Bank of England: Housing move may cause new bubble

Housing development has already been boosted by government schemes. Picture: TSPL
Housing development has already been boosted by government schemes. Picture: TSPL
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THE UK government’s schemes to prop up the housing market and boost builders risk inflating another housing bubble and must be a short-term measure only, the Bank of England’s deputy governor has warned MPs.

Giving evidence to the Treasury select committee, Paul Tucker said that a medium or long-term mortgage guarantee would be dangerous and unnecessary.

He said: “This country has had an active housing market without a government subsidy. I’m absolutely sure that structure helped brew the bubble that blew up the world in 2007 and 2008. This is not a market that needs a permanent subsidy.”

Tucker was speaking shortly after Persimmon became the latest housebuilder to report soaring business since the “Help to Buy” scheme was launched.

The York-based firm has seen its reservation rate jump by 30 per cent since the initiative was rolled out in April.

Help to Buy is not available in Scotland, where there is currently a more limited scheme, but the Scottish Government is expected to launch an equivalent in the autumn.

Persimmon chief executive Jeff Fairburn told The Scotsman: “We are still providing our own shared equity product, but Scotland would benefit from the introduction of a scheme along the lines of Help to Buy.”

Fairburn thinks the schemes are sustainable. “We’ve been doing it for a number of years now – Help to Buy has replaced other schemes – and we are happy with our own shared equity product,” he said. “It’s a lot of money on the balance sheet, but it’s performing well and we are happy to support it.”

The first part of Help to Buy offers interest-free equity loans of up to 20 per cent of the value of a new house. The second part launches in January and aims to support £130 billion of mortgages and will apply to the second-hand market as well.

Some economists have warned this will further inflate house prices, but Fairburn said it is likely to give builders another boost as some potential buyers were currently being held back by difficulties selling their existing home.

In the six months to the end of June, Persimmon legally completed 5,022 new homes, up from 4,712 in the first half of 2012. Visitors numbers to its sites during the first half of the year were 13 per cent stronger than 12 months ago, and cancellation rates remained at historically low levels, it said.

With housebuilders also benefiting from support to the mortgage market, it came as little surprise that the construction sector picked up the pace of growth in June.

The Markit/Cips’ purchasing managers index for June, published yesterday, edged up to 51 – its highest level since May 2012 and its second month in a row above the 50 mark that separates growth from contraction. The index was up from 50.8 in May, but was slightly below forecasts.