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Concerns about housing bubble “increasing” (10 December 2013)

Date: 10/12/2013
Duncan Lewis, Legal News Solicitors, Concerns about housing bubble “increasing”

The Bank of England is warning that recent developments in the housing market could forewarn of a housing bubble.

In November the Bank of England’s financial policy committee said that concerns about a housing bubble had increased since the committee’s last meeting in June.

In April this year the first phase of the coalition government’s Help to Buy scheme was launched – and in October the second phase launched, under which the government partly underwrites loans.

High street lenders have been calling on the government to set an exit date for the Help to Buy scheme, under which homebuyers can purchase properties up to £600,000 with as little as 5% of the asking price for a deposit.

Critics of the Help to Buy scheme fear this may tempt homeowners to take on more than they can afford financially – and the scheme itself may fuel a property bubble as new homes are snapped up by buyers under the scheme, pushing up property prices.

In the 1980s a property bubble crashed when mortgage interest rates spiralled, meaning some homeowners could not meet the repayments. Many ended up having their homes repossessed as a result of mortgage arrears. In turn the value of property fell, leaving some homeowners in negative equity, meaning the value of their home no longer covered the amount of mortgage owed on it. In such cases, homeowners were forced to hand back the keys of their home to the lender and move out, leaving some homeowners homeless.

At the meeting of the financial policy committee in early December, the Bank of England also announced an early end date for its Funding for Lending Scheme (FLS), under which banks and building societies borrow money at preferential rates to lend to homebuyers.

The Bank says it will in the future be concentrating on loans to businesses. It is thought the Bank is trying to “cool” the current housing market, as more first-time buyers try to get on the property ladder under the government’s Help to Buy scheme.

The financial policy committee at the Bank of England has the power to review the government scheme if it thinks it may result in instability in the housing market.

Recently there have been calls for more affordable housing to be built to enable families and first-time buyers to purchase their own homes. However, in Essex a developer is calling for all the affordable housing projects it was asked to build along with four other developments to be scrapped.

Sandhurst Newhomes is using new government regulations to apply to remove all affordable housing from its current developments, as it claims a change in market conditions means the affordable housing projects will no longer be financially viable.

Conditions known as 106 agreements can be added to housing plans to make sure developments include affordable homes. Local councillors make a decision on 106 applications to remove conditions on developers having to build affordable housing.

Managing director of Sandhurst Newhomes Brian Strickland said:

“Southend Council has a policy of taking 20 per cent of everything you want to build as affordable housing. That’s been superseded by the Help to Buy scheme, which gives first time buyers 25 per cent towards the cost of a home.”

A local councillor said it was hoped the developer would “think again”.


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