Schroders warns of risk of ‘Osborne boom’ as it upgrades UK growth this year

5th September 2013

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Fund manager Schroders has upgraded its view of the UK economy predicting growth of 1.5% this year but it warns of the risk of a ‘Osborne Boom’ driven by government support for the housing and mortgage market in 2014.

In a note published this week, the firm says: “Our UK growth forecast has considerable upside risk. We are currently forecasting house price inflation to reach 5.5% in the fourth quarter of this year, and to maintain this rate into the end of 2014. However, the introduction of the second phase of the ‘help to buy scheme’ – expanding the scheme to include existing homes along with the current help for newly built homes – could attract a huge amount of latent demand that has been locked out of the market due to tighter lending conditions.

“For this reason, we have introduced the ‘UK Osborne boom’ into our scenario analysis. In this scenario, housing demand rises sharply causing house price inflation to hit double digits, but in addition, encourages greater housing related consumption. As housing related activity takes off, there are spill-over effects to the wider economy, helping to boost hiring and business investment. By the end of the ‘Osborne boom’ scenario, the Bank of England is forced to increase interest rates, and this helps temper activity.”

However, Schroders says the Osborne boom is not is its ‘central scenario’ for reasons included below. In its analysis of Help to Buy, the scheme which will see the Government help borrowers buy at higher loans to value of as much as 90 or 95%, the firm says it believes the government will charge the banks for guarantees on pools of mortgages rather than offer direct the help to borrowers.

This should limit uptake and therefore restrict the wider economic boost. It also believes affordability will still come into play once initial latent demand is freed up.

The two factors which say the Osborne Boom is not the central scenario

1. Whilst the initial rise in house prices will attract buyers that are fearful of being left behind, continuing prices rises will reduce the affordability of homes, and therefore eventually temper demand over the coming years.

2. We think that the take up of the new mortgage guarantees by banks will not be as great as the government expects owing to the need for the government to make this a self-funded scheme. We expect the scheme to work by the government charging fees to banks for government guarantees on a pool of mortgages. This helps pay for the scheme rather than open up a huge off-balance sheet liability for the government. From the perspective of borrowers, this is equivalent to help in raising the deposits of borrowers, but for banks, it is an insurance scheme, which may be unattractive depending on the level of fees the government decides to charge. Not the free lunch we had expected after the Chancellor’s initial announcement.

Schroders adds it is only upgrading the UK for the second part of 2013 partly because it had already upgraded the 2014 forecast in response to both the funding for lending scheme and help to buy scheme.

The forecast for the UK has been revised to 1.5% from 1.1% while for 2014 it has already been upgraded to 2.1% from 1.5%. The note says the two housing schemes appear to be working with mortgage applications in June rising rose to 57.7 thousand – a 21% increase compared June 2012.

The note adds: “Along with the improvement in housing activity inevitably comes the pick up in housing related consumption. Despite falling real disposable income, real household consumption is up 1.6% in the second quarter compared to a year earlier.”

 

 

 

Schroders adds that looking further ahead, help to buy would expire just before the general election in 2015 which could then see slump in demand.

 

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