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Will Help to Buy Phase 2 help or hinder the residential property market? By: Tracy Hall

Is Help to Buy Phase 2 going to help or hinder the residential property marketFew government initiatives can have secured as much coverage in the media as the current Help to Buy scheme. Designed to kick-start the housing market at the same time as giving a much needed boost to the construction industry, Phase 2 of the scheme has now gone live, three months ahead of its original schedule.

Help to Buy has received a mixed reception from politicians, financial experts and members of the public. Those who have welcomed the scheme recognise the importance of the housing market to the well-being of the wider UK economy. The scheme has the potential to increase funding availability, help to rebuild confidence in the mortgage market and to stimulate demand for new builds.

Others however share the view of Business Secretary Vince Cable, believing that Help to Buy could create a housing bubble that will have a detrimental effect on the industry in the long term. There is also concern over the sustainability of the scheme – i.e. what happens when it comes to an end or when funding runs out?

While Phase One of Help to Buy – which incentivised first time buyers to invest in new build properties via an equity loan - was generally welcomed, there is more scepticism surrounding Phase Two. Essentially the Mortgage Guarantee Scheme is an insurance policy from the government to mortgage lenders, available for up to 15% of the value of the property in return for a fee paid by the Lender, with potential purchasers only needing a 5% deposit to qualify. This return to the 95% mortgage has left many to question whether we are set for a return to boom and bust.

So why has the government brought the scheme forward? Was it an expression of confidence in this landmark scheme bolstered by the apparent success of Phase 1? Or was it a conference headline grabber? Some of the major mortgage lenders (albeit largely confined to the “state owned” organisations) had already signed up to the scheme so it was an obvious decision to simply bring the start date forward. In terms of appealing to the public, David Cameron has pitched it as a way to help ‘people who can afford the monthly mortgage payments and are otherwise financially mobile but who haven’t got rich parents and can’t pay the deposit up front’

And it certainly will have an impact, with the Mortgage Guarantee Scheme enabling people to buy a home with less than £10k in more than half of the regions across the UK. Applicable on new and existing homes with a value of up to £600k the scheme has been quoted as having the potential to save potential buyers up to £22 billion in deposits nationally.

However, there are two specific concerns. Firstly, that prices will become artificially inflated as demand outstrips the pace at which properties come onto the market. Many people across the UK would be forgiven for failing to recognise this, as property prices have continued to either hold or only marginally increase in value in most areas. The situation in London and some parts of the south east are vastly different though, with significant inflationary pressures and unsustainable increases in property prices.

The government has attempted to counter this by allowing the Bank of England to review the scheme each year and intervene if prices look to be artificially inflated. Whether this is realistic, either administratively or politically remains to be seen.
Secondly, while Phase One of Help to Buy focused solely on new build properties, the Mortgage Guarantee Scheme is applicable to both new and existing homes. This is potentially a blow to the construction industry which, on balance, would probably have preferred to see the second phase postponed in order to continue to drive new build development projects. The alternative view is that the stimulus to the second hand residential market will have a knock on and positive effect on the newbuild residential property market.

The real issue in the eyes of the construction industry is lack of supply. This not only relates to the amount of people putting their properties onto the market but also to the rate at which new homes are being built.
Many would argue that if the Government is going to artificially stimulate the construction industry improving access to finance for construction firms and for buyers alike should be delivered in a different way and that the effect of further streamlining the planning system should also be part of the master plan.

With an estimated£1.8 billion of housing projects currently on hold across the country there is a significant delay in the number of new homes being built. In addition, the Department for Communities and Local Government (DCLG) puts the annual number of new house build completions in the UK at 110,530 yet quoted statistics show that we need approximately 250,000 homes per year to meet demand – all figures that demonstrate why investment into the construction industry is so crucial.

Ultimately there is a genuine desire for Help to Buy to work. The housing market is in need of stimulus and the construction industry does need to see demand for properties increase. With some of the major lenders now on board and consumers starting to show an interest let’s just hope the foundations of the scheme have been built on rock and not sand. 

About the author

Tracy Hall is a partner and group head of real estate with Watson Burton LLPTracy Hall is a partner and group head of real estate with Watson Burton LLP.

Features October 2013

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