Mortgages  

Testing the waters

In a dysfunctional market it is vital for developers and lenders to work together to reverse the downward trend in new housing and the involvement of government has started to build some momentum and market confidence this year. There is a long way to go but this scheme has helped to increase transactions in the market and made a modest contribution to the government’s growth agenda.

So why should Help to Buy 2 – a government backed mortgage guarantee – be a step too far? The answer to the question will depend on the eventual impact the scheme has in practice. However, like a series of other critical commentators, I believe the policy creates market risks, not simply some market opportunities for aspirational first-time buyers and home movers.

We have a market where Funding for Lending has already improved flows of credit to borrowers. First-time buyer numbers have been increasing, as has gross lending year-on-year. The Office for National Statistics reported recently that average house prices were now at the highest level ever, exceeding average prices seen in 2008.

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This overall record figure is driven by the London and southeast regions, and is not a true reflection of all of the housing markets across the UK. It is therefore not a sign of a house price ‘bubble’ today. However it is equally clear that, without further government intervention, transactions and lending would have continued to grow in 2013 and 2014 as the market comes out of a stagnant period. This would have been as a result of increased new-build commitments by developers with renewed confidence that funds will be available to buy their properties. It would have also been reinforced by more competition between lenders to offer a wider range of mortgage products, at higher loan-to-values, and at lower monthly cost.

However the government wants to be ‘popular’ in a crucial pre-general election period, and believes there are votes to be gained by supporting aspirational borrowers (I am not sure that this will in fact be the effect). Help to Buy 2 enables first-time buyers and movers to put down a 5 per cent deposit on properties worth up to £600,000, and lenders in the scheme will offer a mortgage for the remainder, backed by the taxpayer if a problem arises and the lender does not get its money back.

Why would lenders participate in the scheme? There are several different factors that will have driven the decision of some of our largest banks to support the scheme, and equally influenced other lenders not to announce an intention to participate so far.

Some banks have to be seen to be supportive and would be criticised if they did not join. But remember that membership of the scheme does not have to extend to offering the best financial terms, so the Help to Buy products of these banks may have an uncompetitive mortgage rate compared to other products in the market. In fact the effect in practice may simply be to substitute higher LTV loans with a government guarantee for similar loans that would have been granted anyway on a self-insured basis.

Some lenders would have been waiting to see the level of capital relief available to participants in the scheme and taken the view that this now makes it economic to offer more high LTV products again. However, as announced recently by Genworth, private mortgage guarantees will also benefit from similar capital treatment by the regulator. So each lender will have to assess whether the increased administrative burden of reporting to the government on Help to Buy 2 is worthwhile. I suspect that many lenders that already have private insurance in place will see few compelling reasons to change, and may find the private market is more flexible to deal with niche and other high-risk products.