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RUTH SUTHERLAND: Is Osborne risking a US style housing bubble?

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On the surface, George Osborne’s flagship Help to Buy scheme looks like a masterstroke that will make mortgages more affordable to first-time buyers and thus help boost the economy.

The property market is becalmed because many banks and building societies, having paid the price of irresponsible loans which helped contribute to the credit crisis, now demand deposits of at least 20 per cent of a home’s value before they will offer a mortgage.

This caution means that tens of thousands of potential buyers cannot afford the necessary downpayment.

Housing bubble: George Osborne's 'Help to Buy' scheme looks good in theory but could lead to a US style property bubble.

The Chancellor’s scheme means borrowers will only have to raise a 5 per cent deposit and the Government will guarantee the remaining 15 or 20 per cent.

  More... Osborne pledges to lend new home buyers 20% of property value and guarantees £130bn of mortgages BUDGET 2013: Government under fire for its 'confused' strategy to boost lending to economy Mortgages 'easiest to come by in five years' as official figures reveal January dip in house prices

It sounds a welcome boost for the housing market and for first-time buyers.

Unfortunately, the idea is frighteningly reminiscent of the system that was set up in America in the 1930s with similarly good intentions to make housing more affordable but which ultimately contributed to the financial crash in 2008.

The home loan agency was founded by Franklin D Roosevelt in 1938 and was nicknamed Fannie Mae (the Federal National Mortgage Association). A similar organisation, Freddie Mac (the Federal Home Loan Mortgage Corporation), was established in 1970.

All went well for many years. But the Clinton government tried to extend home ownership much further in the 1990s and both Fannie and Freddie duly opened the floodgates on loans. Mortgages were freely given to people who had no chance of repaying. Fannie and Freddie – which by then had handed out $5trillion worth of mortgages – had to be taken under the control of the US government.

In total, American taxpayers have had to provide $150billion (£99billion) of support to keep them afloat.

No wonder Angel Mas, a senior executive at the British arm of the giant US insurance group Genworth, has words of warning for Mr Osborne.

He says his scheme could ‘expose the UK taxpayer to unnecessary liabilities’, potentially running into a multi-billion pound loss if there was a property crash. There is good reason for such unease.

According to Budget documents, a housing collapse could leave taxpayers having to provide £130billion to support defaulted mortgages, almost twice as much as the £66billion combined bailouts for RBS and Lloyds.

Of course, the Treasury is playing down the risk. It says the scheme will be only temporary and will only be available to credit-worthy borrowers.

But there remains a huge risk if the housing market falls or if interest rates rise from their current historic low levels. Not only would that inflict more losses on taxpayers, it would also send the UK economy into another tailspin.

The great fear is that instead of laying firm foundations for recovery, the Help to Buy scheme could lead us further into the quicksand.

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