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.
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.
Lenders will have been keen to assess the individual transaction and cumulative costs of the guarantee. The government has introduced a sliding scale depending on whether the loan is at 80 per cent or up to 95 per cent LTV. My suspicion is that lenders in the scheme will tend towards the lower end of the spectrum, and lower premium costs, so the practical effect may not in fact be to open the market up to all deposit-constrained first-time buyers.
The publicity surrounding a major government initiative has unleashed substantial pent-up demand among potential borrowers. However it will not be matched by new housing supply or a substantial increase in the number of properties put on the market for sale. Competition between prospective first-time buyers and buy-to-let landlords will continue to be for a (too) small pool of properties. This will push the price of those properties up. Any benefit of the guarantee will be undermined by having to overpay for the new home. While a ‘bubble’ does not exist today, pressures will build up further, and potentially very quickly, in some regions.
I suggest that the government should take action now by changing the terms of the scheme in the London and southeast regions. As these are the high-risk areas, already facing accelerating average house prices, properties in these regions should either be excluded from Help to Buy 2 in its first year, or the £600,000 limit should only be applicable in the case of purchases of new-build properties. In this way the government would lessen the risks of local markets overheating further, enable it to focus more support in other regions where the scheme is most needed, and would be seen to take decisive action to correct scheme criteria now rather than waiting for a intervention by the Financial Policy Committee in 2014.
I was struck that the chief executive of Lloyds Bank, who has described the scheme as a “game changer”, has more recently expressed concerns about the market effect if housing supply is not accelerated to match new borrower demand.
Finally there is one group for whom the mortgage guarantee could provide a lifeline: second-steppers who have been imprisoned in their homes as a result of past house prices falls. In 2012 Lloyds TSB launched a second-stepper annual report to track the plight of first-time sellers. At that time the lender suggested second-steppers were hardest hit by a subdued housing market. In its fourth Homemovers Review in August 2013, Lloyds TSB commented that the market was flat due to the ongoing lack of equity.
Theoretically Help to Buy 2 could provide a lifeline for this group. If house prices increase across all regions, this will reverse the equity losses and negative equity positions of buyers who bought at the height of the market between 2005 and 2008. In the next 12 months it will be interesting to see whether the primary buyers using the scheme are entering the market for the first time or are first movers. If the former, I suggest the likely effect will be higher house prices. If the latter, the effect would be to improve market fluidity. So if we must have Help to Buy 2, should the government incentivise lenders to transact business with movers rather than first-time buyers?
Michael Coogan is chairman of Shaping Tomorrow, strategic adviser for Loans Warehouse and past director general of the Council of Mortgage Lenders.
Key Points
The Help to Buy 2 policy creates market risks, not simply some market opportunities for aspirational first-time buyers and home movers.
The publicity surrounding a major government initiative has unleashed substantial pent-up demand among potential borrowers.
While a ‘bubble’ does not exist today, pressures will build up further, and potentially very quickly, in some regions
