Yolande Barnes asks if the government mortgage scheme can be extended to institutional landlords
Of course housebuilders will welcome the latest ‘NewBuy’ scheme with open arms – it was designed by the Home Builders Federation (along with the Council of Mortgage Lenders) on their behalf and is designed primarily to boost the housebuilding industry by increasing transaction levels. It is one in a long line of property financing schemes that have enabled housebuilders to trade in what would otherwise be extremely low-turnover markets. These schemes have already boosted new build sales to an extent that output levels, although low, have been much higher than they otherwise would have been.
NewBuy is based on the premise that it is mortgage restrictions that are decreasing the number of people able to buy property - and newly built property in particular. This analysis is not far from the truth. Mortgage repayments are broadly affordable, thanks to exceptionally low interest rates, but it is the deposit needed under the new regime of low loan to value ratios that is proving difficult or impossible for many prospective buyers to afford homes. Consequently, it has been transaction levels, rather more than prices, which have been the main casualty of the recent housing market crash.
This problem afflicts not just first-time buyers but also ‘second steppers’ who have not seen enough growth in their first property to afford a 25% deposit on their second (or even third) one. In this respect, it is good news that the NewBuy scheme is not restricted to first time buyers, as previous schemes have been, but any buyer of newly built property potentially qualifies. The scheme will provide more potential purchasers with access to higher ratio loan to value (LTV) mortgages, while mitigating the risks for lenders.
This would appear to be a particularly efficient use of taxpayers money inasmuch as it underwrites mortgages on new build property rather than spending cash upfront. It also only needs 9% of the property value to be set aside compared to the 20% capital requirement of FirstBuy, for example. Funds will therefore go further – potentially helping twice as many homes. Savills research estimates that NewBuy could facilitate up to 33,000 new home purchases each year until the end of parliament. Most of these will be purchases that would otherwise not have happened – or would have happened in the second-hand property market.
When it comes to property market intervention there are risks though. History is littered in this sector with unintended consequences. The biggest risk in this scheme lies in the fact that it is directed solely at buyers of newly built property, not second-hand resales. This means that the second hand market will remain small and restricted in many locations where people still struggle to obtain sufficient deposits.
The risk here is of creating a two-tier market and one in which new build property prices are at a significant premium to second-hand. This means that buyers will risk significant price reductions when they come to sell. For this reason, lenders will need to be extremely careful when valuing new build product and to make sure that they are referencing its value as a second hand product in the open market rather than a new build product in the “NewBuy” market. To this end, the CML and RICS are already formulating measures to ensure that valuations reflect these market values.
Broader questions then remain over the use of public money to boost one particular aspect of housing and one sector of the property industry. Having established the principle of effective intervention to help housebuilders, I would argue that we need to look at encouraging the supply of rented accommodation to alleviate shortage of rents for those unable or unwilling to participate in NewBuy and which will ameliorate rental increases that are due to low supply.
The principle established by NewBuy of the careful and effective use of public funds to de-risk a sector is very much to be welcomed. If extended to corporate landlords to enable widespread ‘build to let’ to occur it could pay dividends. Such a move would enable new corporate entities to build large, professionally let, portfolios for ultimate institutional investment - and it would also further boost the construction industry, albeit in an unconventional sector.
Yolande Barnes is head of Savills Research