Savills Vietnam - NEW | A boost to the market?

The latest measures will assist in the region of 400,000 buyers get on and up the housing ladder but will not create a housing bubble.

The property market has become a political issue. House building has failed to keep pace with the needs of a growing population. The construction of social housing has slowed to a trickle. Five years after the credit crunch, a generation of first-time buyers is still largely priced out of the housing market and forced to pay increasingly higher rents. They are particularly stretched in London where property prices are over nine times average earnings and the average deposit is running at £59,000. As house prices continue to climb in more affluent parts of the country, wealth, in the form of property equity, has become concentrated in fewer hands.

Previous attempts by the coalition government to alter the picture have had limited impact. However, measures announced in the 2013 Budget, including Help to Buy which provides £3.5 billion of equity loans and £12 billion of mortgage guarantees, are more far reaching than earlier schemes aimed at assisting new buyers and stimulating housing construction.

The initiatives follow an overhaul in the planning system brought in over a year ago that are now beginning to bed down. What effect will political intervention have this time?

Help to Buy

Savills research shows that the initiative will have a much bigger impact on the number of property transactions and help more people to buy than previous incentive schemes such as FirstBuy and NewBuy.

The measures, designed to help creditworthy buyers on and up the housing ladder, is comprised of two parts – an equity loan scheme, which came into play in April 2013, and a mortgage guarantee scheme which will be introduced in January 2014.

Both parts of the scheme will run for three years and help those with deposits of between 5% and 20%. Unlike previous schemes, this one is not means tested and will be available to existing homeowners as well as first-time buyers purchasing any home worth up to £600,000.

While the equity loan part of the measure is restricted to new build homes, the mortgage guarantee can be applied to second hand property.

Effect of prices

Critics have expressed concerns that the scheme may yet prove self-defeating by stoking up house prices and pushing them even further out of reach of first-time buyers.

We believe Help to Buy will stimulate values, boost transactions and encourage more private housebuilding. Assuming a successful take up of the scheme, we could see house prices rise by 15.3% over the next five years, rather than 11.5% previously forecast.

However, we do not expect it will cause a house price bubble. Help to Buy is unlikely to transform the market and reverse the demand in rental homes.

Our analysis shows that demand for privately rented homes will continue to rise by at least 210,000 households in the next three years. Most of that demand will continue to be centred on London where property prices are highest and the population is set to exceed nine million by 2018.

Although the Government expects that the new two part initiative will help over 500,000 home buyers, Savills research estimates the move is more likely to help 400,000 buyers.

The take up may be limited by buyers’ affordability constraints and lenders’ take up of the initiative. For both schemes, borrowers will need to meet their chosen lender’s credit and affordability checks.

Details of the mortgage indemnity scheme have yet to emerge. We still don’t know which lenders will take part and whether the mortgage rates they offer will be competitive.

However, judging from previous lending patterns, we expect that buyers with a 10% deposit will be more likely to get a favourable response from lenders than those who can only put down 5%.

As the scheme allows existing homeowners to refinance, about a third of the mortgage guarantee element is likely to be diverted to those remortgaging.

Effect on housebuilding

The equity loan element of Help to Buy is a more generous extension of the existing FirstBuy scheme which was introduced in 2011. Potentially it can provide funding for 75,000 extra equity loans in England between 2013 and 2016.

The fact it is fully funded by the Government will open up the programme to smaller developers that could not put up the extra loan required by FirstBuy in the past. As a result there should be more widespread take up among housebuilders. There is also established demand for equity loans among prospective homeowners.

Over 2012/13 FirstBuy is likely to have supported around 14,000 sales, in addition to around 2,000 supported by NewBuy (a mortgage indemnity scheme launched in 2012). These deals have accounted for between 20% and 25% of sales among major volume housebuilders.

We anticipate the equity loan element of Help to Buy could build up the numbers of supported sales to more than 43,000 in 2015/16, particularly given its application beyond the first-time buyer market.

On this basis we believe that Help to Buy could increase levels of private sector housebuilding by around 30% assuming that lenders are prepared to advance mortgages on the remaining 75% value of the property on competitive terms.

There is no question that the Government seeks to influence the property market as a means to drive wider economic growth. Measures promoting homeownership may also help deliver some votes for the Conservatives in a run up to the election in 2015. But Help to Buy alone is unlikely to plug the gap in housing need. To deliver the numbers of homes required, the growth of the private rented sector remains key.