Monday, June 2, 2014

UK Housing Market – ‘Help to Buy’ aiding recover or papering over the cracks?

For recovery to be sustainable it needs to be steady and measured.  Allowing people to borrow money, which they would not have been able to previously afford, to get the housing market moving may have a positive impact in the short term, but could prove to be a recipe for disaster in the future. 

To describe the UK housing market as fickle would be an understatement.  Only 18 months ago the debate revolved around how to get the housing market moving, but after what appears to be a remarkable turnaround, there is now even talk about how to ‘cool’ the housing market!  In a recent article in the Guardian Online (Link), the Government cite their flagship Help to Buy scheme as the main driver for the recovery:

‘The government's controversial Help to Buy mortgage guarantee scheme has supported 7,313 home loans worth a total of £1bn since it was launched in October, official figures show.
The figures for the first six months of the mortgage scheme, released by the Treasury, showed the mean value of a property purchased or remortgaged through the scheme was £151,597, well below the average house price of £252,000 recorded by the Office for National Statistics.
The Treasury said 80% of the supported loans were given to first-time buyers and claimed a larger proportion of the market was being helped outside London and the south-east.
Commenting on the figures, and data showing that more than 20,000 people have bought newbuild homes through the separate equity loan scheme, the prime minister, David Cameron, said his government had helped both buyers and builders’
In order to use the first part of the Help to Buy 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.

There is no doubt that the Help to Buy scheme has brought buyers to the market sooner than they would have been able to without the scheme, however, let us look into our crystal ball and see what could happen over the next few years.

Firstly, interests rates WILL rise!  The question is actually when, not if. I am sure that those with mortgages, like myself are monitoring the news very closely and in particular noises coming from the Bank of England.  Some commentators suggest that this may happen toward the end of this year, other suggest early 2015. Over recent years mortgage borrowers have been spoilt by a record low base rate of just 0.5%.  Although the property market has suffered with the economy, we have had the opportunity to borrow money very cheaply for many years. Those who have taken this opportunity may have been lulled into a false sense of security, hoping that this will last for the vast duration of their mortgage loan!  In reality however, it is likely that those who have stretched their budgets or maybe those who are new to the property market will find any interest rate increase a major shock to their finances.  The outcome is that many may find themselves in a position where they will struggle to meet their loan re-payments and unfortunately others are likely to lose their homes.

Also, as explained above, after five years the help to buy loan will start to attract a fee, which if added to rising interest rates is going to impact significantly, particularly those at the lower end of the income scale.  This therefore begs the question, is the help to buy scheme aiding recover or is it just papering over the cracks?  I am sure that lenders will tell us that they have robust audit procedures to ensure that lenders are able to payback their loans, however Reuters (Online) (Link) recently reported: ‘Economic recovery and record-low interest rates have driven British house prices up by about 10 percent over the past year, raising concern some buyers might be taking on too much debt’.  

For recovery to be sustainable it needs to be steady and measured.  Allowing people to borrow money, which they would not have been able to previously afford, to get the housing market moving may have a positive impact in the short term, but could prove to be a recipe for disaster in the future.  There are many high profile examples in the football world of what can happen when money is borrowed to chase a dream, money that is borrowed in the hope that success will produce finances that will more than cover the cost of a loan.  But what happens when you do not get the success you expect? Ask the supporters of clubs such as Portsmouth and Leeds United amongst other, of what they think about this approach, which nearly resulted in their beloved clubs going bankrupt! Borrowing money to those who are likely to struggle to repay their loans when interest rates rise and the help to buy fee commences has all of the same ingredients for disaster.

The real way of addressing the issues within the housing market is to increase supply by building more houses, easy to say you may think!  Simple economics tells us that when there is high demand and limited supply for something, the market will naturally adjust to reflect this, pushing up prices.  Therefore, to deal with the desperate need for housing in the UK and to control house prices, the UK government should be focussing it’s effort on building more houses and not on temporary ‘fixes’ such as the spare room subsidy (referred to a bedroom tax) and schemes such as help to buy!  BBC News Online (Link) recently reported that the number of housing starts had risen by 31% over the last year, however and interestingly, the number of completions only rose by 4% over the year. The article goes onto identify that more needs to be done to increase housing supply in the UK:

‘The housing charity Shelter said the country was still building less than half the homes it needs. "Everyone agrees that we need to build more homes, but sticking plaster solutions like Help to Buy, or tweaks to planning rules will never tackle the hole in our housing market," said Campbell Robb, Shelter's chief executive.
Earlier this week the governor of the Bank of England, Mark Carney, suggested that building more homes was the best way to curb surging house prices.
Above, Shelter’s Campbell Robb refers to help to buy as a ‘sticking plaster solution’. I could not have put it better myself!

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