Help to Buy – will it cause another boom… and bust?

help to buy mortgagesRunning a mortgage broking practice is somewhat on the front line when it comes to the housing market. People often come to us to find out how much they can afford and what it is going to cost before seriously looking to buy their first home, or move to another home. And as such, in the last 14 years I have seen considerable change in the industry.

Many people say that the housing market is the place to go to see any up-turn in the economy. That when we see the housing market move and everything else follows. I don’t wholly agree. The housing market is one of many avenues, most of which need to be moving to identify a true up-turn. It is the combined results which evidence the direction of the economy. The house market is emphasised as a significant ‘yard stick’ as it is the one most evident to the everyday householder. When industry moves or when manufacturing or exports grow, it is noticed by the business community in the main, but it does not mean as much to the average home-owner sat at home watching news at 10. That is one key reason why the house market comes under scrutiny. Accepted, more houses sold means more money spent in the market place and more houses being built results in more jobs.

So the housing market is key, not because it is the primary driver as some would believe, but because it is the one area most people can associate with and understand. When the housing market starts to move, there is confidence in the market right at grass roots.

Since 2007, we have seen various lame attempts by the government to get things going. Labour allowed a couple of years of stamp duty relief to first time buyers, which had little impact on the market as it did not deal with the problem of affording a mortgage or having a big enough deposit. Why did it have little impact? Simply because the stamp duty level was £125,000 which meant that relief was given between £125,000 and £250,000 on the scheme. Houses in many areas of the north and Wales that would be typical first time purchases would be under £125,000 and in the city, finding a property under £250,000 is a challenge. So a small middle band saved with this Labour scheme. But at the time they needed typically a £31,250 to buy at £125,000 and yet the government claimed they were doing something by allowing the first time buyer £1,250 off. How ridiculous. If a first time buyer could save £31,250, what difference does another £1,250 make? The people who were buying at time were buying anyway. All the government did was extend austerity by allowing those buys a bit a tax relief.

On the other hand however, the Funding for Lending Scheme (FLS) has had a significant impact. It has opened the door to more borrowing and at a lower cost. It has also brought back into the marker some of the quirkier lenders who lend mainly in the Buy to Let arena such as Kensington who are owned by Investec. In simple terms it to buy mortgages

And Help to Buy is another positive step. Unlike the aimless token of offering free stamp duty to those who could afford it anyway, it offers a solution. Help with the deposit, giving people the opportunity to buy.

Will this radically change the market? Will it make house price inflation through the roof? If you listen to the opposition it will. I’m amazed. I’m even more amazed at some housing professionals who are saying exactly the same thing. Although, from the latter, it is usually those who have a course or consultancy to sell and that is why they make such claims.

Consider the view of the mortgage lenders. Even if the government will lend a deposit, the mortgage lenders won’t lend to someone who has proven they don’t keep their credit commitments in order. Help to Buy is not the return of sub-prime lending. It is not the return of 125% mortgages either. It is not making it too easy, just easier. It is not proposing recklessness, but to create more opportunity. Why does the opposition want to stifle opportunity? Their claim that the Help to Buy will create uncontrollable house price inflation is a wild as their claim at the point of campaigning for power in the 1990’s – ‘no more boom and bust’ they promised.

Social pressure is another ingredient to the current and future market. Not so long ago, parents put pressure on their adult children to get on the housing ladder. They encouraged that start which brought first time buyers who in turn kept the rest of the market turning. However, we have a generation of renters. A whole generation who have not, and will not, have the social pressure from parents and friends to buy a house as they have been acclimatised by the last 6 years of hardship. They believe the fallacy that lenders don’t lend and they have no ambition to own a home. For these people, renting is a way of life. Help to Buy or no Help to Buy. Combine this with the lack of appetite for sub-prime mortgages by lenders and we have a large proportion of the market that simply won’t be part of Help to Buy. Very different to the years when virtually anyone could get a mortgage and didn’t need a deposit either.

So let’s be realistic. Will it improve the market? The answer has to be yes. But will it cause house price inflation? The answer is yes again, in some areas it will. But in many parts of the UK house prices are still decreasing; and that is an important counter-balance to keep in mind. London will always be a niche market which is evidentially increases now with or without Help to Buy.

Therefore, without sub-prime mortgages, without 125% loan to value and with reduced ambition to own a home, Help to Buy won’t send demand soaring, it is going to mean those who deserve a home, those who can  handle credit properly and who work hard can borrow some of the deposit the lenders now want. They can get a home, and why not?

Call Harvey Bowes today to discuss your mortgage requirements: 029 20 676 716

Howard Bowes, managing director, Harvey Bowes Limited