There are two obvious reasons why house prices are so high in the UK. The first is that we aren’t building enough homes to keep up with our rocketing population.
The second is that years of near-zero interest rates made borrowing cheap, tempting buyers to take on more debt.
There is a third reason, one almost nobody talks about, but is about to inflict serious damage on the nation’s tattered finances.
In a desperate bid to help first-time buyers get on the property ladder, the government decided to give them a helping hand. Using taxpayers’ money.
In both cases, taxpayers are backstopping high loan-to-value (LTV) mortgages that banks and building societies deemed too dangerous to offer themselves.
If house prices crash and indebted buyers hand back the key to their homes, the banks are in the clear. Taxpayers will clear up the mess and the total liability is heading towards £25billion.
That’s a major concern as the Office for Budget Responsibility predicts house prices will drop 10 percent over the next two years.
It’s a scandal, that nobody talks about. That will soon change.
Help to Buy allowed first-time buyers to secure a property with a deposit of just five percent of its purchase price.
It did this by handing them a government-backed interest-free five-year loan of up to 20 percent of the purchase price (40 percent in London).
Buyers could then get a 75 percent loan-to-value (LTV) mortgage to fund the rest of the purchase from a bank or building society.
Applications closed on October 31, 2022, and all purchases must be completed by the end of March.
Help to Buy will leave a long legacy, though, in the shape of more than £20 billion of taxpayer liabilities.
Last year, with property even more unaffordable and lenders still unwilling to offer-LTV mortgages up to 95 percent, Sunak launched his Mortgage Guarantee Scheme.
Again, this allows first-time buyers to purchase a property with a five percent deposit on homes up to £600,000.
It has already helped 24,000 onto the ladder and handed the taxpayer another £2.3billion in liabilities. That will rise, because the scheme has just been extended to December 2023.
The first problem is that both schemes are further inflating the house price bubble by offering young buyers cheap taxpayer-backed mortgages.
That will make the coming house price crash more painful.
An even bigger concern is that when young buyers fall behind on their high-LTV loans and banks repossess their homes, the taxpayer will have to cover any losses.
Under Help to Buy, the first loser is the buyer, who will sacrifice their deposit and mortgage payments and get nothing in return.
Taxpayers will then stand behind the 20 percent of the loan Osborne forced them to guarantee. Banks only lose if the property value falls by more than 25 percent, which is unlikely to happen.
The Mortgage Guarantee Scheme is similar. If the buyer defaults, they are on the hook for the first five percent of any house price fall.
Taxpayers stand behind the next 20 percent. Banks and building societies will only have a liability if prices fall more than that.
Both schemes are great deals for mortgage lenders. They get the rewards of lending money, but without the risk.
They’re rubbish for taxpayers, though.
The 2008 UK house price crash almost wiped out the banks. This time it will be the taxpayer’s turn.
I wouldn’t recommend anybody take out a 95 percent mortgage, in the current climate. Yet the Government is giving them a direct financial incentive to do just that even as house prices fall.
Funded by us.