On 20 March 2013, the UK Government announced the introduction of a new scheme - Help to Buy, to assist British Nationals or residents who want to get on or move up the property ladder.
Since the Global Financial Crisis (GFC), UK banks have generally been unwilling to extend lending to buyers with small deposits. While buyers with larger deposits of between 25% to 40% have been able to access relatively cheap and a wide range of loan products, those with 5% deposits have had to contend with largely expensive products.
For example, a typical three-year fixed rate mortgage for a person with a 25% deposit costs around 2.5%, while a buyer with a 5% deposit could pay a rate of just over 6%. With the average price of a property in London now higher than at the 2007 peak, it has become increasingly difficult for the average Londoner to save a sufficient deposit to purchase a property at an affordable interest rate.
What is Help to Buy?
While full details of the scheme have yet to be made known, it has been announced that the Help to Buy scheme will be limited to properties with a value of up to £600,000, and will consist of two parts.
The first is a loan up to 20% for purchasing newly build homes, with £3.5 billon in funding available from 1 April 2013. A buyer with a 5% deposit will be able to borrow 20% of the purchase price from the Government, interest-free for five years. The loan, plus charges, is repaid when the property is sold or at the end of the mortgage term. If the property is sold, borrowers repay the Government by giving them back 20% of the sale price of their home.
The other is a mortgage guarantee for purchasing existing homes, available from January 2014. The government will make available £12 billion of guarantees to lenders who offer mortgages to people with a deposit of between 5% and 20%. The Government has said this amount should be sufficient to support £130 billion of high loan-to-value mortgages, thereby increasing the availability of mortgages on existing properties for those with small deposits.
UK property prices set to increase
While prices in London have remained strong post-GFC, it is our view that price increases will be even more robust in London over the next several years as a result of this Government stimulation.
The scheme is being introduced to help those with small deposits onto the property ladder. Unlike previous housing assistance schemes, there is no limit on how much the buyer earns, which opens up funding to many more people. We believe the scheme will significantly push up demand, but only marginally increase supply.
JP Morgan has estimated that there are 1 million first-time buyers who have been unable to buy since the GFC because of constrained mortgage market conditions. The broker has told clients “Of those if even half find funding and attempt to buy over the next three years, we would see a 27% increase in housing demand.”
While the Government is attempting to tackle the problem of “generation rent”, those who are effectively locked out of the property market, at the heart of the issue is supply. There is limited housing stock in London which keeps prices strong, even in economic downturns. The lack of stock in London is not that house builders are unwilling to build; rather constraints are largely due to the UK’s strict planning laws and, to a lesser degree, the number of available sites on which to build in London. JP Morgan forecasts London house price inflation accelerating from the current 10% level, in 2015 and 2016.
As with any asset purchase, there is a first-mover advantage to be had; the earlier one makes a purchase from when the Help to Buy scheme is launched, the better one will be placed to take advantage of price rises. We are aware of some developers who have recently pulled unsold developments off the market. They are, presumably, waiting for clarity on, and implementation of, the Help to Buy scheme to re-price some of these developments upwards. Our view is that further upward re-pricing will take place as more people start accessing the scheme for funding.
While the cap on financial assistance by the Government is £600,000, we believe that prices above the cap will be pushed up by the increased demand at the £600,000 and below mark. Expectation often becomes reality, and if house builders and house owners expect that property prices will rise, property prices at the sub-£600,000 level will soon start rising, putting upward pressure on property prices further up the chain.
Regional Market Director (UK & Europe)
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