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Will ‘Help To Buy’ Hurt Lloyds Banking Group PLC And Royal Bank Of Scotland Group PLC?

Some legacies of the financial crisis are proving hard to shrug off. UK GDP growth is still sluggish, for example, and total economic output remains at pre-crisis levels. Unemployment is still too high, and savers are getting next to nothing on their money with interest rates held at previously unthinkably low levels.

However, one thing has come back with a vengeance, and that’s talk of a house price bubble.

This might seem premature if you live in the north or west of England, Scotland, Northern Ireland or Wales. There houses for sale are still taking time to find buyers, let alone buyers prepared to pay high prices.

But in London house prices have been rising for years now, to the extent that last month property portal Rightmove claimed asking prices in the capital had leapt by 10% — or £50,000 – in a month.

Clearly such a rate, if true, would be utterly unsustainable. It’s led many pundits to wonder whether the government’s Help to Buy initiatives are stoking up a house price bubble.

The next crash?

As UK citizens, we all have good reason to fear a house price boom and bust. It would be ironic if we clawed out of the financial crisis only to careen into a new one.

Some would say there will be an inevitable wobble when rates start to rise. Reportedly as many as 20% of all mortgages have been advanced to households that have less than £200 spare each month after meeting their obligations. That’s precious little buffer to absorb higher interest rates.

On the other hand, we’ve been waiting for higher rates for years. And while the Bank of England now thinks the economy is picking up pace faster than it was – bringing forward expectations of the first hike in the base rate – governor Mark Carney has made clear he’s in no hurry to raise borrowing costs.

Hype to help ratio

What you think about the government’s Help to Buy schemes probably comes down to what you think about the future for house prices. If you believe the market is fundamentally sound, then government initiatives to enable more buyers to get access to the mortgages required to buy into it aren’t irresponsible ­– they are if anything equitable.

You’ll have to decide that for yourself. But what if you’re a shareholder in Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) or Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US)? It’s one thing to face the prospects of a reversal in housing arm-in-arm with your fellow taxpayers. But as shareholders in two of the country’s biggest mortgage players, is Help To Buy putting you at the thin end of the wedge?

It’s a fair question. At the moment, though, I think Lloyds and RBS shareholders have more reason to cheer these government initiatives than to fear them.

The reason I say that is because the direct impact of Help To Buy to-date doesn’t quite match the hype.

When David Cameron himself revealed figures earlier this month, he said only 2,384 mortgages had been approved under the second phase of Help To Buy. Lloyds alone advanced 55,000 mortgages to just first time buyers in its last full financial year. So far, Help To Buy is a drop in the ocean.

What’s more, there are some signs that mortgage lenders are being even more cautious in who they grant their low-deposit Help to Buy mortgages to, despite having the government sharing in the risks.

According to one broker quoted recently in The Telegraph, lenders may be offering Help to Buy rates as low as 4.99% from RBS-owned Natwest, but they are assessing affordability in the light of a mortgage rate a couple of percentage points higher:

“If you look at the underwriting process, a very small number will be accepted. The lenders are assessing potential borrowers based on 6pc or 7pc affordability. My gut feeling is at least half of applicants won’t be approved.”

This should be music to bank shareholders ears. While it’s important for future returns (and for the UK economy) that banks are able to increase their lending, it’s paramount that they do so responsibly, and with the awareness that today’s ultra-low interest rates won’t last.

Help to bank a profit

So far, the low number of Help To Buy mortgages granted and reports that this isn’t likely to change due to tough eligibility requirements suggest Lloyds and RBS shareholders have little to fear from government intervention to prop up the market.

That’s not to say they are not at risk from a house price crash – with massive exposure to residential UK property, they most certainly are.

But that’s a bed they made long ago and must lie in. To the extent that Help to Buy has helped bring some confidence and liquidity back to the market, it’s surely been a benefit to these banks.

Of course, the only way to really be confident about the risks facing the UK's biggest lenders - and the potential rewards on offer - is to dig into each one in turn. If you're wondering how to assess a bank by key measures such as price-to-book value or net interest margin then you must download our special report on evaluating banks.

An informed shareholder is a prepared shareholder, so make sure you understand your chosen bank better by reading our free report today.

> Owain owns shares in Lloyds.