Is the help to Buy Scheme Going to Cause Prices to Rise too High?

help-to-buy-house

Help to Buy is one of the government’s solutions to the housing crisis of 2008, but is it causing more problems? According to the International Monetary Fund this government scheme can lead to another housing bubble if supply does not meet the increasing demand.

The Basic Economics of Help to Buy

Help to Buy is a home ownership scheme available to individuals living in England (Wales and Scotland have their own schemes) who can’t afford a large deposit. There are several options under the Help to Buy scheme including: Help to Buy Equity Loans, Shared Ownership, NewBuy, and Help to Buy Mortgage Guarantee’s which is available in Wales and Scotland too.

The cause for concern stems from basic economics, supply and demand. Imagine a balanced Supply and Demand curve, both supply and demand is balanced. Now, with the housing scheme that makes it easier for people to get a loan by lowering required deposits, the demand curve is moved which results in unbalance with the supply and this the price is increased.  The Help to Buy scheme has created this unbalance between supply and demand and this has international organisations, financial advisors, and buyers wondering is there is a better solution to revamping the housing market.

Thriving Demand from those Wanting to Buy your House 

More than 6,000 Help to Buy applications were filed in the first three months since it’s introduction and the number of applications have steadily increased since the second phase was introduced in October 2013. The first 3 months of Help to Buy was able to aid more than 750 applicants in achieving the lifetime accomplishment of owning a home. Unfortunately, if it sounds too good to be true it probably is. The Help to Buy scheme has increased demand but the U.K. government has failed to balance the market and supply is running low and prices have been sent skyrocketing.

Less supply from those wishing to sell their property

The housing market has seen more than a 25% demand increase but the supply has only increased by a minimal 6% meaning there are more people who can buy your house. Prime Minister David Cameron stated that the Help to Buy scheme was to help people who didn’t have the funding for a big down payment realise their dreams but the ease of getting together a small deposit has not only been a cause of concern for a potential housing bubble but has also seriously inflated the demand of buyers and authorities need to seriously consider the potential risks of Help to Buy.

Warnings have been declared by the International Monetary Fund, Société Générale and the Treasury Select Committee that Help to Buy could actually “Help to Bubble” by causing prices dramatic price increases. Mr. Viñals from the IMF has suggested the U.K. offers tax breaks or alleviating planning constraints to encourage new housing constructions to stabilize prices.

Help to Buy creates an interesting economics plan: Help people buy a house – but increase the housing prices. The solution seems simple; increase supply to create a balanced supply and demand curve. This should make housing prices more affordable so that first-time homebuyers don’t only need mum and dad’s help, but they also don’t need Help to Buy to make their dreams come true.

 

 

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