Boris Johnson has attracted both praise and horror in equal measure with a new plan for 95 percent mortgages to help beleaguered first-time buyers to get on the property ladder, but would that expose UK taxpayers to too much risk? In this article, I discuss the implications of what that would mean both nationally and locally in Tameside.
With the Tameside property market taking off due to the stamp duty holiday introduced in the summer, Boris Johnson announced at the recent Tory Conference a plan to offer first-time buyers long-term low-interest rate 95 percent mortgages (meaning they would only need to raise a five percent deposit). Yet when someone borrows more than 75% percent the banks normally take out insurance in case the buyer defaults and the bank lose money if the property gets repossessed.
When the economy is good, the risk is low – so the insurance premiums are also low for the banks – meaning they are happy to lend high percentage loans. Yet, nobody could deny we are entering a period of uncertainty in the coming 12/18 months, meaning the insurance premiums for the banks have gone through the roof.
Mortgage companies have avoided riskier, high percentage first-time buyer mortgages since the start of the Coronavirus predicament. At the end of February 2020, there were just under 400 95 percent loan-to-value mortgage products accessible for first-time buyers; yet today that figure stands at just 26.
Another reason for removing the number of 95 percent mortgages was that the demand for lower percentage loans exploded after the lockdown was lifted, and with many mortgage staff still working from home, the banks and building societies focused their attention on getting those (less risky) mortgages sorted first. Therefore, they removed the higher percentage loans from their books, so they weren’t swamped with too much work. So, it must be asked, should the Government take on the risk from mortgage providers in the form of a guarantee from the Government — sparking concern among economists the Government is already burdened with debt – does it need anymore?
Yet taxpayers have been funding a similar scheme for years. The Help to Buy scheme, which allows first-time buyers to buy a home with a 5 percent deposit (and the Government guaranteeing between 20% percent to 40 percentof the loan) has been in operation since 2013. Taxpayers are already guaranteeing £16.049bn of loans for 224,133 first time buyers, and when we look closer to home locally, since 2013:
1,232 first-time buyers in Tameside have used the Help to Buy scheme to help buy their home, relying on the Government to guarantee them on average £44,357.
So, should the Prime Minister be playing with the housing market? Should he instead allow open market forces to be applied to the property market, allowing it to find its own normal and leave the mortgage providers to decide on mortgages based on risk, because all the Prime Minister will potentially achieve is a synthetic rise in property values?
Or would it be better to spend that public money on delivering affordable rental properties?
Personally, I don’t disagree with the initiative, yet all I am querying is, what are the Tameside first-time buyers going to be able to buy? The Tameside property market is already quite drawn-out, as ultra-low interest rates have augmented the gap between the first home and the second home, the second home to the third and so on and so forth, so is this initiative fashioning a massive demand that will inflate property prices up the Tameside property ladder still further and ultimately lead to even more frustration down the line?
However, could this be the very thing that saves the Tameside property market in 2021?
Firstly, with the stamp duty holiday due to finish by the end of March, there are suspicions the property market will stall. And secondly, the very popular Help to Buy scheme mentioned above also finishes at the end of March 2021. This boost instead of fuelling house price inflation could stabilise the property market.
In fact, it seems the Government are hoping the property market will help power us out of recession. The early signs are good as the Tameside housing market has exploded as a result of the stamp duty holiday introduced in the summer. It certainly needs to as the country’s GDP only grew by 2.1 percent in August, down from 6.4 percent in July, 9.1 percent in June, and 2.7 percent in May.
As a country, our GDP is still 9.2 percent below the levels seen pre-Covid. With the property market doing well, the country remains on course to leave recession in Q3, yet with the impending triple peril of rising unemployment (after furlough), further lockdown restrictions and a messy end to the Brexit transition period does this mean we are potentially in for an interesting ride?
Only time will tell if ‘Generation Buy’ will help save the property market and its part in the economy. In the meantime, I think it will be a safe bet that people still need homes to live in, and irrespective of what happens to the property market, with that simple fact, the winners in all of this will be Tameside buy to let landlords.