How Help to Buy Helped to Fuel London’s Property Bubble

London’s property bubbleAt first glance Help to Buy seemed perfect. You stump up 5% of a mortgage on a property less than £600,000, the government tops up the pot with a 20% equity loan, and you’re in your first home. However, despite the UK Chancellor of the Exchequer’s declarations to the contrary, Help to Buy has only fuelled London’s property bubble. We spoke to Eden Harper, a Battersea estate agents on how this fuelled…

It’s Attracted an Influx of Property Investors

UK investors have long had a love affair with property, and the Help to Buy scheme has fuelled this. This has resulted in less than a third of new build homes in central London being sold to local residents. These investors have pumped up the prices of the very properties help to buy is aimed at.

It’s Attracted International Property Speculators

London has always attracted international property investors. While you may picture a Ferrari driving magnate with a multi-million pound mansion, Help to Buy has attracted these speculators to lower priced properties. In 2014, 30% of property speculators were looking at properties under £500,000. In Asia, widespread coverage of Help to Buy generated huge interest, fuelling speculation, and sending prices skyrocketing.

It Failed to Balance Supply and Demand

The only way prices will stabilise is if there’s a significant increase in properties for sale or rent, and the market is given time to organically adjust. Although Help to Buy was initially focussed on new build properties, the mortgage guarantee component extends the scheme to existing homes. As more people take advantage of the scheme, demand for property will continue to outstrip supply, inflating the bubble further. The only way to address the problem is for the government to liberalise building regulations, or supply affordable housing.

It Left Buyers Less Room to Negotiate

More buyers flooding the market left vendors determined to stick to their initial pricing. Negotiation has always been part of the property game, but the fear of being beaten by other buyers has forced people to purchase overpriced properties. This stops the market from correcting itself, and keeps prices soaring.

It Forced Mortgage Lenders into a Price War

As more lenders came on board, a price war was inevitable. Fees plummeted, rebates became commonplace, and there were 145 mortgage products on the market at the beginning of the year. The rush of buyers, and the resultant property prices, has left some mortgage lenders increasingly concerned about the bubble, with the Lloyds Banking Group recently capping Help to Buy equity loans at £150,000.

Irrespective of what the government says, it was inevitable that house prices would soar, with the introduction of the help to buy scheme. With increased calls to burst the housing bubble before it worsens, it’s no longer a question of if house prices will collapse but when. One thing is certainly clear, Help to Buy has had a large part to play in the current property market.

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