Wednesday, 26 October 2016

Can they fix it?

From: Inside edge

It must be trebles all round in the boardrooms of the major housebuilders as they celebrate the details of today’s housing strategy. Where does that leave the rest of us?

The document had been so well trailed in the papers over the weekend that there were very few surprises when it actually appeared this morning - and very few answers to the obvious questions begged by the advance publicity.

First up there is the big new idea to help housebuilders, sorry, home buyers, with a government-backed mortgage indemnity scheme. The idea is that this will be enough to persuade lenders to give 95 per cent mortgages on new-build homes to up to 100,000 buyers. Housebuilders would also pay 3.5 per cent of the sale price into the indemnity fund.

The obvious issue picked up on by the national media is that the taxpayer will be guaranteeing private mortgages - and potentially open to any losses if house prices fall. After all, the reason why the government has to guarantee mortgage indemnity insurance in the first place is that insurance companies will not (they lost more than £2bn in the housing market crash of the early 1990s). However, any loss would come first from the buyer’s deposit, then from the housebuilder and only then from the government.

But that begs several more questions.  Is it really such a good idea to encourage people to take out 95 per cent mortgages? If house prices fall they will be left in taxpayer-funded negative equity. If they rise, the taxpayer will have propped up prices for them (and all other existing owners) at the expense of others further back in the queue. 

What guarantee is there that housebuilders will not simply use the existence of the guarantee to raise their prices and increase their margins? None that I can see - and that is the stated strategy of all the major firms. What’s to stop that feeding into higher land prices?

What about the rest of the market? Imagine you stretched yourself to the limit to buy a tiny starter home. You now want to sell and move on. Suddenly all of your prospective buyers disappear to the new housing development up the road.

As research for HSBC revealed last week, there are up to 360,000 people who have bought a home since 2007 who are in negative equity. If those potential second-time buyers can’t move, neither will the market as a whole.

And the help for housebuilders does not stop there. A £400m Get Britain Building ‘investment fund’ will help unlock progress on up to 133,000 homes on stalled sites. Up to 90,000 of these are on sites that have not started and another 43,000 on sites where work has started but not finished.

Again the questions come thick and fast. Is this government money or investment from elsewhere? What’s to stop builders taking the money for these sites and stopping work elsewhere with no net increase in output? 

And there’s a related boost for housebuilders that carries a nasty sting in the tail for housing associations too. The government will consult on a proposal to ‘require’ local authorities to reconsider Section 106 agreements on the stalled sites ‘agreed in more prosperous market conditions prior to April 2010’. Bye-bye affordable homes?

There is more of the same wherever you look in the strategy, much of it already announced but gathered here in one place. Builder-friendly planning changes. The government committed to reducing the regulatory burden on housebuilders in last year’s spending review. There’s the revised definition of zero carbon, the removal of centrally imposed standards on homes built on central government land and in January 2012 the launch of the Red Tape Challenge for housing, planning and construction to put all existing regulations under the spotlight. Bye-bye more affordable homes?

As for the rest of us, the document has plenty of reheated announcements interspersed with a few good ideas like the £30m fund for custom homes (the new name for self-build?) and another £50m for empty homes and yet another review of investment in private renting.

There’s a raft of consultations to come next month on things like Right to Buy 2. The document claims that initial modelling shows there can be one for one replacement despite 50 per cent discounts and the Treasury taking a 75 per cent share of the receipts. Effectively what’s left after paying off the debt would be added to borrowing against future income and free land to fund a replacement on affordable rent. 

In the meantime, the Welfare Reform Bill continues to make its way through the House of Lords and peers will discuss the potentially disastrous household benefit cap this afternoon.

On top of all that the document has plenty to say about the problems caused by high house prices in the past without confronting the fundamental problem that they are still too high now. 

It’s good to see that the government sees housing as a priority. But does what David Cameron claims is ‘radical and unashamedly ambitious’ and Grant Shapps says will challenge ‘the lazy consensus’ really deserve to be called a ‘strategy’  at all?

Instead it’s more a case of giving builders what they want and hoping for the best. Can they fix it? I don’t think they can. 

EDITED NOV 22: The indemnity scheme is for all buyers of new-build homes (except buy-to-let investors and second home owners) and not just first-time buyers. 

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