SET BACK FOR NEWBUY SCHEME
by Daniel Pike, March 30th, 2012
My previous blog, which focussed on the prospects for further supportive measures for the housing market, predicted the chancellor was unlikely to introduce any significant giveaways in the budget and Mr Osborne didn’t disappoint. In fact, arguably the most significant change for the housing market was a planned increase in Stamp Duty Land Tax for properties worth more than £2,000,000.00, hardly something that will have estate agents rushing into their local Mercedes dealerships.
But if the coalition was banking on the success of the “NewBuy” scheme and a new stream lined planning process to form the bedrock of a sustained house building boom then the headlines in the media over the last couple of days will have made for difficult reading.
First, the government has been forced to compromise on its flagship planning reforms in the face of stiff and well organised opposition from environmental lobbies and now it appears its high profile scheme designed to revitalise the housing market is in disarray, as mortgage lenders have failed to support it.
The Daily Telegraph reported on Thursday that crisis meetings have been taking place between the Treasury, the Home Buyer’s Federation and the Council of Mortgage Lenders to work out these problems.The main difficulty, it would seem, is with the Lenders and their requirements governing the eligibility of building companies. Although seven major builders are already on board the Lenders are still deliberating about the rules of entry for smaller builders. These are being presented as teething problems, but this will be little consolation for buyers desperately trying to get a foothold on the housing ladder.
The NewBuy scheme was officially launched on 12 March but has been a long time in the making and some will wonder why these problems were not thrashed out beforehand. The government had hoped that the scheme would provide a welcome boost to the housing market by providing 95% loan-to-value mortgages of up to £500,000.00 on new build properties, guaranteed by the builder and the state. It was also claimed that the “NewBuy” initiative would help create up to 50,000 jobs.
The news of this set back comes close on the heels of an announcement by construction firm Balfour Beatty that it has notified all 12,000 of its UK construction services staff that their jobs are at risk.
Sceptics remain unconvinced bythe NewBuy scheme and have questioned whether complex schemes involving highly leveraged products arenot the sort of “quick-fix”the wider economy could do without, especially with the fall-out from the credit crunch and unravelling of complicated financial instruments still fresh in our minds.
No one can argue that there is a housing shortage in the UK but it remains unclear whether a building boom built on subsidised mortgages is really the solution.
By Daniel Pike
The first time buyer has become an endangered species
by Daniel Pike, January 20th, 2012
With the Christmas period behind us, the economic backdrop to the upcoming budget statement on 21 March promises to be a challenging one. With the Stamp Duty Land Tax exemption for first time buyers due to expire on 24 March 2012, the housing market, which has been remarkably resilient given the scale of the international credit crisis and the difficulties in the Eurozone, is showing renewed signs of weakness. What price a helping hand from the Chancellor this March?
The property market is never far from the minds of editors from certain quarters of the tabloid press and when they are not busy dodging googlies from Robert Jay QC, we can be sure they will be scanning the raft of latest statistics from HM Land Registry, Rightmove et al. as inspiration for an attention grabbing headline ahead of the Chancellor’s statement. Tabloid headlines have a habit of focussing political minds and recent statistics paint a picture of a struggling market.
The numbers of completed transactions remain well down on 2007,when, at the zenith of the property market, Stamp Duty Land Tax receipts garnered the Treasury a useful £6.5 billion and despite a general respite through 2011, the number of new mortgage applications made in December 2012 (a key indicator of housing market activity),fell by around 43% compared with the previous month.
In addition, amidst the continuing Eurozone uncertainties there are fresh signs that lenders are becoming more selective in their lending criteria. Although mortgages are generally more affordable than in the immediate aftermath of the credit freeze in 2008/2009, the very lowest mortgage interest rates are still the preserve of those fortunate few who are able to muster a 25- 30% deposit. Add to that weaker than anticipated employment and GDP figures and the auguries look rather grim, at least for the immediate future.
How does the government fix the problem and should it even try to intervene, assuming it has the necessary levers at its disposal?
The key and increasingly illusive player in the property market, the first time buyer has become an endangered species in recent years. Their continuing existence owes much to the broad shoulders or deep pockets of the baby boom generation, or if you prefer, the Bank of Mum and Dad, Auntie, Uncle, Grandfather or Grandmother. How long they can continue to carry this load in the face of chill economic headwinds remains open to question.
Another underlying and inconvenient truth is the extent to which the property market is used a default repositoryfor private pensionsand the distorting effects this has on the market as a whole. Buy to Let Loans increased by 16% in the third quarter of 2011 but the inexorable logic of supply and demand means that theresurgent buy-to-let sector comes at a price. With data from the Office of National Statistics showing the construction sector shrinking on an annualised basis in the last three months of 2011, the increasing appetite of buy to let buyersmeans the stock of potential properties for first time buyers is unlikely to increase any time soon.
Perhaps it was the combination of all these factors that prompted the coalition government to announce plans in November 2011 to introduce a mortgage indemnity scheme for new build properties. The scheme allows borrowers to purchase a property with only a 5% deposit and through a mixture of an initial financial contribution from the developer and a government backed guarantee the initiative is designed not only to help first time buyers gain a foothold on the property ladder, but to incentivise developers to get on with the business of building new homes, whilst at the same time providing some helpful balance sheet protection for the mortgage lender. Further supply side reforms including streamlining the planning process are promised and it will be interesting to see the impact these changes have as the parliamentary term enters its third year.
But beyond this the Chancellor may be content to let market forces take effect. If house prices follow a gentle path downwards- and even the most cautious commentators are only predicting relatively modest falls in house prices (Capital Economics predicts a 5% decline in 2012 and 2013) – this may not be judged by Mr Osborne as an altogether bad outcome and this improved affordability may itself negate the need for any further intervention.
And in the meantime, if the Chancellor is looking forfurther reasons to be cheerful he could console himself with the following crumbs of comfort. Firstly,there have of late, been some respectable trading figures emanating from some of the leading construction companies, most recently Barratt which posted a 40% rise in profits for the six months leading up to December 2011. Land purchased at the bottom of the market in 2008/2009 combined with a strategic focus on higher value propertieshas lead toimproved margins. Secondly the overall relative decline in new house building has acted as a break on catastrophic house price declines of the order witnessed in theUnited States and Spain. This, coupled with record low interest rates, further aided by falling inflation, has also helped prevent a cataclysmic fall in values and an uncontrolled spike in repossessions. This may not be much comfort for first time buyers but it does sweeten the pill for another key section of the electorate, the so called squeezed middle, whose support is likely to be crucial to all of the main parties in the run up to the next general election.
Underlying all this appears to be a general deeper (and some would argue belated) recognition across the political spectrum that a house should,once again be viewed once again as a place to live rather than as a quick and easy way of realising a large capital gain. Pronouncements about the need to increase the stock of affordable housing and rebalance the housing market so as to increase the share of rental properties indicates the political class wants the relationship with the housing market to be one based on the firmer foundations of long term price stability. Whether this rhetoric can break the seemingly indestructible spell held by the property market over the electorate remains to be seen.
By Daniel Pike