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UK recovery “fuelled by housing bubble” (30 December 2013)

Date: 30/12/2013
Duncan Lewis, Legal News Solicitors, UK recovery “fuelled by housing bubble”

The Institute for Public Policy Research (IPPR) is warning the UK’s economic recovery is built on a property bubble and consumer debt.

The IPPR says that the coalition government’s Help to Buy mortgage scheme is helping push up property prices, while more hard working – but hard up – families are resorting to credit to make ends meet.


The IPPR is a leading think tank and says the credit crunch and subsequent recession which followed the banking crisis in 2008 was made worse because households had already accumulated massive personal debts before the banking crash.

Low interest rates and easily available credit in the early noughties was part of New Labour’s economic strategy to prevent recession in the UK. As a result, householders took out credit to buy luxury items and pay for holidays, as well as buying on credit household goods they might not have been able to afford without credit. Many of these goods were imported, as British manufacturing stalled.

Since the credit crunch which following the banking crisis of 2008, the three main sectors in the UK – construction, production industries and services – have also stalled.

However recently independent accountancy and consultancy firm Grant Thornton LLP has said that all three sectors are showing increased business confidence.

The UK economy is due to grow 1.3% in the fourth quarter of 2013 and by nearly 2% this year – the biggest increase since 2008.

But the Bank of England and critics of the government’s Help to Buy scheme – aimed at both existing homeowners and first-time buyers wishing to get on the property ladder – say that the upper limit for property values eligible for the scheme needs to be reduced from £600,000.

The Bank of England and some property experts and lenders are calling for the £600,000 upper limit to be halved to £300,000, which might mean that buyers in high-value property areas such as London would not be able to afford to buy under the government’s Help to Buy scheme.

Critics of the Help to Buy scheme have also accused the government of encouraging first-time buyers to take out higher mortgages than they can afford – first-time buyers are able to buy a property up to the value of £600,000 under the scheme, while putting down deposits of just 5%.

The scheme has kick-started the property sector, but the Bank of England has recently called for the upper limit on properties eligible under the scheme to be reduced and will review the scheme in September 2014. Lenders are calling for the government to set an end date for the Help to Buy scheme before a property bubble develops.

The IPPR now says that the recent growth in Britain’s economy is mainly due to consumer spending rather than falling unemployment figures or increased growth through manufacturing or industry. Consumption is outstripping UK exports abroad, says the IPPR – and warns the UK is facing the same economic conditions which caused the downturn in 2008.

If a property bubble develops as a result of rising house prices, mortgage repayment rates could also increase – as they did in the late 1980s/early1990s – meaning consumers might be saddled with higher mortgage repayments and mounting credit card debts or payday loan debts.

As a result, some homeowners may even lose their homes if they are unable to meet monthly mortgage repayments because of debt.

Senior economist at IPPR Tony Dolphin said:

“The government has introduced Help to Buy which generates more debt, rather than focusing its efforts on boosting investment spending in the manufacturing sector.

“We should be alarmed that growth is being driven by exactly the same mix of factors that contributed to the depth of the last recession.”

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For expert legal advice on housing issues, mortgage repossession and debt, contact Duncan Lewis housing solicitors on 020 7923 4020.

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