The United Kingdom (UK) has announced a new “Help to Buy” scheme that is based on a government guarantee of loans, which theoretically will help prospective homebuyers interested in new homes get their foot in the mortgage door. Some experts say the shared-equity plan should work to bring more confidence to the market by helping first-time homebuyers and others looking to move into new homes get into the market, which will then spur growth. Others, however, believe the plan exposes taxpayers to too much risk and will not trigger activity if the economy and employment fail to improve. For more on this continue reading the following article from Property Wire.
There has been a mixed reaction to the new boost for the UK residential property market announced today with the Help to Buy plan generally welcomed but some experts voicing skepticism.
Most agree that it was a surprise announcement in the 2013 Budget and many point out that the detail of how the scheme will operate is needed before it can be properly evaluated.
Reactions vary from proclaiming it the most important new initiative for the housing market to warnings that it could prompt prices to rise too fast and have little effect for struggling home buyers in London where prices are much higher than the rest of the UK.
The fact that it builds on the already existing New Buy and Funding for Lending schemes that already exist is regarded as a major boost along with an extension beyond first time buyers to those who are looking to move up the property ladder, the so-called second steppers. Many commentators have pointed out recently that it is not just first time buyers who are struggling to get funding and unless second steppers can move on there will be no boost for the all important first time buyer sector and therefore no overall improvement in the housing market.
‘This is possibly the most important announcement for the new homes market ever. The scheme is for all, not just first time buyers, and has a cap of properties valued to £600,000 that covers the vast majority of new homes built of any shape or size, in any location across the UK,’ said Guy Jenkinson, head of new homes at property firm Bidwells.
‘Quite simply, it will assist many expanding families, and those with changes of circumstances, who are desperate to move into larger and more suitable accommodation and who have been hampered to date by lack of equity in their own property and the inability to attract loans that come anywhere matching the governments proposal,’ he explained.
‘The south east new homes markets have seen an encouraging start to 2013 with monthly sales rates up by as much by 30% and this initiative could well provide the support needed to encourage developers to accelerate their build programmes on current schemes,’ he added.
Richard Sexton, director of e.surv chartered surveyors, believes that Help to Buy will help stoke the fires of the mortgage market. ‘Prospective buyers need all the help they can get in piecing together a deposit, particularly while their personal finances and savings are being pillaged by inflation. High deposit requirements have been the major roadblock to home buying since the financial crisis hit. They have barred the way for people wanting to get a mortgage and move home, particularly first time buyers. The scheme will increase high LTV lending, increase the number of first time buyers and increase overall house sales,’ he said.
But he questioned the length of time it will take to introduce. ‘Why wait nine months to introduce it? But once it does come in to effect, house purchase lending and sales should rise at the start of 2014 and provide a welcome boost to the economy,’ he added.
James Bailey, managing director of Henry & James, also believes it is one of the biggest boosts to home ownership in recent years. ‘In the past, there have been small gestures made towards first time buyers but George Osborne has gone one step further by helping not just those struggling to get on the housing ladder but those looking to move up the ladder. This is very welcome news,’ he said.
‘One of the greatest challenges facing this nation is that future generations will not have the same standard of living as their parents. Struggling to afford a deposit, these frustrated would be home buyers will have to cut their consumer spending in an attempt to save faster than the rising costs of living in a low interest environment. This not only bodes badly for the overall economy, it also saves up problems for the future. What, for instance, is generation rent expected to do in retirement when they are still having to pay market rents rather than enjoying a mortgage free home?’ he pointed out.
‘The Chancellor has recognised this danger and has given a boost to those struggling to get onto the housing ladder for the first time and to those looking to move further up to the ladder. This will free up housing stock at the bottom of the ladder and free families to move into the bigger home they desperately need,’ he added.
James Greenwood of Stacks Property Search said that the aspect that is most welcome is that it will provide help for home owners wanting to move at the middle of the market as well as those at the lower end. ‘There are too many people stuck at various points of the ladder, not just difficulties for those trying to get on it in the first place,’ he added.
Home builders are also delighted. Steve Roche, Persimmon Homes’ group communications director, said that it shows that the government recognised the importance of the new homes sector in terms of boosting economic growth.
Roarie Scarisbrick, partner at independent buying agents Property Vision, said that it has the potential to help boost the number of new homes available with positive knock on effects for the construction industry and other businesses linked with the property industry such as removal companies, builders, decorators, appliance and houseware companies for example.
Some in the industry are sceptical. ‘With VAT on refurbishment and stamp duty remaining unchanged, it may seem churlish to decry any form of support for the property market, but the fact is that the Help to Buy scheme is simply an alternative mechanism to boost use of the funds in the under-performing Funding for Lending Scheme,’ said Ed Mead, director at London real estate agent Douglas & Gordon.
Others want to see more detail before making up their minds. ‘The focus on housing is welcome and promises of a 20% equity loan sounds great in principle, but the crunch will come in what mortgage rates look like for customers utilising it. At the end of the day, someone taking out a mortgage with just a 5% deposit will still be viewed as a higher risk than someone with more cash,’ said Darryl Flay, chief executive officer of property management company Essential Living.
Trevor Abrahmsohn of Glentree International believes that the Chancellor has missed a trick in not attempting to merge the VAT on new build with that of refurbishment of existing buildings, the latter of which carries the full 20% of VAT. He added that another glaring omission was not forcing lending institutions to facilitate loans more easily and effectively to the consumer. ‘They have been hoarding cash now for some considerable time and have are becoming more pernickety in terms of borrowers qualifications for loans that are holding up the entire process. Transactions wait an inordinate amount of time for mortgage offers and sometimes they don’t come through at all. The paradox is that as they accumulate more cash they pay savers a pittance,’ he said.
‘Yield on cash has never been less attractive and hopefully people will decide to put that money into residential properties as buy to let which is a much more effective and rewarding investment,’ he explained.
Andrew Turner, head of residential estate agency, Smiths Gore, pointed out that whilst any help for the housing market is welcome, the underlying problem is one of confidence and people are worried about jobs and the economy and it needs a sustained economic recovery to improve these concerns. He called the housing market changes nothing more than tinkering around the edges.
‘There was very little take up of the defunct NewBuy scheme amongst the first time buyers to whom it was restricted. The Help to Buy scheme revealed today will be open to all buyers of new houses, and this is a welcome change which should see a marked increase in applications,’ he explained.
‘Whilst support for buyers of new houses may help the large house builders, there is an argument that shared equity loan schemes merely support the over pricing of some new house developments. It is common for resale values on new developments to be well below brand new prices, and any support for new houses in isolation may merely exacerbate this problem,’ he said.
‘Regarding the deposit guarantee support, the detail of this isn’t clear, but this may well help a lot of families whose financial footings are sound, but haven’t been able to save enough deposit to get the best mortgage deals, and have therefore stayed out of the market. This scheme could provide a real boost to the bottom and middle tiers of the housing market which will filter through to all price ranges,’ he added.
Angel Mas, president of Mortgage Insurance Europe for Genworth, is not convinced that the government guaranteeing loans is the right way forward. ‘Using the government guarantee for new high loan to value mortgages will expose the UK taxpayer to unnecessary liability, potentially a multi-billion pound loss if there was a late 1980s/early 1990s style property crash,’ said Mas.
‘It is extraordinary that given the existence of capacity and expertise in the private mortgage insurance sector the government has not yet considered the involvement of private mortgage insurance in order to reduce the risk to the UK taxpayer. Given the role of irresponsible lending in the crisis, this seems an oversight that puts the taxpayer at unnecessary risk, whilst leaving the government in the hands of the banks when it comes to ensuring prudent lending standards are maintained under any extended scheme,’ he explained.
‘The mortgage insurance industry has the expertise to help ensure lending remains prudent, and standards do not slip, which is critical for the economic health of the country. We hope the government avoids crowding out existing private capacity and engages the mortgage insurance sector on risk sharing opportunities as well as to use its expertise to administer such a complex scheme,’ he added.
This article was republished with permission from Property Wire.