It has been announced today that the Bank of England has decided to scale back on the Funding for Lending scheme used to support housing transactions, leaving its sole aim as supporting lending for business. Hurrah, and thank goodness the Bank has seen sense in this matter and that it wants to put the housing market into neutral, it is interesting to note that the bank controls this scheme. Meanwhile the government controlled scheme, Help To Buy, still exists and is soon to be expanded. The second phase of Help to Buy that applies to pre-owned houses will start advancing monies in January. The opening of the scheme for applications in October has seen a huge surge in pent up demand with anecdotal evidence of Estate Agents seeing a boom in activity.
This is classic market manipulation, the incentive for which is dubious given the forthcoming election in May 2015. Consumer confidence in the UK is largely dependent on house prices and it would appear that this is a cynical ploy to boost the economy in the run up to the election, at the expense of house prices and affordability. This scheme cannot last forever. When it is withdrawn we will have the same issue as now, of unaffordable deposits against a backdrop of even higher prices.
It is clear that house prices will rise on the back of inflated (liquidity fuelled) demand during the scheme, but what at the end of it? There has to be a correction, this will mean house prices falling as the market finds it’s equilibrium. The net result will be people eagerly joining the house owning club, only to suffer losses, which will eat into monies available for a deposit on the next move. This in turn leads to more people unable to afford to move and caught in the first home trap, as well as people not being able to enter the market.
The answer, unpalatable as it may be, is to increase supply and not temporarily, and artificially, create liquidity in the market. Who will suffer under the current cynical plans? Yet again it will be those on the early rungs of the property ladder, i.e. the young and the less wealthy. Shame on us for failing, once again, to see the blatant electioneering at the expense of the young.