UK Government ‘Help to Buy’ scheme

A policy of genius or economic idiocy?


Essay, 2013

11 Pages, Grade: A14


Excerpt

Approach

From 2011 to 2012 the UK Economy was struggling with recession. In 2013 the Economy is doing slightly better but barely recovering from recession as recent GDP-data from the Office for National Statistics (ONS) (ONS, 2013. p.4) shows. Since growth in the GDP is considered as one of the most important figures expressing the potential and the health of the overall UK Economy (Fyfe and Threadgould, 2013, pp.1-2) the UK government recently launched the Help to Buy scheme in order to boost this gentle recovery (UK government, 2013).

The ‘Help to Buy mortgage guarantees scheme’ (subsequently: Help to Buy scheme) (UK government, 2013) seeks to help first-time buyers as well as existing property owners to move up the housing ladder giving them access to 95% mortgages in order to purchase properties up to £ 600,000 (Peachey, 2013; UK government, 2013).

Although this is good news for homebuyers the Help to Buy scheme is extremely controversial. Economists (BBC News, 2013) and even the International Monetary Fund (Giles, 2013) fear that government intervention in the housing market may boost demand for homes at a much higher level than it raises supply of properties and therefore could fuel a housing bubble. So the question arises if Help to Buy is economic idiocy or a policy of genius.

This assignment argues that Help to Buy is going to boost UK GDP in the short-term because of various multiplier effects of the housing market caused by increasing aggregated demand. Nevertheless the artificially growing demand for houses will lead to a housing bubble and will therefore cause negative consequences for the UK Economy that will outweigh the positive factors in the long run. The position argued here is that the Help to Buy scheme is considered both economic idiocy and bad politics.

Section 1 focuses on the characteristics and the political motivation of the Help to Buy scheme, section 2 discusses the economic perspective of Help to Buy and critically evaluates possible impacts of the scheme on the UK Economy. The last section summarizes the main points of the assignment and discusses alternative measures to fuel the recovery of the UK Economy.

Characteristics and Political Motivation of the Help to Buy scheme

The Help to Buy scheme provides guarantees to mortgage lenders in order to encourage them to offer 95% mortgages. Hence there is only a 5% deposit required by the borrowers. As a consequence default risk is pretty high which is why the government guarantees 15% of the mortgage in case of a debtors default. These guarantees are necessary to reassure the lenders and give them confidence to lend money in spite of the high loan-to-value ratio. In order to get the government’s guarantees mortgage lenders are charged a fee by the government. The whole scheme comprises £12 billion of guarantees during its 3 year duration. This should enable mortgage lenders to release at least £130 billion of loans to homebuyers (Ross, 2013).

With the scheme the government tries to counteract the development in the UK that prospective homebuyers could on the one hand afford monthly mortgage payments but on the other hand they aren´t able to provide the required equity to get a loan (Cameron, 2013).

For this the government now wants to help people purchasing property by providing them access to 95% mortgages. As already mentioned the scheme covers house deals up to a value of £600,000. Critics (BBC News, 2013) question whether £600,000 is appropriate compared to the average house price in the UK of £247,000 (ONS, 2013, p.2). However, there are huge regional differences in the UK housing market and so the average house price over the overall country is not a valid point of reference to the costs of property to individuals. Recent data from the ONS (2013, p.8) has shown that in the South East and especially in London (£437,000) average house prices are almost twice as high as the national average. For this reason the high limit is absolutely appropriate in order to provide the whole country access to the benefits of Help to Buy.

Probably David Cameron is not only worried about people who are not able to purchase their own property. The fact that in 18-months time elections take place does doubtless also matters. Help to Buy should boost the recovery of the UK Economy using the housing market as key to further economic growth in order to bring back confidence about the future of the UK. If Help to Buy is going to be a successful anti-recession measure people will associate David Cameron and his Help to buy scheme with the growing and prospering UK Economy. Therefore people should be even more likely to vote for him as Prime Minister.

The Economic Perspective of Help to Buy and its possible impacts on the UK Economy

Economically Help to Buy can be considered as a macroeconomic policy trying to stimulate the housing market and to fight recession. Based on a Keynesian approach to economics such measures gear towards an increase in aggregated demand and therefore to an increase in actual GDP (Fyfe and Threadgould, 2013, p. 71). The question arises why the government is trying to push the housing market and how especially housing activity can contribute to the recovery of the UK Economy.

Since housing activity is linked to many other industries such as the construction industry it acts as a multiplier of demand. That´s why the health of the housing market is generally of crucial importance to the health of the overall economy (Summers, 2011). Talking about possible effects of boosting the housing market to the UK Economy you have to distinguish between direct and indirect impacts.

The most obvious direct effect of Help to Buy is increasing demand for property which leads ceteris paribus to rising house prices. Therefore building new houses is more profitable and construction companies are encouraged to expand their business in order to increase supply and to catch up with the demand. Recently the British house builders Bellway (Reuters, 2013) and Barratt Developments (BBC News, 2013) reported that they have already benefited from the higher demand fueled by Help to Buy and there further expectations are even better. As a consequence jobs are created and household´s income is rising.

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Excerpt out of 11 pages

Details

Title
UK Government ‘Help to Buy’ scheme
Subtitle
A policy of genius or economic idiocy?
Grade
A14
Author
Year
2013
Pages
11
Catalog Number
V270956
ISBN (eBook)
9783656627074
ISBN (Book)
9783656627043
File size
726 KB
Language
English
Keywords
government, buy’
Quote paper
Simon Bergstein (Author), 2013, UK Government ‘Help to Buy’ scheme, Munich, GRIN Verlag, https://www.grin.com/document/270956

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