In today’s harsh economic climate, the prospect of purchasing a new property is a daunting one indeed.Gone are the days when the bank was willing to dispense money around to absolutely anyone who wanted to hop onto the property ladder. Nowadays, acquiring a new house for a first time buyer is dramatically more difficult, and this is accentuated by the increasing prices that have to be put down for deposits. This has resulted in the farcical reality that many people have been unable to purchase their desired property, even though they can afford to make the required monthly mortgage repayments.
Statistics from the government have indicated that there have been far fewer first time buyers in recent times and in 2012 there were 40 per cent fewer first-time buyers than in 2007.
Introduce the Coalitions new ‘help to buy scheme’ that is intended to augment first time buyer’s capacity to enter into the property market, as well as improving the likelihood of all applicants having their accepted.
The scheme is two pronged and attempts to address property market problems by reducing amounts consumers need to have for deposits and increasing the likelihood of mortgage applications being accepted.
The Equity Loan scheme is intended to enable prospective house owners to enter the property market by allowing them to borrow up to 20% of a new build home, interest free for a period of 5 years. They will have to be able to pay the 5% deposit required to obtain the house and will still be required to acquire a mortgage to address the other 75% that needs to be paid.
After the initial interest fee period comes to an end, you will have to pay interest totalling 1.75 of the amount you borrowed from the government and this will get higher with every year that passes. Moreover, you will still be required to pay your mortgage back concurrently.
The Mortgage Guarantee Scheme will enable first time buyers and other consumers to only have to pay a 5% deposit on any property they intend to buy up to the value of £600,000. Essentially you can acquire 95% of the property’s value to pay for it from a mortgage provider. The government then guarantees mortgages for anyone who is borrowing over 80% of the house value. So if you have a 90% mortgage the government would guarantee 5% of it to the provider if you go into default.
This is intended to encourage lenders to provide more because they are not risking as much with offering small deposits.
When asked about his motives for the scheme, the Prime Minister David Cameron told BBC’s Andrew Marr show the market was “recovering from a very low base” and that first-time buyers ‘needed help to get on the housing ladder’.
He added: “If we don’t do this it will only be people with rich parents to help them who can get on the housing ladder – that is not fair, it is not right.”
Let us put aside the political ramifications of the scheme, the agenda, and concentrate on the most important question for the general public; how will it actually benefit me?
On the surface, this sounds like just what the country requires doesn’t it? More affordable deposit prices, lower requirements to acquire a mortgage and a greater chance of having a house when you are young .However on closer examination, you begin to question how necessary the scheme actually is and whether its pre-supposed impact will actually be as effective as first thought.
Bank of England statistics have illustrated that the number of mortgages being approved by loan provider’s totals 62,226 and this represents a huge increase of 30% from the previous year.
Furthermore, recent data has indicated that approval rates for mortgages are actually higher now than they have been in the past five years, and this is applicable to first time buyers as well.
This raises the question whether the scheme is actually set to change the property landscape as much as it has been heralded to do so, and has provoked some more radical corners to suggest that it could be more detrimental than helpful in the future.
The primary criticism that has been raised is that the scheme will actually lead to property prices rising. This is because by increasing the likelihood of acquiring a mortgage without increasing the amount of property available in the market, you are risking a property shortage. This in turn will push property prices up, which is essentially producing results that are counter-productive to the government’s aims.
You only have to look back in history to appreciate the legitimacy of these claims. A key feature of the New Labour government from 1997 was to make houses more available to the electorate, and this culminated with mass house inflation. The danger is that people will be encouraged to purchase houses that they simply cannot afford, and will accumulate mass debt that they expect the government to bail them out of.
The real problem then it seems is that houses are currently overvalued and that more measures should be taken to reduce these prices, rather than increasing people’s ability to purchase property’s that should cost a lot less. If the government invested more money into house building, and restoring property prices to a normal level then surely this would be more beneficial in the long term for the general public.
When asked about this issue, the National Housing Federation chief executive David Orr said:
“We are building less than half the homes a year we need to meet demand, while millions of families are priced out of the housing market and struggle to keep on top of their rents,”.
This claim is reinforced by the fact that building completions dropped by 9% in the 12 months to June 2013, according to the Office for National Statistics.
This suggests that the long term implications of the scheme could be severely damaging and plague future governments in charge. Essentially, when the economy eventually improves, mortgage rates will start to rise. This will eventually culminate in a period where the deposit for a 95% mortgage will be unobtainable for the average person.
It is undoubted that there is a deep lying, social problem with property purchase within the UK, and measures should be taken to address this. However, improving first time buyer’s capacity to purchase property can be done in a number of ways. By concentrating money on more property being built, or encouraging people to invest in house building, you are staking to restore property values to their pre-inflated values. This will enable younger people to be able to buy without having to become government dependent and severely indebted.
By increasing people’s ability to acquire a mortgage by reducing deposit requirements, you are essentially encouraging people to purchase property irrespective of whether they have the necessary finances to do so. Moreover, as the demand increases, the amount of property available will decrease, and this could lead to an inflation in house prices and possible even a housing ‘bubble’. This would make it even more difficult to acquire a house for a first time buyer. Moreover, as mortgage rates increase, the less affordable even a deposit will be, even on 95% mortgages.
And in times of such economic instability, any course of action that risks a reversion to problems that plagued the recession surely requires further scrutiny and discussion before being implemented.