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. 

Source: http://www.wiltshirebusinessonline.co.uk/

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’

Source: http://blog.sewellgardner.com/

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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First time buyers – Step onto the property ladder while you still can!

The Government can introduce as many incentive schemes as they like, such as help to buy, however although undoubtedly some will benefit in the short term (and good luck to them!), the reality is that many more will suffer in the long term

Source:http://emerginggrowth.com

First time buyers are always faced with the dilemma of deciding when the ‘optimum’ time to enter the property market actually is.  As house prices in the UK have increased significantly over the last thirty years or so, the ability to take this first step is often tempered with the reality of having to save for a large deposit.  Without any equity to fall back on first time buyers must despair when they see house prices starting to increase, and proportionally the amount they will need to save for a deposit will increase with it. The result of the significant increase in UK house prices over the last 30 years is that average house prices have increased from £25,580 in 1982 to £167,294 in Q2 2013 (Nationwide 2012)  With many lenders now requiring a deposit of around 20% it is not difficult to see why so many first time buyers are struggling to enter the market.

Last month (06^th September 2013), www.thisismoney.co.uk summarised the outlook for the UK property market:

‘House prices are back on the up. Fuelled by cheap mortgages and the Government plugging its deposit-boosting Help to Buy scheme, the property market has swung back into growth. Since January, cheaper mortgages from Funding for Lending have begun to filter through, Chancellor George Osborne nailed his flag firmly to the property market mast, and a chunk of Britain's home buyers appear to have decided they have had enough of sitting on their hands. Transactions still remain well below the long-term average rate seen before the 2007 property market peak, but both they and prices are on the up’

This could be interpreted as either good or bad news depending upon where you are on the property ladder.  For developers this is good news as increasing house prices will in most cases result in increased margins.  This is demonstrated starkly by the buy to let market where the Council of Mortgage Lenders have reported strong growth over the last few months:

‘15,200 buy to let (BTL) loans were advanced in July, an increase of 12% compared to June. This represents a value of £2bn which was 11% higher than in June. Lending for BTL house purchase was up 7% in July compared to June, a total of 7,600 loans. The value of these loans was £900m, up 13% from June. There was strong growth in BTL remortgage lending which increased by 24% in July compared to June, a value of £1.1bn. This equated to 7,200 loans in July for BTL remortgage in total, an increase by 13.4% on June 2013’

This however is of no benefit to the first time buyer.  In fact, factors such as buy to let investors, disproportionate house prices increases in certain parts of the country, particularly London and the South East and in particular a general lack of supply of affordable first time houses all help to contribute to a big slap in the face for those looking to invest in the property market for the first time. 

Source: http://www.itv.com

The Government will no doubt argue that their help to buy scheme will alleviate some of these problems and provide easier access to the housing market for those who may not have previously been able to enter.  As a short term measure there is little doubt that the help to buy scheme will bring more first time buyers to the market, in fact this is already happening.  There is however one fundamental flaw in the scheme.  House prices are determined by the market.  Whether we like it or not basic economic principles such as demand and supply will always determine the price level.  This is true of all markets, not just the housing market. The problem we have in the UK, one which we have had for many years, is that we just do not have enough houses.  With a restricted supply and high demand the market will naturally re-adjust, resulting in increasing house prices.  Unless we construct more new houses and quickly, there will come a point where all of these house prices levels could become out of control.  Incentivising, large numbers of first time buyers and new investors into a market which already has a restricted supply is not the answer.  Surely, the UK Government must see that investing in large scale housing development is the only real way of dealing with the housing shortage and controlling house prices.

I am lucky enough to have been on the property ladder for many years.  If I were looking at entering the property market for the first time, I would definitely utilise the help to buy scheme while it is available.  As a first time buyer my priority would be to get on the property ladder as soon as possible and I would (selfishly) not be worried about what will happen to the property market afterwards, because I am then highly likely to be generating equity over the next few years. The property market is a different place for those who are already on the ladder.  The Government can introduce as many incentive schemes as they like, such as help to buy, however although undoubtedly some will benefit in the short term (and good luck to them!), the reality is that many more will suffer in the long term.  Long term sustainable housing policies are needed urgently, rather than short term (and short sighted), policies, designed to try and win votes rather than solve the real problems!

The Help to Buy Scheme explained

Below I offer a summary of the help to buy scheme, which I have taken from one of my earlier posts:

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.

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Information/opinions posted on this site are the personal views of the author and should not be relied upon by any person or any third party without first seeking further professional advice. Also, please scroll down and read the copyright notice at the end of the blog.