The Government can introduce as many incentive schemes as they like, such as help to buy, however although undoubtedly some will benefit in the short term (and good luck to them!), the reality is that many more will suffer in the long term
First time buyers are always faced with the dilemma of deciding when the ‘optimum’ time to enter the property market actually is. As house prices in the UK have increased significantly over the last thirty years or so, the ability to take this first step is often tempered with the reality of having to save for a large deposit. Without any equity to fall back on first time buyers must despair when they see house prices starting to increase, and proportionally the amount they will need to save for a deposit will increase with it. The result of the significant increase in UK house prices over the last 30 years is that average house prices have increased from £25,580 in 1982 to £167,294 in Q2 2013 (Nationwide 2012) With many lenders now requiring a deposit of around 20% it is not difficult to see why so many first time buyers are struggling to enter the market.
Last month (06th September 2013), www.thisismoney.co.uk summarised the outlook for the UK property market:
‘House prices are back on the up. Fuelled by cheap mortgages and the Government plugging its deposit-boosting Help to Buy scheme, the property market has swung back into growth. Since January, cheaper mortgages from Funding for Lending have begun to filter through, Chancellor George Osborne nailed his flag firmly to the property market mast, and a chunk of Britain's home buyers appear to have decided they have had enough of sitting on their hands. Transactions still remain well below the long-term average rate seen before the 2007 property market peak, but both they and prices are on the up’
This could be interpreted as either good or bad news depending upon where you are on the property ladder. For developers this is good news as increasing house prices will in most cases result in increased margins. This is demonstrated starkly by the buy to let market where the Council of Mortgage Lenders have reported strong growth over the last few months:
‘15,200 buy to let (BTL) loans were advanced in July, an increase of 12% compared to June. This represents a value of £2bn which was 11% higher than in June. Lending for BTL house purchase was up 7% in July compared to June, a total of 7,600 loans. The value of these loans was £900m, up 13% from June. There was strong growth in BTL remortgage lending which increased by 24% in July compared to June, a value of £1.1bn. This equated to 7,200 loans in July for BTL remortgage in total, an increase by 13.4% on June 2013’
This however is of no benefit to the first time buyer. In fact, factors such as buy to let investors, disproportionate house prices increases in certain parts of the country, particularly London and the South East and in particular a general lack of supply of affordable first time houses all help to contribute to a big slap in the face for those looking to invest in the property market for the first time.
The Government will no doubt argue that their help to buy scheme will alleviate some of these problems and provide easier access to the housing market for those who may not have previously been able to enter. As a short term measure there is little doubt that the help to buy scheme will bring more first time buyers to the market, in fact this is already happening. There is however one fundamental flaw in the scheme. House prices are determined by the market. Whether we like it or not basic economic principles such as demand and supply will always determine the price level. This is true of all markets, not just the housing market. The problem we have in the UK, one which we have had for many years, is that we just do not have enough houses. With a restricted supply and high demand the market will naturally re-adjust, resulting in increasing house prices. Unless we construct more new houses and quickly, there will come a point where all of these house prices levels could become out of control. Incentivising, large numbers of first time buyers and new investors into a market which already has a restricted supply is not the answer. Surely, the UK Government must see that investing in large scale housing development is the only real way of dealing with the housing shortage and controlling house prices.
I am lucky enough to have been on the property ladder for many years. If I were looking at entering the property market for the first time, I would definitely utilise the help to buy scheme while it is available. As a first time buyer my priority would be to get on the property ladder as soon as possible and I would (selfishly) not be worried about what will happen to the property market afterwards, because I am then highly likely to be generating equity over the next few years. The property market is a different place for those who are already on the ladder. The Government can introduce as many incentive schemes as they like, such as help to buy, however although undoubtedly some will benefit in the short term (and good luck to them!), the reality is that many more will suffer in the long term. Long term sustainable housing policies are needed urgently, rather than short term (and short sighted), policies, designed to try and win votes rather than solve the real problems!
The Help to Buy Scheme explained
Below I offer a summary of the help to buy scheme, which I have taken from one of my earlier posts:
The first part of the initiative builds on the existing ‘first buy’ shared equity scheme for which the Government have allocated £3.5 billion for those who want to purchase a new house up to a maximum value of £600,000. The second part, in simple terms, will see the Government act as guarantor for a percentage of the lender’s debt. The difference with this new scheme is that the previous cap of a maximum £60,000 income has been removed. The new scheme is also being made available to existing homeowners, whereas the ‘first buy’, scheme was only available to first time buyers.
In order to use the first part of the scheme borrowers will first need to save a deposit of 5% of the value of the property they want to purchase. They will then be able to apply for an interest free loan for a further 20% of the value of the property, to a maximum loan value of £120,000. Repayment of the loan will then be made when the property is eventually sold. After five years the loan will start to attract what the government call a ‘fee’, which is basically interest at a rate 1.75% which will increase annually thereafter by the current Retail Price Index inflation plus 1%. The loan is therefore interest free, but you need to read the small print to see that this only applies for five years. Borrowers can access the scheme from 1 April 2013 which is proposed to run for three years.
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