First time buyers should beware builders bearing gifts in the form of nearly £1bn subsidies for shared equity schemes. These will support house prices today but may not be reflected in sales achieved in future.
New figures from the House Builders Federation figures make sense from the point of view of housing stock providers but could prove a dangerous case of market manipulation and an expensive mistake for buyers at current prices.
These incentives to buy are a rational response to the mortgage famine, which followed the global credit crisis. Banks and building societies have lurched from one extreme to another, switching from absurdly lax 125pc loan to value (LTV) mortgages to demanding deposits of 30pc or more which few first time buyers can afford without the help of their parents.
Shared equity schemes are probably better value than the gimmicks they replace, such as the fitted kitchens and carpets that builders used to offer as inducements to shift over-priced stock. But, like any other part of the marketing budget, they must eventually be funded by the prices buyers pay.
So youngsters desperate to get onto the housing ladder had better remember that taking up these schemes today is a ‘geared play’ – or, in plain English, betting with borrowed money – that house prices will rise sufficiently in future to justify the artificially inflated price being asked today.
This would be a brave and possibly unwise decision in the week that further evidence emerged of how existing buyers are struggling with mortgage costs. Despite interest rates remaining frozen at historic levels, Financial Services Authority figures show that 300,000 households have switched from repayment mortgages worth a total of £60bn to an interest-only basis in the last three years.
The regulators are now considering restricting the availability of interest-only loans because of worries about how these debts will ever be repaid. Last year in this space I reported how more than half the mortgages granted during the previous four years would have been refused if new rules proposed by the regulators had applied then.
Nearly 4m homebuyers would have been frozen out of the housing market by restrictions on interest-only mortgages among other changes proposed by the FSA) according to calculations by the Council of Mortgage Lenders (CML). None of this sounds like a recipe for national average house prices rising much in the near future.
Against all that, the builders schemes can be seen as offering the opportunity of home ownership to a younger generation that their parents took for granted when credit was easily available. David Hollingworth of London & Country Mortgages said: “Developers have turned to creating their own schemes to try and help a sluggish market. Shared equity offers an alternative to first time buyers that find the current requirement for larger deposits hard to meet. Of course, they need to fully understand the terms of any such scheme as eventually the equity loan will need to be repaid.”
Similarly, Ray Boulger of mortgage brokers John Charcol said: “The reality is that housebuilders always allow a marketing margin in their sale prices, which in a difficult market can often be used to offer whatever incentive is most relevant to their customer.
“In the environment we have had since 2008 offering shared equity has been a critical sales tool for most high volume builders and will continue to be so until more 95pc LTV mortgage options become available.
“Therefore shared equity, where the borrower typically initially only needs a mortgage to cover 75pc or 80pc of the purchase price, and a deposit of 5pc, are still likely to remain attractive to buyers of new build homes.”
But a simpler and safer alternative – as pointed out in this space three years ago – would be to wait for house prices to fall further. Many homes are a fifth cheaper now than they were then.
Source: The Telegraph
By Ian Cowie