Sir Mervyn King issues Help to Buy mortgage warning

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The outgoing governor of the Bank of England Sir Mervyn King has warned that a government scheme to help the housing market should not become permanent.

Under the plan, due to run until 2017, the state will guarantee up to 15% of a mortgage on homes worth up to £600,000.

Sir Mervyn said the UK must avoid emulating the US, where state-backed mortgage schemes had to be bailed.

But Treasury Minister Danny Alexander told the BBC that the scheme was never intended to be permanent.

"We've been very explicit that this scheme is limited to three years," he said. But if it was extended, "we want the Bank of England's new financial policy committee to take a view on this scheme before it's extended."

BBC business correspondent Joe Lynam said Sir Mervyn was concerned that, should Chancellor George Osborne's Help to Buy scheme become permanent, it could leave taxpayers exposed to billions of pounds in private mortgage debt for years to come.

The governor, who has just over a month of his decade-long tenure remaining, told Sky News' Murnaghan programme the eurozone remained the "single biggest risk" to the UK's economic recovery.

"It's very difficult to see that growing quickly for a long while, and that downward drag on exports from the UK to Europe... and the fact that our banks still have some exposure to the euro area, is undoubtedly the biggest factor dragging down on our economy."

'Too close for comfort'

Sir Mervyn said: "I'm sure that there is no place in the long run for a scheme of this kind.

Analysis

It's pretty rare for a sitting Bank of England governor to publicly question government policy - however politicised that policy may appear.

But the fact that he's stepping down from the post he's held for a decade appears to have loosened Sir Mervyn's tongue a little.

More relevant though is the fact that many economists share Sir Mervyn's concerns about the Help to Buy scheme.

Some feel that the government has no business intervening in a private market - whatever the circumstances.

Others fear that such intervention could stoke up the kind of reckless borrowing that got the UK into such economic trouble only five years ago. Borrowing and spending is not conducive to the long-term goal of rebalancing the British economy.

Finally and ironically, there may soon be less of a need to artificially kick-start home buying by the state.

House prices are rising and the criteria for bank lending is also less strict than it was even a year ago - signalling a returning confidence.

An economy inching its way upwards - however glacially - may be one that doesn't need direct government intervention in the market.

"This scheme is a little too close for comfort to a general scheme to guarantee mortgages. We had a very healthy mortgage market with competing lenders attracting borrowers before the [financial] crisis, and we need to get back to that healthy mortgage market.

"We do not want what the United States have, which is a government-guaranteed mortgage market - and they are desperately trying to find a way out of that position."

He added: "So, we mustn't let this scheme turn into a permanent scheme... when is the right time to terminate it will depend on economic conditions at the time."

The outgoing governor's comments about Help to Buy echo those of the Treasury Select Committee, which warned in April that the government would come under "immense" pressure to extend the scheme in three years' time.

But any such decision would be made by the bank's incoming governor, Mark Carney - the Canadian who was hand-picked by the chancellor to succeed Sir Mervyn.

The Treasury stresses that it explicitly included this provision in the scheme.

A spokesman said: "The mortgage guarantee scheme will provide much-needed help for people who can't afford a big deposit to get a mortgage."

He added that the scheme represented "a good use of the government's fiscal credibility".

Equity loan

But Yvonne Goodwin, an independent financial adviser, told the BBC it could make buyers take risks.

Peter Bolton King, RICS: "The government, in my opinion, has done absolutely the right thing"

"The worry is, are the government actually doing this for political reasons to make people feel confident again?" she said.

"People are sort of bonded to the idea that house prices always go up without coming down again, and they only need a bit more of a nudge to push them into buying something a little bit more expensive than maybe they can afford and this'll give them the ability to do that."

Help to Buy consists of two elements - an "equity loan" scheme and the mortgage guarantee.

Under the equity loan, new or existing homeowners will need to raise a deposit of 5% of the value of the property they want to buy, but can borrow up to a further 20% from the government on an interest-free basis. The biggest loan available will be £120,000.

In total the government will be guaranteeing £12bn worth of lending.

Labour MP John Mann, a member of the Treasury Select Committee, told the BBC that "government interfering in the housing market" in this way had been "a disaster in the United States".

He also said the scheme was designed to help young people onto the property ladder, but would struggle to succeed because not enough small starter homes were being built.

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