It’s not, for instance, as some think primarily a way to get first-time buyers (FTBs) on the housing ladder and it will not generate 100,000 “extra” new homes over the next three years.
It is in essence an allocation of the overall mortgage pot supported by an indemnity fund that is designed to provide high loan-to-value mortgages to buy new-build homes.
But while it will inevitably lead to less than the Government hype suggests, that doesn’t mean its impact will be piffling.
So, placing many important issues to one side, this blog aims to edge towards an answer to the burning question for the construction industry: how many extra new homes will be built as a result of this policy initiative?
Looking to the Government for an answer is silly. In truth, despite some of the rhetoric leaving ministers’ mouths, the Government itself recognises that it hasn’t a very complete idea how the scheme will impact on the market.
What is more shocking, to me at least, is that there is no available impact assessment from the communities department DCLG.
So, basically, we have an experiment. Any assessment I make will be at best an educated guess.
Let’s start with the basics. NewBuy will provide loans of up to 95% of the sale value on homes valued up to £500,000 to FTBs or existing home owners.
To cover the increased risk to the lender and reduce the amount of capital they would otherwise have to carry to cover that risk, participating house builders will put 3.5% of the sale price into a special indemnity insurance fund.
The majority of any losses that might occur from the sale will be covered from this pot. If the losses are greater, then the Government would cover those up to 5.5% of the sale price.
The scheme will be open for three years with the indemnity cover running on for a further seven years.
The arrangement is limited to up to £1 billion of potential losses to the Government. However the risk of a £1 billion loss is pretty slim, as it would presumably mean all the NewBuy mortgages defaulting within seven years and for all repossession sales being at least 9% below the loan value.
If that happened we’d nearly all be heading to economic hell in a handcart and a £1 billion loss would be of little consequence. But there are clearly higher risks of lower losses.
Leaving that to one side, what do we know about how this scheme will impact on the housing market?
Well we can be pretty confident of one thing. It’s not a solution to the low numbers of home buyers. NewBuy is unlikely to have a major impact on overall home sales.
That at least seems to be the view of the Office for Budget Responsibility. It suggests that NewBuy’s support for an estimated 100,000 mortgages will lead to about 30,000 more property transactions in total over its forecast period (then up to 2016/17).
This, presumably, is to take into account transfers of homebuyers from one existing approach to buying a home to going down the NewBuy route.
For example, some people who may have bought second-hand homes with a struggle will shift to buying new homes and avoid scrimping and saving as much to raise the deposit. And some who would have bought a new home through other means will now choose the NewBuy route.
That means the net number of extra sales generated by NewBuy in the housing market is expected to be far fewer than the number of mortgages underwritten by the scheme, if we take into account transfer and replacement effects.
Under NewBuy mortgages will be available until the end of March 2015, three years, so that suggests on the OBR figure a rough average of 10,000 more sales a year. Against about 750,000 transactions a year in England, that’s a pretty slim rise.
And even set against the near 200,000 or so FTBs it is not likely to have a huge impact on that slice of the overall market.
Indeed in its housing strategy released late last year the Government in a roundabout way admits it’s uncertain about the overall impact of NewBuy.
The strategy document states: “The scale of the scheme will depend on new housing supply, buyer demand and the availability of funding for mortgages. The cost of the scheme will depend on house prices, repossession rates and the size of the indemnity fund.”
So, the Government doesn’t really have that much of a clue. But the document does add: “Given the innovative nature of the Government’s support there will be a review after two years.”
Boiled down NewBuy is a house-builder initiated idea aimed at boosting new home sales – and so building – rather than boosting sales in the housing market overall.
Its biggest plus for expanding new build may well prove to be that, as a measure, it makes new homes more attractive than second-hand homes in the marketplace, because it’s easier to get finance for one than the other.
This in theory means that some potential buyers will switch to buying a new home instead of a second-hand home.
Looked at from the house builders’ view of the housing market, with new home sales being just a shade more than 10% of the market, it means there’s a huge pool of potential buyers who could switch from a second-hard purchase to buying a new home even if the market doesn’t expand that much overall.
But, back to that burning question, how many more new homes will it directly generate above what we’d have seen built and sold under the existing regime?
Sadly that’s not an easy question to answer because of the unknown number of “transfers and replacements” within those taking up NewBuy.
But let’s start at the top and whittle the number down to a reasonable guess.
The Government is putting up a maximum of £1 billion in guarantees. That will cover 5.5% of the sale price of each home covered.
Assuming the average sale price is about £180,000 we come to the much quoted 100,000 new homes. These will of course be spread over three years.
Naturally if the average sale price rises above £180,000, fewer homes will be covered and vice versa. But let’s take the 100,000 over three years as the base figure.
To be realistic from a construction perspective, we have to recognise the transfer effects of buyers moving from mainstream purchases of new homes to NewBuy and adjust down. And we should also adjust for the effects of Government and other industry incentives changing as NewBuy beds in – what might be described as replacement effects.
Let’s start with the FirstBuyscheme, which was introduced in the last Budget as a two year scheme. It has provided underpinning for almost 10,500 shared-equity sales of new homes. The construction of these homes will be tapering off as NewBuy kicks in.
So we should probably see NewBuy as, in part, a replacement for the FirstBuy incentive, even though it doesn’t cover exactly the same ground. That said, some people who would have bought FirstBuy were it still on offer will probably go for NewBuy.
But from our point of view we should expect a fall in building numbers as a result of the ending of FirstBuy and we should consider what’s left of the NewBuy boost when this fall is taken into account.
Then there are those who would have bought a new home as a result of a targeted house builder designed incentive schemes aimed at those struggling to raise a deposit. Bovis, for instance, developed Perfect 10 with the Woolwich which runs on similar lines to NewBuy. We should expect to see many incentives targeted at the deposit-poor potential purchaser shrink or disappear as prospective buyers are pushed towards NewBuy.
We should, again from our perspective, discount for this.
Also there will be those who would have bought a new home without such incentives who might “transfer” to NewBuy because it suits them to have a lower deposit. They may wish to hold onto savings. They may be uncomfortable raiding the bank of mum and dad. They may not wish to max their credit cards. They may be able to buy a bit earlier than intended because they don’t have to save as much for the deposit.
So, by the time we take away from the 100,000 mortgages on offer the number taken up by those who would have bought had opportunities remain the same and NewBuy not been introduced, the impact in terms of new homes built diminishes significantly.
Indeed, the number of extra new homes built as a result of NewBuy would seem very much to hinge on how house builders shape their marketing and tweak their package of incentives.
From a house builders’ perspective, NewBuy can be seen as a very powerful incentive. So, if as a result of its introduction other existing incentive schemes disappear, when the FirstBuy effect ends we might be looking at house-building numbers in England up by considerably less than the 100,000 over three years suggested by the initial figures.
The Home Builders Federation hasn’t made an estimate of the potential increase in house building from NewBuy, because there are so many variables. HBF is rightly concerned that if it made even a broad assessment it might lead people to put too much weight on what would be a very uncertain estimate.
The 25,000 in total that HBF mentions in its guidance notes to NewBuy was a number they needed to use for administrative purposes.
So, if we take a punt at the transfer and replacement effects it may be that 15,000 “extra” homes a year in England might be a better guess. There maybe more, maybe less. It really is hard to tell because we just don’t know how much transfer there will be among those who would have bought a new home anyway.
That 15,000 would be a useful bump up for private sector completions which last year, according to official figures, ran at 82,170, with total completions at 109,020.
However, in the end the impact of NewBuy all depends on how and to whom house builders sell the product.
Looked at very pessimistically, if the majority of the 100,000 mortgage packages are snapped up by those who would either have bought FirstBuy or through schemes currently in existence and if the average price of homes is much higher than £180,000 then the impact could be pretty marginal.
That then leaves the question of where will we be in three years’ time when NewBuy is coming to an end?
With social sector homes likely to decline, what this all suggests to me is that if we are looking for a more permanent answer to the lack of homes being built, we must keep on looking.