Posted by Leonard Steinberg on March 17th, 2014

Does Government stimulus fuel housing values? Apparently in the UK with its ‘HELP TO BUY” program the answer is YES: London housing prices surged 2.1% from February to a record this month, as the buoyant outlook spread to other parts of the country: annualized this equates to an appreciation of more than 11%.

“Help to Buy” allows people to buy a home with a down payment of as little as 5%. The UK government plans to extend the program for new homes to 2020 to spur construction. Will this program unlock a semi-frozen market strangled by a lack of low-deposit mortgages and low consumer confidence? Or will it simply boost pricing artificially? Is the easing of scraping together a large downpayment the key to unlocking a large, healthy buying audience?

Price growth in London last month was led by the outer boroughs. The most expensive district, Kensington & Chelsea, saw values drop 2.4%, while Westminster recorded a 2.3 percent decline. The report showed a 10% annual increase in the number of properties coming onto the market. While that will ease some price pressure, structural shortages remain in London’s housing supply.

The UK will invest another $ 10 billion into the HELP TO BUY program, hoping to fuel the construction of an additional 120,000 homes. 80% of economists believe this program is somewhat similar to the cheap, low-down-payment mortgages that fueled the 2007 housing bubble. Some feel that this program will fuel construction, job growth and a broader recovery and be a positive. Do we need a “help to buy’ program in New York to help resolve the affordable housing dilemma? Would it be better for those needing affordable housing to become buyers rather than renters reliant on taxpayer-paid-for-housing for life?

Nationally, asking prices for residential property rose 6.8% in March compared to 2013. Values are now above the 250,000-pound mark that increases the stamp-duty tax on property sales to 3% from 1%. Are increased tax revenues another benefit of rising home prices? Some believe the primary goal of this government fueled housing  escalation is indeed to cross this threshold to raise more taxes and they believe these thresholds require adjustment, much the same way the mansion tax in the USA should be adjusted to reflect what truly is a mansion: and no,  a mansion does not cost $ 1 million, especially anywhere in New York or the boroughs!

It remains to be seen whether the HELP TO BUY stimulus will help or hurt the UK economy overall: If loans are provided to responsible buyers with strong credit but just an inability to scrape together the 20% downpayment, then I believe this could work well. If the program allows poorly qualified buyers to buy easily, then I think history has already proven rather recently that this is a bad, bad idea. We in the US have the luxury of watching this program in the UK unfold to gauge its appropriateness for our markets.