WILL HELP TO BUY SCHEME CREATE A HOUSE MARKET BUBBLE?– You don’t have to be an economist to understand the basics of how an economy works and one thing remains crystal clear from historical records – you cannot buy your way out of a recession.
In 1976 Jim Callaghan, Prime Minister and leader of the Labour Party quoted:
“We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending.
I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.”
This realisation came after the Labour Government effectively bankrupt Britain and was force to go ‘cap-in-hand’ to the International Monetary Fund (IMF) and beg for a bailout.
Yesterday Ben Broadbent, a leading economist with the Bank of England, attempted to downplay fears that an upward movement in the interest rates, would not cause mass repossession of property as a rise would be affordable to most homeowners on the ‘Help to Buy’ scheme.
Let’s look at the scheme. A person is able to borrow up to £600,000 to buy a home with a deposit of just 5%. The Government, actually the taxpayer, then secures the loan against a 20% guarantee. Effectively if the homeowner defaults the taxpayer is liable to the bank for up to £120,000.
Interest rates for the Help to Buy scheme have been set at around 5% despite the current base rate being just 0.5% – yes there certainly is a premium interest rate to be paid for those wishing to take advantage of the Help to Buy scheme.
The Governments target for inflation currently stands at 2% but this target has not been met and indeed now stands at 2.7% – things are getting more expensive.
Common sense would therefore tell you that in times of an economic downturn austerity measures need activating so that people spend within their means and reduce borrowing.
On this principle alone it is madness that this, or any other Government, could consider that increased spending, spending that creates more debt, is not only folly it is highly dangerous to the economy.
We like to think we are immune from bankruptcy; such as we witnessed with Greece, Portugal, Spain and Italy and yet not one of these economies carried anywhere near the debt that the United Kingdom currently has.
Currently Britain’s debt is approximately 508% of its national income; Greece was at 267% when it collapsed. The only reason Britain hasn’t join the likes of Greece, Italy, Spain and Portugal is the fact that the interest rate remains at their lowest in 30 years and with an estimated £1.4 trillion of debt any rise in the base rate could well tip the British economy over the edge – the last thing anyone should be doing now is borrowing money.
Despite Mr. Broadbent’s comments that all appears rosy, other experts feel that he is being complacent; one City economist Dr. Tim Morgan pointed out that the Bank of England has an appalling record at predicting housing market bubbles ahead of time.
The other dangerous aspect of the Help to Buy scheme is that it will undoubtedly artificially push up house prices. This happened in the U.S when President Bush introduced a 0% down payment policy for home buyers.
We are now all fully aware that house prices rose exponentially, buyers were taking out two to three mortgages due to the low interest rates and the banks were buying and selling sub-prime mortgages in order to spread the risk.
Some economists feel it is only a matter of time before borrowing will increase inflation and as a result see interest rates rise – maybe rise to a point where borrowing becomes unaffordable.
When this does happen the banks will be quick to repossess property in order to stave off yet another bankruptcy and in turn call in the taxpayer marker on the secured finance.
The result of this will be to leave the Government exposed to more debt and as the interest rates rise be unable to honour the national debt.
Yes, at that point Britain will either have to go once again ‘cap-in-hand’ to the IMF or ask the EU for a bailout and with the EU currently asking EU member states for funds so that it can meet its legal obligations it is a stark reality that the EU won’t have the funds to assist.
The British economy is heading for a meltdown and the last thing it needs is to increase borrowing or attempting to artificially inflate the housing market.
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