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Home > News and Reports > Rising housing prices and the Help to Buy scheme: is a bubble imminent?
Oct 18, 2018
Rising housing prices and the Help to Buy scheme: is a bubble imminent?

The Office of National Statistics recently stated that London home prices have skyrocketed by 8.7 per cent during 2018.

On average, August home prices were nearly four per cent higher than last year’s average of £247,000, and they even topped the previous record set in January of 2008, right before the eruption of the credit crisis.

The milestone has already begun fueling fears about the development of a new housing bubble, considering the increased demand for a home purchased by the new Help to Buy scheme.

According to the government, the Help to Buy scheme will help people purchase their first home who are able to afford the mortgage repayments but find it difficult raising the previously required sizable deposit.

In addition to a tightened lending environment, the catalyst behind the Help to Buy scheme has been the UK’s rising home prices, which has put pressure on homebuyers to raise additional funds for the increasing deposits. In essence, the Help to Buy scheme is meant to solve this dilemma and spark consumer spending.

Danny Alexander, Chief Secretary to the Treasury, recently told BBC radio, ”I don’t believe our housing market should be shut off from people who are not lucky enough to have wealthy parents or have accumulated enough assets to pay for a 30 per cent deposit.”

However, critics of the Help to Buy scheme insist that the government guarantee forming a segment of the scheme’s second stage may create another UK housing bubble.

“Mistakes may distort the housing market or pose threats to the nation’s financial stability,” stated Andrew Tyrie, the head of parliament’s Treasury Committee.

The first phase of the Help to Buy scheme began in England this past April, resulting in a government now offering 20 per cent home equity loans to new property buyers.

These buyers are now able to buy a home with a down payment of five per cent.

Similar schemes also exist in Scotland and Wales, each of which openly encourage new homebuilding.

Thus far, Lloyds and RBS, both of which have a substantial government stake, are participating in the Help to Buy scheme. Aldermore and Virgin Money, which are two smaller lenders, have announced that they will also be involved.

According to the government, rules have been put in place to ensure irresponsible lending does not occur. For example, offsetting or interest-only mortgages are not allowed, and the scheme cannot be used to purchase buy-to-let properties or second homes.

Additionally, lenders must also put applicants through new demanding affordability checks in order to curb the reckless lending that led to the last real estate boom, suggesting that a real estate bubble may not be as imminent as it appears.

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