Tuesday, 16 September 2014

Shaky start

From: Inside edge

If NewBuy really is to be about supporting buyers and new homes rather than just subsidising housebuilders here are 10 questions that need answers.

The launch of the scheme this morning got off to a somewhat shaky start, with many reports claiming (wrongly) that it is for first-time buyers and others (rightly) pointing out the advantages for builders.

The basic details are that the scheme has been designed by the Home Builders Federation and Council of Mortgage Lenders (CML). It will be available for an estimated 100,000 mortgages on any new build property in England up to £500,000 constructed by a builder who is in the scheme. Shared ownership and shared equity are excluded and so are second home owners and buy-to-let investors.

NewBuy will underwrite 95 per cent mortgages, with housebuilders putting up 3.5 per cent of the sale price into an indemnity fund and the government providing an additional 5.5 per cent guarantee. Any loss will come first from the buyer’s deposit, then the housebuilder’s fund and only then from the government guarantee.

So far, so good. If the scheme really does result in 100,000 homes that would not otherwise have been built then it will help support jobs and growth and bridge some of the huge gap between current output and demand from new households. Despite the first-time buyer spin put on it by David Cameron and Grant Shapps, some of the biggest beneficiaries could be frustrated second steppers, people who bought their first home at the top of the market, may now need a bigger home for a growing family and do not have enough equity for a deposit. The website for the scheme already has 28,000 people interested.

But now for the questions: 

First, and most obviously, why is the government intervening in what is meant to be a free market? Isn’t it better to let house prices fall to an affordable level rather than prop them up artificially? In the name of the (housing) market, the scheme seems to offend basic principles of free-market economics.

Second, will the 100,000 homes really be additional? There seems to be no guarantee of that and no undertakings from the companies involved. As I blogged last week, the business strategies of the major housebuilders are based on increasing their margins rather than their output. They also seem free to choose which homes they include and set their prices knowing they have desperate buyers. Even if the homes are additional, what’s to stop them manipulating the prices? If the homes are not additional supply, the effect of the increased demand surely has to be to boost house prices and those margins even more.

Third, why is a new-build guarantee needed when lenders are increasingly making 90-95% mortgages available for secondhand homes? I asked on twitter earlier whether this was because they are worried new build prices will fall by more in a downturn. The CML responded that ‘new build value can be less easy to benchmark for lending purposes’ and the disparity is ‘a consequence of constrained/cautious market’. It remains to be seen how attractive the rates on offer will really be.

Fourth, won’t this discriminate against existing owners of secondhand homes? Imagine you are someone trying to sell a secondhand home when just down the road a housebuilder launches NewBuy. Will you have to cut your asking price because of a scheme paid for by your taxes?

Fifth, why such a high limit? A 95 per cent mortgage on a £500,000 house would be worth £475,000. What is the justification for the taxpayer underwriting the mortgage of someone earning £150,000? 

Sixth, why is it being launched now? At the moment only seven housebuilders – Barratt, Bellway, Bovis, Linden Homes, Persimmon, Redrow and Taylor Wimpey – and three lenders – Barclays, Nationwide and NatWest – are taking part. They will be joined in the next few months by two more banks (Santander and Halfax) are set to join. It may make sense because of the Spring selling season or for Budget- or local election-related reasons but it seems somewhat premature.

Seventh, where are the small builders and potential new entrants to the market? Although the DCLG says that ‘other leading names, including smaller housebuilders, are expected to follow their lead in the coming weeks and months’ the big players that dominate the market are in there first. If the government has subsidy available, why not concentrate it on companies you know will build additional homes?

Eighth, why is there apparently no role at all for social landlords? The scheme does not cover shared ownership but there are plenty of housing associations out there who might be interested in mortgage guarantees on homes they build for outright sale.

Ninth, where is the impact assessment? If the government is guaranteeing 5.5 per cent of 100,000 mortgages worth an average of, say, £200,000 then £1.1 billion of taxpayer’s money is potentially at risk. Yet the DCLG has published no impact assessment yet and (amazingly) its press office cannot say whether there is one.

Tenth, how will the guarantee be accounted for under public borrowing rules? If it is extra borrowing, what about the deficit reduction programme? If not, why is there flexibility in the rules for NewBuy but not for local government? What else could be done with more flexibility?

And that’s just for starters. 

Readers' comments (6)

  • Jules, for £1.1bn of taxpayers money to be at risk all 100,000 mortgagees would have to default.

    I'm not suggesting the indemnity won't create a degree of moral hazard, but a default on that scale seems rather unlikely.

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  • Jules Birch

    Unaplanner you're right, of course that is very unlikely - and house prices would have to fall by more than 8.5 per cent and eat up the deposit and housebuilder share before the taxpayer guarantee was at risk anyway. Much easier unfortunately to see a risk of taxpayer-funded negative equity

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  • excellent article.

    I can't help thinking this government has given up on impact assessments. they want to push through their agenda quickly before people have time to take in what's happening.

    if only someone from here would do a similar article on the NPPF..

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  • Some good questions and some with obvious answers:

    Obvious.
    Q1 - House building industry is a huge employer and boosting jobs in this market will aid recovery.

    Q2. - Obviously not; lenders only have the same amount to lend..

    Good questions..
    Q5. Perhaps to keep wealthy Tory voters on side?
    Q8. 'Social' Landlords? This is a Tory led Coalition...
    Q9. Impact - surely it'll only be good, so no need for one eh? ;)
    Q10. Now you're just getting awkward Jules. Strike him off the honours list, Jim.

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  • As a 1st time buyer I was interested to read this article, however one point that is being missed is that these new build "affordable" homes price out 1st time buyers.

    The standard cost for new homes in my area is £125,000+ so even if you can get together enough for a 5% deposit (which I’m struggling with), whether or not the banks will lend enough to cover the mortgage is another question!

    Whereas on the open market, you could get a property the same size for a fraction of the cost, surely the government should be looking at schemes to help 1st time buyers find the deposit for properties?

    The equity loan would be of great use to me if I could loan a small amount to top up my savings for a deposit rather than borrowing a large amount to top up a mortgage.

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  • Jules Birch

    Good point GemmaB and another question to add to the extra ones that keep occurring to me. The scheme is designed to shift new homes and, while there are definitely arguments for that, another big question is what happens to the existing market. Is all this extra lending by the banks (perhaps £19 billion over three years if there are 100,000 at an average price of £200,000) really going to be additional? If not, then lending on secondhand, and perhaps more affordable, homes is going to be squeezed. On the other hand, if there is less demand for them then prices should fall relative to new build.

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