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Osborne dismisses Help to Buy house price fears

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Chancellor George Osborne has refuted suggestions that the government’s Help to Buy scheme will start a house price bubble.
Osborne dismisses Help to Buy house price fears

When asked whether the effect of the scheme in the short to medium term would be to raise house prices the Chancellor replied that the Office for Budget Responsibility had not changed its house price inflation forecast and that he expected prices to rise ‘broadly in line with long-term average rate of earnings growth’.

Speaking to the Treasury Select Committee, Osborne finally confirmed details of the mortgage guarantee scheme would be released within two weeks.

Mortgage lenders involved in the guarantee scheme will pay a fee to the government intended to cover administration costs, expected losses and the cost of capital. When it was suggested that pricing the commercial risk would be difficult he said the government wanted to cover the costs of the scheme.

“We wanted to be self-financing, but at the same time we want to have a scheme that works and provides a help to those who can’t current access high LTV mortgages due to the impairment of the mortgage market,” Osborne said.

The Chancellor was asked about the end of the scheme and the possibility it could be extended beyond its current three year term. He said the Bank of England’s Financial Policy Committee would have a ‘clear red card’ to use if the government of the day wished to extend the scheme.

“It is a three year scheme and will come to an end after three years,” he said. “This is a time limited scheme and this is not something we want to see as a permanent feature of our financial landscape.”

Osborne made clear any decision on the extension of the scheme would not be made in the current parliament but was asked by the committee if the government was ‘replacing the too big to fail problem with banks with a too big to fail problem in the housing market’.

“I don’t think in the current environment a house price bubble is going to emerge in 18 months or three years,” Osborne said.

He told the committee he had discussed Help to Buy with Mervyn King ahead of the Budget announcement and the then governor of the Bank of England had not offered any objections.

“If he had said I strongly object, it probably would have killed it at birth,” the Chancellor said.

However, in May, King publicly warned the government that there was ‘no place in the long run for a scheme of this kind’.

“This scheme is a little too close for comfort to a general scheme to guarantee mortgages,” King added.

In a seminar this morning, economists suggested the cost of the scheme to lenders will be critical to its success.

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