Sunday, 30 April 2017

Who buys it?

From: Inside edge

It’s under attack from all sides but the strongest arguments for help to buy 2 are the ones that ministers cannot mention.

No matter how much David Cameron, George Osborne and the new junior housing minister go on about aspiration and opportunity, the critics refuse to go away. In just the latest example, the all-party Treasury select committee scorns government assurances to repeat its earlier warning that the controversial scheme will boost house prices and be politically impossible for future administrations to exit.

Here’s my analysis of the stated – and unstated – arguments made by ministers:

1) There’s nothing wrong with 95 per cent mortgages. This boils down to an assumption that if anything is dysfunctional it’s the mortgage market not the housing market. That presupposes that mortgage market deregulation and the rise of 95 per cent loans were not themselves factors in the last bubble. According to the Council of Mortgage Lenders, the median advance for a first-time buyer was 84 to 88 per cent between 1974 and 1981, rose to around 95 per cent through most of the 1980s and 90s, then fell back to 87 to 90 per cent between 1999 and 2007 before slumping to 75 per cent in 2009. The median is currently 82 per cent but it is possible for first-time buyers to find a 95 per cent mortgage without help to buy – see, for example, these save to buy deals available from Nationwide.

Low deposit deals remain expensive compared to those available to people with more money to put down but it looks like help to buy 2 will not change that much if the Treasury charges lenders a commercial rate of 90 basis points on the entire cost of the loan for the guarantees on a 95 per cent mortgage. Will rates of 5 or even 5.5 per cent, plus restrictions on affordability and people with a poor credit record, limit demand along with the benefits claimed by government and the risks feared by critics?

2) House prices are not too high. At the Conservative Party conference last week, ministers were quick to highlight prices in places like Nelson and Wigan rather than London and the south east while carefully not explaining why it is necessary for homes worth up to £600,000 to be eligible and for the previous income limit of £60,000 a year to be scrapped. Much depends on which house price index you believe. Asked by Evan Davis on the Today programme why house prices are so high (6.7 times earnings in England against a historic norm of 3.5), Treasury chief secretary Danny Alexander said: ‘Actually I’m not sure it’s right to say house prices are so high’ but it became clear that he really meant mortgage repayments are not so high (because of record low interest rates). As for fears that help to buy 2 will trigger a stampede of applications and a new bubble (but see 1 above), the government seems so unconcerned that the launch press release says that ‘banks are braced for a flood of interest from the public’.

3) It could still boost supply even though it is not linked to new homes. As David Cameron put it this morning:

‘Moves such as Help to Buy will also encourage housebuilding. If potential buyers can’t buy, builders won’t build - so this is an important part of unlocking the market.’

Unlike the first phase of help to buy, and unlike new buy, the help to buy mortgage guarantees are available for existing as well as new homes. That’s the basis of the most obvious objection: that it will simply boost demand without doing anything about supply. As Brian Green of Brickonomics has pointed out, there is a long-term relationship between transactions and private home completions: roughly one home is built for every 10 homes sold. If Savills is correct in its estimate that help to buy will add an extra 550,000 sales over the next three years, that implies an extra 55,000 new homes as a result. An increase of around 20 per cent on current private sector completions is not to be sneezed at but it seems very poor targeting of £12 billion of guarantees. As Paul Smee, director general of CML, points out: ‘The homes need to be there for people to buy, as well as the finance to buy them.’

4)   It will help first-time buyers in particular. George Osborne said in his ministerial statement this morning:

‘The government is committed to supporting people who aspire to become homeowners. Since the financial crisis, increased deposit requirements and falling equity values have left many hardworking households unable to get onto the housing ladder or trapped in homes unsuited to their aspirations and needs. This has particularly impacted first-time buyers, who have found it increasingly difficult to purchase their own home.’

Listening to that, you’d think that Help to Buy 2 was only for first-time buyers, when in fact it’s available to everyone except buy to let landlords and second home owners (but see 6 below). If it means more loans at higher loan to values (see 1 above) that should help some people but many first-timers interviewed in the national media say they believe they had better get in quick before prices rise. 

More significantly it should at least allow first-time buyers to compete on more equal terms with buy-to-let landlords. Buy to let effectively works by allowing landlords to borrow against the future incomes of their tenants, many of them the reluctant renters that help to buy is meant to be helping. However, landlords enjoy two other advantages that make their repayments cheaper: interest-only mortgages and funding for lending. Launched last year, this scheme is much less well known than help to buy but it has significantly reduced interest rates for landlords and buyers with significant deposits. Although it is meant to help small businesses, its real impact is indicated by its nickname: funding for landlords. Will one government subsidy counterbalance another?

5) It should help second steppers, freeing up a key part of the market. The plight of people who succeeded in becoming first-time buyers only to find that they cannot afford to move is widely seen as a key factor holding back the market as a whole. Help them to move, the argument runs, and it will free up properties for new first-timers. According to the latest survey by Lloyds Bank, their position has improved over the last year and they now have an average of 13 per cent of the average value of a second stepper home. However, the group of second steppers who arguably most need help – those with a poor mortgage arrears or credit record – will not be eligible for help to buy 2.

6) Second homeowners and buy to let landlords will not be able to benefit. The scheme rules make clear that the loan guaranteed cannot be a buy to let mortgage and loans will cease to be eligible for the scheme if the borrower grants a tenancy or lease to someone else. In addition, Help to Buy 2 borrowers will have to sign a declaration that they do not have an interest in any other property and that none of the additional funds will be used to buy an interest in other property. In addition the loan cannot be a buy-to-let mortgage. However, there are exemptions for service personnel posted elsewhere, for people renting out their home as part of mortgage forebearance or because they have to move for employment reasons, and where there is a family bereavement or relationship breakdown. All of those sound perfectly sensible but how many help to buy homes will end up being rented out?

So all six of the stated reasons for help to buy 2 have some things going for them but, to varying extents, more against. That leaves two more arguments that are probably the strongest as far as the government is concerned but which for obvious reasons go unstated:

7) It will provide an economic stimulus and Treasury windfall. Boosting housing market transactions is a good way of getting the economy as a whole moving because of all they furniture and white goods movers will need to buy for their new home. The government will make money directly from rising stamp duty receipts and indirectly from up to  £1.2 billion in help to buy fees (as Robert Peston pointed out this morning, though the government says it is not meant to make a profit) and from increases in the value of the government’s holdings in RBS and Lloyds as the housing market picks up. A stimulus financed by government borrowing may have been out of the question but one financed by borrowing by other people guaranteed by the government is a completely different matter. And, with any luck, it will all be happening in time for spring 2015 when…

8) It should be worth lots of extra votes at the next election. Mr Cameron and Mr Osborne have made great play of the link between help to buy and their narrative of ‘a land of opportunity’ and the older Tory theme of ‘home owning democracy’. Most people will not benefit but grateful first-time buyers who got on the ladder and existing owners who see the value of their home rise could generate vital votes at the next election. As for the dire warnings about boom and bust and what happens when the scheme ends in 2016, who cares? (But see 1 above). 

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