06/08/2013 10:49 BST

'Help To Buy' Will Boost Banks And Builders' Profits But Will See Few New Homes

Chancellor of the Exchequer George Osborne during a visit to the Riverlight construction site in central London, a development which is being constructed on a regeneration area on the south bank of the River Thames near the Battersea Power Station, to become six residential apartment buildings.

George Osborne's flagship home ownership programme Help to Buy will fail to see new homes being built but help boost banks' and builders' profit margins, Fitch Ratings agency has warned.

Under the Chancellor's plan, consumers are offered an interest free equity loan by the government of as much as 20% of the property's value, to bring down the barriers for first time buyers from getting onto the housing ladder.

Banks would be set to benefit from the extra home loans being offered while builders will prosper on the higher house prices brought about by an inflated housing market, as supply fails to satisfy demand.

Fitch's warning will come as galling news for the Chancellor, who previously drew on the credit rating agencies' positive predictions on Britain keeping its triple AAA credit rating to argue the "world has confidence that we are dealing with [our economic problems]."

"For house builders the main benefit from the second phase of the scheme will come from rising house prices, rather than increased volumes," said Fitch Ratings.

"This is because selling a house for more than originally expected has no additional associated costs and therefore generates pure profit, whereas increasing volumes also increases variable costs.

"Builders also might prefer to avoid sharply increasing construction because of the risk that they may not be able to sell the properties when they are completed in two years' time.

The risk was offset by Help to Buy's three-year duration, Fitch added.

"While the scheme does not come with any requirements on home builders to increase construction, we do expect them to face political pressure to build more."

The housing sector has been afflicted by a lack of new affordable homes being built. In 2012, just 100,000 new homes were built despite many predictions saying 250,000 would be needed to keep pace with demand.

Liberal Democrat business secretary Vince Cable has warned that the scheme could inflate a new housing bubble.

"I am worried of the danger of getting into another housing bubble. The Help to Buy scheme is actually quite complex. We have one part that's already operating, which is providing mortgages against new homes, nobody has questioned that.

"The proposal which hasn't yet been implemented, which is providing a guarantee for a limited range of mortgage, could be a problem. It could inflate the market.

"But, if it's properly designed it could be a useful addition. But the real problem, of course, is housing supply. The current numbers of about 100,000 a year are hopelessly inadequate."

Graeme Leach, Chief Economist at the Institute of Directors, said last month: "Help to Buy looks like a drug homebuyers and politicians could get hooked on. We're looking at the 'addictive economy'.

"The housing market needs help to supply, not help to buy and the extension of this scheme is very dangerous. Government guarantees will not increase the supply of homes, but they will drive up prices at a time when it seems likely that house prices are already over-valued.