and will continue to rise – a trend that has not been seen outside of London for many years now – and only a few days ago did Halifax report that house prices had fallen 0.7% last month. The problem of negative equity, where the debt owed is greater than the value of the property, is a serious one that councils should not so easily dismiss.

The impact on the housing market as a whole is also worrying. A scheme such as this distorts the housing market, artificially increasing house prices. Where prices should reflect the ability to pay (demand) and the supply of houses, it will now reflect ability to pay and a taxpayer subsidy (demand) and the supply of houses. This may make it easier for a small number of first-time buyers on the scheme, but the vast majority of buyers would face artificially higher house prices. As a result, just as many, if not more, problems are created with the housing market.

Councils, too, are not banks. They should be providing value-for-money services such as emptying our bins regularly and ensuring our streets are well lit, not gambling with taxpayers’ money like a casino bank.

If councils want to solve the housing crisis, they should be looking to ease planning regulations to make it easier for more houses to be built, helping increase the supply of desperately-needed homes. Meanwhile, the Government should focus on why people are struggling to save for deposits in the first place: the high cost of living, excessive taxes and stamp duty have all made it harder for people to save up for their first home. If councils and the Government moved to lift such burdens, the housing market could be more responsive to changes in supply and demand, which would benefit all buyers, not just the small numbers who join the scheme.

At a time when councils need to tighten their belts, putting money into a risky scheme that will distort the housing market further whilst ignoring the root causes of the problem is something our politicians must avoid.A government-backed mortgage scheme NewBuy is being rolled out throughout the country with a number of local authorities eagerly signing up – the video clip above is a report on ITV Central News focusing on the situation in Nottinghamshire. The scheme involves first-time buyers only paying a deposit of as little as 5% whilst taxpayers effectively underwrite the rest of the amount required to secure a mortgage, supposedly using the property as security.

There are many reasons why this scheme does not add up. Firstly, it is aimed at first-time buyers who cannot afford the deposits of 20% and 25% typically required by high street banks. The private sector is not willing to lend to those without substantial deposits as the default rate with these high-risk borrowers is greater. So why should the taxpayer be expected to pick up the tab when problems with default inevitably arise? Low-deposit loans to high-risk groups that were backed by government schemes exacerbated the US sub-prime mortgage crisis less than five years ago, so it’s unsettling that politicians here seem so eager to make the same mistakes again.

Having the mortgaged property as security does not ensure taxpayers’ money is safe. It assumes that house prices are rising and will continue to rise – a trend that has not been seen outside of London for many years now – and only a few days ago did Halifax report that house prices had fallen 0.7% last month. The problem of negative equity, where the debt owed is greater than the value of the property, is a serious one that councils should not so easily dismiss.

The impact on the housing market as a whole is also worrying. A scheme such as this distorts the housing market, artificially increasing house prices. Where prices should reflect the ability to pay (demand) and the supply of houses, it will now reflect ability to pay and a taxpayer subsidy (demand) and the supply of houses. This may make it easier for a small number of first-time buyers on the scheme, but the vast majority of buyers would face artificially higher house prices. As a result, just as many, if not more, problems are created with the housing market.

Councils, too, are not banks. They should be providing value-for-money services such as emptying our bins regularly and ensuring our streets are well lit, not gambling with taxpayers’ money like a casino bank.

If councils want to solve the housing crisis, they should be looking to ease planning regulations to make it easier for more houses to be built, helping increase the supply of desperately-needed homes. Meanwhile, the Government should focus on why people are struggling to save for deposits in the first place: the high cost of living, excessive taxes and stamp duty have all made it harder for people to save up for their first home. If councils and the Government moved to lift such burdens, the housing market could be more responsive to changes in supply and demand, which would benefit all buyers, not just the small numbers who join the scheme.

At a time when councils need to tighten their belts, putting money into a risky scheme that will distort the housing market further whilst ignoring the root causes of the problem is something our politicians must avoid.

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