Is government over-stimulating today’s red hot housing market?

WHILE critics accuse Boris Johnson’s administration of fumbling its response to the economic ravages of Covid-19, nobody could question its dedication to keeping the housing market in rude health.

The Government is doing everything in its power to prevent a house-price crash, and its efforts are working as prices fly to fresh highs.

This month alone it has proposed two new schemes aimed at first-time buyers, to help them keep up with today’s spiralling prices.

Experts fear the combined stimulus efforts will ultimately backfire, by making property even more unaffordable and encouraging people to take on debt they may struggle to repay, especially if interest rates rise.

Many property hotspots are seeing record levels of demand but could it all end in a winter chill?

HELP TO BUY

There are now a mind-boggling number of schemes designed to help people buy property, effectively creating a false market.

Help to Buy allows buyers to purchase a new-build property with a deposit of just 5 per cent, by topping it up with a five-year interest-free government loan for up to 20 per cent of the cost, a figure that rises to 40 per cent in London.

Other schemes, including shared equity and the starter home ones, also try to wriggle round the affordability issue.

The same goes for the Lifetime Isa, which hands first-time buyers a 25 per cent bonus worth up to £1,000 if they save a maximum £4,000 a year towards a deposit.

Earlier this month, Boris Johnson promised a scheme allowing first-time buyers to get a mortgage with a 5 per cent deposit, in an effort to create two million new homeowners by turning “generation rent” into “generation buy”.

John Phillips, national operations manager at Just Mortgages, called the bid to get more people on the housing ladder “laudable” but added: “Guaranteeing such mortgages with taxpayer money cannot be the way to go at a time when the national debt is growing by the day.”

FUEL TO THE FIRE

Last week, Pensions Minister Guy Opperman suggested allowing first-time buyers to raid their pension savings to fund a property deposit – an idea rejected by the Treasury a decade ago but now back in play.

Experts say that rather than solving the affordability problem, it will drive prices even higher.

Mike Smedley, partner at pension adviser Isio, called it “robbing Peter to pay Paul”, and warned this would make it harder for people to save for retirement: “The message that it is OK to dip into the piggy bank risks undermining pension policy.”

Smedley said there could be a price to pay for this instant gratification: “Do we really need another incentive for young people to increase their debts and add more fuel to the fire of high property prices?”

BUBBLE TROUBLE

On top of all this, Chancellor Rishi Sunak’s stamp duty has scrapped the levy on properties up to £500,000 until March 31, 2021, saving buyers up to £15,000.

The Bank of England’s move to slash base rates to 0.1 per cent has further fanned the flames by making mortgage rates cheaper than ever. It is even considering negative rates now.

No wonder the housing market is enjoying its best summer for 10 years, with prices growing at 5 per cent a year, even as millions look set to lose their jobs in the pandemic.

With demand for property outstripping supply, driven by the dramatic increase in the country’s population, the result is to make property less affordable, rather than more.

In the 1990s, houses cost four times average earnings, but now they are around eight-and-a-half times earnings, official figures show.

‘The market could resemble Wile E. Coyote – it’s run off a cliff but hasn’t looked down yet’

Experts fear this longstanding refusal to let house prices fall to more affordable levels is storing up trouble.

Andrew

Montlake, managing director at mortgage broker Coreco, said the economic fall-out from Covid-19 is starting to gather momentum and house price growth will soon fade.

While many people are in secure jobs and looking to move out of cities in search of bigger houses and more outdoor space, others are hurting. “Price growth is likely to slow as the true impact of Covid-19 becomes apparent,” he said.

Jonathan Hopper, chief executive of Garrington Property Finders, said the stamp duty holiday has triggered a “breathless dash” to buy property, but warned: “The booming market cannot defy economic reality for long.”

The big worry is that house prices could crash in the new year, as the stamp duty holiday draws to a close while unemployment peaks.

Laith Khalaf, financial analyst at investment platform AJ Bell, said the property market could soon resemble Wile E. Coyote in the old Road Runner cartoon: “It has run off the end of a cliff and just hasn’t looked down yet.”

The housing market ran out of road years ago, but has been kept on track by low interest rates and government support. It can’t defy gravity forever.