Government schemes are reverse butterfly effect
Coles was speaking to Protect last Friday, the association of companies and individuals working in the UK protection markets.
He said: “In chaos theory if a butterfly flaps its wings then there is a tsunami the other side of the world.
“In Whitehall it is a reverse butterfly in that the government creates a huge wave of policy initiatives and somewhere out there in the housing market a butterfly flaps its wings.
“Gordon Brown did it in 2009 when he announced a series of initiatives for people who had difficulty repaying their mortgages and David Cameron has just followed suit.
“You have to galvanise those who can make these policies happen into making them happen and one way is to announce these policies before you tell your civil servants.”
Chancellor George Osborne defended Help to Buy while addressing the treasury committee last week by saying it had the backing of the former governor of the Bank of England Sir Mervyn King before he left the job and he insisted it would not cause a housing bubble.
Part one of the Help to Buy Scheme, which offers equity loans from the government, requires the borrower to stump up as little as 5% deposit and is now in its third month but is still raising concerns.
But Coles said that if you subsidise something then one must take a look at the market to see where that subsidy ends up. Osborne’s intention was that the scheme would help first-time buyers but it seems to be leaning more towards helping house builders.
Coles said: “If you give every first-time buyer £5000 they will go out in the market and pay an extra £5000 for a house. No first-time buyer is going to be better off, only those selling properties or land. Affordability worsens as a result of the scheme and those who own property are the ultimate beneficiaries.”
Reflecting on the Mortgage Interest Relief at Source (MIRAS) scheme of the 1970s, Coles said politicians were addicted to subsidising the mortgage market which was as much a political imperative as it was an economic one.
But despite the doubt surrounding the real outcome of the scheme Coles remained positive.
He added: “There is a risk that the scheme will cause house prices to rise more rapidly in the future but probably no more than 5% a year. Overall, for the risk that is being taken over a house price bubble I personally think it is a risk worth taking if it will encourage more activity because it is a time limited programme. There is financial policy coming through the Bank of England which is looking at and advising the government as to if it should continue it after three years.”