According to the report by the Treasury Select Committee, the proposals made the government an “active player” in the mortgage market for the foreseeable future.
The report described the guarantee scheme as good politics but “horrendous” economics.
“The government is encouraging people to leverage themselves up to the hilt in order to buy what is already likely to be overpriced property and, as a result of this policy, is likely to become still more so.
“This is irresponsible enough. But worse, the government will probably now find itself permanently using its balance sheet to support risky housing finance, as the US has done. The market cannot sensibly finance such high loan-to-value ratios. But this fundamental lesson from the crisis is now being thrown away.”
While both Help to Buy schemes were intended as temporary measures, the committee predicted there would be immense pressure for the government to continue guaranteeing mortgages: “The unintended and unwelcome outcome could well be that a scheme designed to deal with a supposedly temporary problem in the UK housing market becomes a permanent feature of the UK housing market.”
The government was wrong to imagine the current scarcity of high loan-to-value mortgages was a cyclical problem, it suggested. Instead, it could be read as a symptom of long-term structural change.
The committee also argued a volatile housing market meant charging lenders appropriate fees to cover the risk to the Treasury could be extremely difficult.
It noted: “There is a risk that if mortgage lenders begin to exercise reduced levels of forbearance, repossessions may rise and house prices subsequently be lower than they would otherwise.
“If this happened, and unless this risk was fully priced into the fee, then the Treasury could end up facing large losses on those mortgages it has guaranteed.”
The committee also expressed scepticism about the mortgage guarantee scheme’s impact on housing supply, noting that George Osborne was unable to give any concrete numbers on the additional houses expected.
And in a reference to post-Budget claims by Labour that the plans amounted to a second home subsidy, the committee called on the government to think schemes through carefully before announcing them.