HELP TO BUY: BOOM OR BUST?
The Help to Buy initiative forms part of the Government's Funding for Lending scheme.
Aimed at overcoming the deposit barrier, this mortgage guarantee scheme is currently only available for new-build properties. The Government will lend buyers with a 5% deposit up to 20% of the value of their home priced below £600,000 for five years. From January 2014, the scheme will be extended to buyers of all properties, giving purchasers with a 5% deposit the ability to buy on the understanding that the Government will guarantee a further 15% of the home loan as an insurance policy for banks.
The residential housing market is currently experiencing a resurgence of activity, giving a much needed boost to the construction industry. Major house builders including Crest Nicholson, Bellway, Barratt, Cala, Persimmon Homes and Berkeley have all posted an increase in activity since the Help to Buy scheme launched in April. The Council of Mortgage Lenders has announced that the number of mortgages being advanced to buyers in the second quarter reached 68,200, representing the largest quarterly total for five and half years. For first time buyers, things are finally looking up - more than 25,000 loans were advanced in June alone. This represents an increase of 30% when compared to a year ago and the boost is widely accepted to be due to the Help to Buy Scheme.
However, the outlook is not entirely rose-tinted and there are growing fears that Help to Buy risks fuelling a new housing bubble, further widening the gap between house prices and wages. Jones Lang LaSalle's mid-year residential market update predicted a 3% increase in prices this year and 3.5% next year (it had previously anticipated rises of only 1% and 2.5% respectively) a rise which is likely to be the result of the Government scheme. There is growing concern that the scheme is leading to artificial house price inflation which risks pushing house prices further out of reach of future first time buyers. It could also lead some to overstretch themselves financially (particularly if mortgage rates rise) to get on the ladder now before the prices increase beyond their reach. The Council of Mortgage Lenders reported that first-time buyers are already having to borrow more because of the recent surge in prices (the average loan size rose from £112,500 in May to £117,00 in June of this year).
As a result, calls are growing for the Government to scale back or terminate the scheme early as it is viewed as being excessive in the context of a more upbeat market. Perhaps a middle road would be to insert a 'bubble release' mechanism into the scheme in the event that house prices start to rise at too fast a rate. We await the Government's reaction to calls to scale back the scheme.