Today is the day that part or phase two of the UK Coalition government’s Help To Buy scheme for the housing sector begins. It has attracted plenty of attention from the media as the moment I switched on the radio today the newsreader declared that it was expected to lead to a “surge” in the housing market. Adding to the sense of a building frenzy was the next announcement that some banks will be opening branches for longer hours for today to cope with the expected rush! Actually RBS will be doing this for a fortnight.
What is Help To Buy Part Two?
This has been nicely illustrated by the graphic below released by the UK Treasury today.
I like the way that the buyer is apparently waving in a friendly fashion. Perhaps they should have drawn a wide smile on his or her face too.
The gain for the buyer
This is where they can now get a 95% loan to value mortgage which were in very short supply if available at all before this scheme commenced. Also in spite of the fact that the government intends to charge a fee to the mortgage lender for the guarantee it provides, such mortgages already look as if they will be cheaper too in terms of having a lower interest rate. Here are the initial signs of what they will cost from Mortgage Solutions.
Today, RBS (Royal Bank of Scotland) has also launched two products, a two-year fixed rate product at 4.99% and a five-year fixed rate mortgage at 5.49%. Both are available fee-free up to 95% LTV and will be offered on all properties up to £600,000.
So the two-year rate is around 1% lower than that available before (for example 5.95% from the Newcastle) although the additional zing factor is also the increased availability as they were hard to get before. We can expect rates for less sub-prime lending to be lower. By the way when did sub-prime lending become a good idea again?
It is strange is it not that the taxpayer supported RBS can suddenly bend to politician’s wishes after us being told for so long that they have no influence over it? As the taxpayer supported banks have such a large share of the market this will force other banks to join the scheme over time.
What about the banks?
One more time we see that they are receiving a subsidy from the UK taxpayer. Indeed such subsidies seem to be never ending. If they increase their lending via Help To Buy for example then they will be eligible for cheap funding from the Funding for Lending Scheme of the Bank of England. They can then lend it out at an interest-rate of around 5% per annum with 15% of the risk as measured by the size of the mortgage guaranteed by the UK taxpayer.
There is a scenario here where banks can borrow FLS funds at 0.75% and then lend them out at 5% which provides quite a margin to pay any fee the UK government may charge! Also as the scheme will increase their volume of lending it makes it more likely that they will pay the lower FLS rate. This soon becomes a scenario of bankers dreams..
The UK government
The coalition government has just awarded itself a boost too as we wonder how the world can turn out to be a lyric from Hot Chocolate.
Everyone’s a winner, baby, that’s the truth (That’s the truth)
It pockets the fees charged on this scheme (up to 0.9% of the mortgage amount) and immediately books them as revenue. The exact amount is not yet clear but there will be other gains from the government in terms of extra stamp duty as well.
These are also likely to see a windfall as house prices push higher. Indeed it is likely that this is already in play as we see a transfer of wealth to existing home owners and we look to see where it has come from.
The UK Taxpayer
Of course not everybody can win and the UK taxpayer finds him and herself financing all this in another example of the type of financing round-tripping that I have described in the Euro area. As described above the home buyers, banks and indeed the government are all in the process of making gains at the expense of increased liabilities for taxpayers. They bankroll the cheap funding for the banks which they are already either explicitly supporting or providing an implicit guarantee. The banks make a wide margin on these funds and have even managed to get the taxpayer to guarantee the riskiest part of the mortgages! It would be much simpler to give the banks an annual tribute.
Even the government is taking a share of the money rather in the manner of a pimp taking his/her cut.
Underlying this round-tripping ponzi scheme is the poor beleaguered UK taxpayer most of whom probably feel that the phrase “contingent liability” is not that important. At some point in the future they are likely to find it represented in an episode of this ITV programme.
First Time Buyers
It may seem strange that the apparent winners are the most likely losers. However we know from what happened in Spain and Ireland that apparent gains can turn into substantial capital losses very quickly. Paying ever higher prices is exactly the road that led to the problems experienced by first time buyers there.
Will it be made safer by rising house prices?
This is something of an illusion as whilst it will appear safer as house prices rise there is a catch. Remember what happened in Ireland and Spain where higher prices turned to bust? As I shall discuss below if house prices are already out of reach for many raising the price is exactly the wrong choice for everyone except the banks. So higher prices now are in fact a riskier strategy and pose the question can we ever get off this treadmill without a bust? Or will it be Help To Buy be as Buzz Lightyear opined.
To Infinity……and Beyond!
What about mortgage affordability?
This is mostly only debated around the level of mortgage rates which are right now at low levels compared to much of the past. The new offers at 5% are relatively low when one considers that they are at what was until, say yesterday, considered to be rather sub-prime. But what happens after the end of the two-year term for that particular mortgage as we face the prospect that not only could mortgage rates rises but that they are likely too? Suddenly it does not look so affordable.
What about wages?
Her Majesty’s Treasury helpfully tells us this today.
Compared with earnings UK average house prices across the UK are the same price they were in 2003.
Immediately we note the rather vague concept of “earnings” used as opposed to the precision of “average house prices across the UK”. Also we note that even if this is true the current slow rate of wage growth is already being way outstripped by rising house prices. From the Office for National Statistics.
The average weekly wage, including bonus payments, rose by 1.1% comparing May to July 2013 with the same period a year earlier.
There is one immediate difference with 2003 where wages were rising at an annual rate of around 4%. But the fundamental problem here is that wages have fallen substantially behind inflation in the credit crunch era meaning that real wages have fallen by around 9%. Indeed as many of the price rises have been in essentials such as food and energy (bizarrely labelled non-core by central banks) there is a strong case for arguing that we are worse off than then.
Also there are issues with choosing 2003 as a benchmark. After all what happened next? A sequence of events which we seem to be doing our best to repeat! Even the long-term average for affordability calculated by the Nationwide, which is itself inflated by the boom, is below the levels of 2003.
If we consider the overall picture which is one of recovery in the UK economy it is quite reasonable to wonder why any further economic stimulus was needed at all. After all we already appear to be in a sharp mini-boom meaning that the timing looks to fit with the next General Election rather than economic need. The danger is that it lights the blue touch-paper and the UK heads into yet another inflationary boom which if it happens will appear to be a cycle from which we cannot escape.
On the upside it may well stimulate a little more house building but the major economic effect turns out to be yet another stimulus for our banking sector. Is that on the path to infinity too? As we continue ever further down the sugar dependency road it will become ever harder to stop.
As to first-time buyers they may think that they are being helped but who will help them once interest-rates rises and house prices fall? More help to them would have been provided by letting prices drift lower as we note that everything seems to prioritise the banks once the public relations fascia is removed.
The upper Help To Buy limit is £600,000 which is some 24.3 times the current average wage (July 2013). So even if a couple both on average wages buys such a house it is over twelve times their gross income. Extraordinary numbers but I guess a lower limit would have excluded London.