The Devil may be in the detail on ‘Help to buy’

By Noel Meredith, Director at United Trust Bank and Head of Development Finance

In mid-March the CML reported that January had been the best start to a year since January 2008 for house purchase lending. The value of mortgages advanced was £5.7bn, 11% higher than January 2012’s £5.2bn, and despite the seasonal dip from December’s total of £6.9bn, sentiment appeared to be optimistic. The most significant improvement was in what is arguably the most important sector of the market, first time buyers (FTBs). The total number of house purchase loans advanced to FTBs in January this year was 15,900, 24% more than in January 2012, and for the third month in a row FTB activity accounted for 42% of all house purchase loans. Could we be starting to see those fabled green shoots of recovery in the residential property market?

Less than a week later and the CML reported that February’s gross mortgage lending figures were likely to be just 1% higher than in February 2012. CML Chief Economist Bob Pannell observed that “the underlying position does not appear to have changed much over recent months”. He’s right. Leaving aside some regional hotspots, most notably London and the South-East, the residential property market in the rest of the UK remains almost stagnant.

A key contributing factor can be found amongst the CML’s other data. In January this year the average loan to value ratio for FTB lending was 80%, a figure which remains unchanged for over two years. According to the ONS, the average price paid for a house by a first-time buyer in January was £175,000 requiring therefore an average deposit of around £35,000. Now of course this is an average figure and I’m sure there are areas where FTBs can pick up their first home for half that amount of money, but they’ll still need to find a £17,500 deposit. No small sum by most people’s standards. Activity in the FTB sector may be increasing but it’s not enough to kick-start the market.

Enter George Osborne and his red leather briefcase. The ‘Help to buy’ initiatives he announced in his recent budget may be cause for some celebration between developers, first time buyers and those wanting to move but trapped by low equity. Through guarantees for first time buyer loans and shared equity loans with zero interest, these initiatives are designed to put house purchase within the reach of many stuck in the rental market or in an unsuitable home bought when personal circumstances were different.  I broadly welcome any scheme which addresses the very real problem of the high percentage deposits required by mortgage lenders.

What remains to be seen however, is the attitude of the mortgage lenders.  Will they still be requiring ‘gold plated’ borrowers or will they be prepared to accept borrowers with a less than perfect credit history.  Also unknown is how the banks and their regulator will assess affordability.  Clearly the shared equity interest free loan for 5 years is a real benefit and could put housing within the reach of those with little savings.  But what happens at the end of the 5 years and what assumptions about future costs will be built into affordability models used by the lenders and the Regulator?

Demand side initiatives are the best way forward, and if applied pragmatically these may inject some new life into a moribund housing market outside of London and the South East.  Ultimately liquidity is generated by demand from first time buyers and this has been missing for some time now. However, as always with Government schemes, the big test will be whether the terms are simple enough and the guarantees and shared equity loans widely available enough to help the many thousands of people caught in the rental / low equity trap.  Previous shared equity initiatives have been limited to housing produced by large developers and have made little impact on the wider market.  First impressions are that the newly announced schemes will be more widely available.  The Devil may still be in the detail and we should perhaps hold off popping the champagne corks until the full terms and limitations of Mr Osborne’s proposals emerge.