One thing that always rings true about the housing market is there is always something changing.
Recently we saw the introduction of the stamp duty holiday helping feed the huge surge in house buying, and now the Government have followed that up with an announcement to help first time buyers.
At OPG we have been looking at what that could mean for home buyers, the impact on the market, and how the plans could work and keep the market moving when the Bank of England are saying we are facing one of the worst periods of economic uncertainty in history.
It is true to say that over the course of 2020 the range of mortgages available to first time buyers has reduced dramatically, some even say it’s dried up completely. So, on the back of the stamp duty holiday what have the Government now said about helping first time buyers.
The Government says its research indicates that there are in the region of two million prospective first time buyers who could afford to make the mortgage repayments but are not in a position to put down the initial deposit. It believes that by providing easier access to more low-deposit home loans they could fuel “the biggest expansion of home ownership since the 1980’s”, that in itself is quite a statement and brave objective to set.
The Prime Minister further went on to say that he aims to change “generation rent into generation buy” but what would that mean for the mortgage market and what challenges would if create for these new homeowners.
Moving to a position where 5% deposits for first time buyers would open up the marketplace to a huge number of individuals who would have thought that homeownership was financially beyond them. Whilst this would be a welcome relief to would be homeowners it brings much bigger challenges to the financial services sector.
It’s no surprise that many are already commenting that risky lending in the 2000’s was the major contributing factor of the 2008 financial crisis. Nobody wants that on the back of the current pandemic so control measures and affordability checks are sure to be a significant factor as banks and mortgage lenders get their heads around how they deliver against the Government’s pledge.
With many lenders offering mortgages with very small deposits, or even higher that the property value in the early 2000’s regulations were put in place following the 2008 crash to take risk out of the financial system. These regulations would have to be reversed to help young people onto the housing ladder, its frightening to know that the number of UK renters increased from 2.8 million in 2007 to 4.5 million in 2017.
The move to low deposit 95% mortgages also comes with its risks if the housing market takes a nose dive. As OPG commented in its last update the property market is in a significant upturn at the moment with prices rising across the board, but experts are predicting a 14% drop in prices over 2021.
At the end of the stamp duty holiday the market could go into decline, with a 95% mortgage that could create negative equity, where you owe more that the house is worth. A sobering thought for many potential purchasers, with the average first time buyer house price in England at around £220k you only need a deposit of £11k on a 95% mortgage. With most current mortgage lenders wanting a minimum of 15% or £33k you can see the financial advantages to the would be buyer, but also the risk of a drop in price.
The other challenge to the Government’s objective is the supply of houses themselves. Whilst we are seeing huge swathes of the countryside turned over to new housing development the building of millions of new homes is no small feet and, while planning legislation is being relaxed to make this happen, it still all takes time.
Currently there is very little detail of how the proposals would work in practice or confirmation on whether the Government would underwrite the mortgages, which in itself would be a major financial commitment at a time of already increased financial pressure on the country purse.
Faisal Islam, the BBC’s Economics Editor, tweeted: ‘If its two million people, & average size of a first time buyer mortgage is £185,300 – and market currently serving 75% LTV and below with cheap rates, but not 95% – back of the envelope, that’s several tens of billions of guarantees to cover possible losses.’
Would lenders really want to take on this additional risk at a time of great economic uncertainty, difficult to tell without the support of Government but necessary if we are to see the market truly opened up.
So the motivation is clearly there, the desire to fuel the housing market and provide home ownership to current renters and take the pressure off the bank of mum and dad is a great statement, the detail of how to make it work, reduce the risk of exposure to the banks, and deliver the houses to make it happen are the details that now have to be delivered upon.
The impact of these new changes in the market, and the provision of financial support for first time buyers, will take some time to wash through.
Open Property Group, a specialist house buying company, will continue to review the market and provide our insight and our opinion of what we see, one thing you can be certain of is that the next six months could be as dynamic and fast moving as the last six.
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