George is blowing a bubble, and no this is not a reference to the royal baby, rather to the right royal mess George Osborne may be creating with his Help to Buy scheme. The list of those accusing our chancellor of creating a new housing bubble is getting longer. But then our George says he is just trying to create a construction boom, and if he can do that, this will surely be a good thing. So which one is it: construction boom or housing bubble?
Help to Buy comes in many guises. New Buy, was a scheme aimed at first time buyers and provided assistance solely if they bought a new home. So the idea behind the scheme was actually quite laudable. But the latest iteration is not like that. This is destined to help people who can only rustle up say a 5 per cent mortgage.
Home builders say that the latest idea will encourage them to build more, but then, frankly they would say that wouldn’t they? What house builders really want, what they really really want is for house prices to go up in value enabling them to build and sell homes for a very substantial profit on land which they have already paid for.
This week credit ratings agency Fitch stated: “The scheme, [that’s Help to Buy] along with the phase that began in April [New Buy] could have an impact on sovereign gross debt and its dynamics, particularly if there is strong pent-up demand as the tighter loan-to-value ratios that have prevailed since 2008 are relaxed.” It continued: “For house builders the main benefit from the second phase of the scheme will come from rising house prices, rather than increased volumes.”
A couple of weeks ago Vince Cable warned that a housing bubble was a danger, and the IMF made similar warnings before that.
Oh why, oh why won’t George listen?
It is just that according to a housing construction survey from the Royal Institution of Chartered Surveyors (RICS): “59 per cent more respondents predicting workloads continuing to rise rather than fall once more.” According to recent data from the ONS, construction activity grew by 0.9 per cent in Q2. The latest Purchasing Managers’ Index from Markit/CIPS for construction rose to its highest level since June 2010.
This is good stuff. Apparently, or so says RICS, every pound spent on construction leads to £3 more economic growth, so that is a good thing.
On the other hand, to put the construction boom in perspective: in Q1 2013 construction output was at its lowest level since Q1 2001.
Is George blowing bubbles or creating a construction boom? The most likely consequence is that this is doing both, and that is both good and bad.
© Investment & Business News 2013