OBR says it expects prices to rise and little in way of new building

The Government’s mortgage indemnity guarantee element of its Help to Buy scheme will push up house prices but do little to stimulate house building, according to the Office for Budget Responsibility.

OBR member and economist Stephen Nickell made the remarks while giving evidence to the Treasury Select Committee last week, having been asked what impact both elements of the scheme would have.

On the specific point of the mortgage indemnity guarantee element, Nickell responded that house prices will go up in the short-term but building is unlikely to pick up over a longer period of time.

He said: “The key issue is: is it going to drive up house prices? By and large, in the short-term, yes it will. But, in the medium term, will the increased house prices stimulate more house building? Our general answer to that would be “probably a bit”. But historical evidence suggests not very much.”

Giving evidence at the same session, OBR chairman Robert Chote said the planning system, as it currently stands, is holding back the supply of new housing stock.

He said: “The planning system remains an important reason why the supply of new housing is relatively inelastic.”

Seperately, former chancellor Alistair Darling reportedly warned the scheme could cause another housing bubble.

The mortgage indemnity guarantee element of Help to Buy, revealed by Mortgage Strategy in February, will be open to borrowers wanting to buy a new-build home or an existing property when in launches in January.

The Government will offer a guarantee of up to 15 per cent of the purchase price to lenders, for an as yet undetermined fee, with the borrower putting down a deposit of between 5 and 15 per cent.

The guarantee will last for seven years and lenders will also take a 5 per cent share of net losses above the 80 per cent threshold, to ensure lenders do not lend recklessly. The Treasury says its liability is expected to be no more than £12bn on £130bn in guaranteed mortgages.