London: A scheme partially to underwrite some UK mortgages with taxpayer money announced by finance minister George Osborne last week will not trigger a new property market bubble in Britain, according to a Reuters poll.
The survey also found that the Bank of England’s Monetary Policy Committee, which has been split 6-3 in favour of keeping its 375 billion bond purchase programme on hold for the past two months, will wait until at least May to fire it up again.
Respondents said not enough had changed since the meeting earlier this month to prompt enough members to tip the balanced in favour of Mervyn King, Paul Fisher and David Miles, who want to expand the programme.
“I would be tempted to keep some powder dry until such time as the green shoots begin to peer through [in the economy] and use QE (quantitative easing) to reinforce the upswing, in much the same way as the US has done recently,” said Peter Dixon, UK economist at Commerzbank.
The poll’s finding on housing, meanwhile, suggested only a modest amount of concern. Many have criticised the housing plan, seeing it is a miniature version of the pre-crisis US system where government agencies provided the cheap financing that played a key role in the biggest property boom and bust in US history.
But 29 of 42 poll respondents said that the plan to shoulder the risk of billions of pounds in mortgages by allowing Britons to buy homes with much smaller down payments than lenders require will not reinflate the property market.
“The mortgage market has collapsed partly because of deleveraging and partly because households are not keen to make long-term commitments. This move may help to give the market a lift but I can’t see it generating a major bubble,” Dixon said.
Osborne has denied the policy will create a new boom, saying it is intended to help buyers who would normally qualify for a mortgage based on their earning power and credit risk but who can’t put up the deposit now being required by lenders.
Since the financial crisis, British mortgage lending has shrunk, as have property prices. The only exception has been London, where prices are rising strongly, pushed up by demand from foreign buyers.
Compared with the US — where household finances are in much better shape than before the crisis and where house prices fell by more than a third and are climbing again — there hasn’t been any significant deleveraging in Britain.
As a share of disposable income, UK mortgage debt has dipped only slightly from around 140 per cent to still above 130 per cent. On top of that, the economy is not growing and wage inflation is not keeping up with the cost of living.
House prices only fell by about 20 per cent at most in the UK after more than doubling over the decade before the financial crisis struck in 2007-08 and have been rising strongly in London for the past several years after a mild correction.
Fathom Consulting, along with several others, argue that Osborne’s new scheme will only serve to raise house prices and put the government on the line for any future decline in prices.
Under the scheme, people will be able to buy new-build homes worth up to £600,000 with only a 5 per cent deposit, covering the rest with an interest-free loan for five years, open to all, not just first-time buyers.
The government will also guarantee £130 billion of mortgages from next year for three years, allowing banks to lend to buyers who don’t have big deposits to put down.
“This is effectively a policy to allow sub-prime lending,” said Fathom’s Philip Lachowycz.