Monday, March 25, 2013

UK Housing Market - Will 'Help to Buy' get the housing market moving?

Construction output, particularly in new build housing, is nowhere near the levels needed to have any significant impact on the shortage of housing in the UK.  Developers may be encouraged by the new 'help to buy' scheme as it should increase interest in new build housing, however it is unlikely that the current rate of completions will be sufficient to meet any increased demand. 
In his budget last week the Chancellor George Osborne outlined the Government’s latest attempt to get the UK housing market moving with an attempt to boost homeownership in an initiative they have tagged ‘help to buy’.  The first part of the initiative builds on the existing ‘first buy’ shared equity scheme for which the Government have allocated £3.5 billion for those who want to purchase a new house up to a maximum value of £600,000.  The second part, in simple terms, will see the Government act as guarantor for a percentage of the lender’s debt.  The difference with this new scheme is that the previous cap of a maximum £60,000 income has been removed. The new scheme is also being made available to existing homeowners, whereas the ‘first buy’, scheme was only available to first time buyers.
In order to use the first part of the scheme borrowers will first need to save a deposit of 5% of the value of the property they want to purchase.  They will then be able to apply for an interest free loan for a further 20% of the value of the property, to a maximum loan value of £120,000. Repayment of the loan will then be made when the property is eventually sold.  After five years the loan will start to attract what the government call a ‘fee’, which is basically interest at a rate 1.75% which will increase annually thereafter by the current Retail Price Index inflation plus 1%.  The loan is therefore interest free, but you need to read the small print to see that this only applies for five years. Borrowers can access the scheme from 1 April 2013 which is proposed to run for three years.
The question therefore is what impact is this likely to have on the housing market?  Historically, the housing market has been used by the government as a vehicle to kick start a slow or ailing economy and clearly this Government has the same view.  In 2007 The UK Government, (Labour, at the time) put affordable housing at the top of their agenda and set an ambitious target to build 3 million new homes by 2020 with other initiatives to bring vacant properties back into use.  Fast forward to 2013 and we now have a coalition Government who although you could say had inherited the problem, have little if any chance of achieving anywhere near the volume of new housing that is desperately needed.

It is ok introducing initiatives like ‘help to buy’ for new housing, but where do you find all of this housing to buy? The latest national statistics on house building in England, released on 21 February 2013 ( state: ‘annual housing starts totalled 98,280 in 2012, down by 11% compared with 2011; annual housing completions in England totalled 115,620 in 2012, 1% higher than in 2011. It is very clear from these statistics that construction output, particularly in new build housing, is nowhere near the levels needed to have any significant impact on the shortage of housing in the UK.  Developers may be encouraged by the help to buy scheme as it should increase interest in new build housing, however it is unlikely that the current rate of completions will be sufficient to meet any increased demand.  In response to the Chancellors announcement, Chief Executive of the National Housing Federation, David Orr made the following statement about this very issue:

"We welcome the chancellor's realisation that people around the country are struggling to buy their own homes, and the measures introduced today may help a number of them. But the danger is that if we don't tackle the fact we're still not building enough homes, we'll just create another housing bubble that will continue to push house prices up and out of reach of the majority.

"Our housing market has long been weakened by the lack of new houses being built, which are forcing up rental and house prices – leaving millions of people struggling to get on the property ladder or pay their rent. The government should be focusing on unlocking investment to build more new homes as a way of managing down the housing benefit bill and boosting the economy”
The answer therefore seems simple; just build more houses!  The reality is that in a struggling economy, where we are all feeling the effects of cutbacks and austerity measures that developers will understandably be much more reluctant to build speculatively if they think they may struggle to sell.  This new scheme however may act as a positive catalyst, and result in developers revisiting mothballed schemes as well as those in planning, as they can now have more confidence that they are likely to be able to sell their houses.  This I am sure is one of the key objectives that the Government are trying to achieve.

From a purchaser’s perspective the help to buy scheme is again likely encourage many who are struggling to save large deposits onto the housing ladder, sooner than they would have expected.  As an example, if someone wants to purchase a new house for £180,000, they now only need to save a deposit of £9,000 and can apply for an interest free loan for a further 20% (£36,000).  The lender will then only need to borrow 75% of the purchase price, £135,000 thereby significantly reducing their risk.  The upshot of this is that the 20% interest free loan is underwritten by tax payers like you and I.  The risk is therefore much more evenly spread between the lender and the tax payer and will undoubtedly encourage lenders to loosen the purse strings.
In a time where many countries in Europe are self destructing, creating even greater uncertainty, it is my humble opinion that the ‘help to buy’ scheme together with planning reform, is a positive step in trying to prevent the UK going down a similar road as Greece, Ireland, Portugal, Cyprus and the like.  It is true that the housing market is only one sector of the economy, however it is a very important one, which has the potential of breathing life into the wider UK economy. The ‘help to buy’ initiative provides incentives for developers, lenders and purchasers and should be effective as long as we can build a sufficient amount of houses to meet demand.  I am sure that there will be many who will be very sceptical about this latest initiative given the inability of the Government in recent years to get our economy out of the doldrums. In this instance it might be worth reserving judgement as I think ‘help to buy’ has a real chance of kick starting the housing market, as long as output levels of new housing significantly increases, and increase quickly.  Time will tell, however given what is going on in other economies in Europe and around the World, time is a commodity in short supply, and unless we try to stabilise our own economy now, we may not have time in the future react to what is going on elsewhere, which will prove disastrous for us all.

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  1. Having own house is everyone's dream bit all the time it is not easy to buy or build own house. This post tell the real situation. Thanks for sharing.

  2. The Help to Buy scheme is helping but there are concerns it is artificially propping up the housing market.

    UK Rental Property

  3. New figures show that along with the governments Funding for Lenders scheme, there has been an increase in mortgage applications and approvals.