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Thursday, 15 March 2012

NewBuy Guarantee Scheme – Is this really going to fix the broken property market ?

Earlier this month to great trumpeting from No 10, and following numerous pre-announcements the Government launched its NewBuy Guarantee Scheme.

The scheme is intended to be the solution to kick-starting the ailing property market.

The theory being that the whole market is stalled because first time buyers can’t raise sufficient deposits or borrow sufficient mortgage funds to get on the property ladder in the era of tight lending conditions following the credit crunch. Without sufficient first time buyers the whole house moving market can do no more than limp along at its current low levels of activity.

The government is desperate to repair the damaged market because a properly functioning transactional market would do much to improve the economic situation of the country as a whole.

How does the scheme work ?

House builders pay to the mortgage lender 3.5% of the purchase price on a new- build property while the government provides an additional guarantee of 5.5%. This is meant to encourage the mortgage lenders to lend to people with lower deposits on a higher loan to value basis at a reduced risk. The government suggests that this will help 100000 first-time buyers onto the property ladder who would otherwise have been frozen out by tight lending requirements.

Will this scheme deliver the return to normal business that housing minister Grant Shapps predicts. Unfortunately, I suspect not.

Looking first at the numbers, normal transactional volumes pre credit crunch were around 1.5m housing transactions p.a. , post credit crunch we are seeing volumes nearer the 900,000 level. Even taking the governments predictions at face value (i.e. assuming that there are 100000 first time buyers all waiting to buy new build houses all of whom will suddenly become eligible to buy) 100,000 new first time buyers in the market is not going to have a significant impact in improving the overall transaction levels. The best you will see is a 10% increase which will still leave the market trading at 30% or more down from its normal level.

Since the scheme only applies to new-build properties each of these first-time buyers is only going to be involved in a chain of one buyer and one seller. If the whole market is waiting for first time buyers to buy from the bottom of the chain so every one else can buy further up then encouraging first time buyers to buy from house-builders rather than private sellers is not going to help the rest of the market. In fact if anything the scheme will decrease first time buyer demand for private purchases and stagnate the rest of the market further

The property market got into trouble in the first place because we all borrowed more than we could afford on our properties. The intrinsic nature of the NewBuy Scheme is that we are encouraging mortgage lenders to lend more monies to individuals than they would otherwise consider it safe to do so. Is this really the solution to problem? Creating a short term fix by reintroducing the same bad habits that caused the mess in the first place.

My view is that the scheme is misplaced tinkering, and, as with much that the coalition has done in the last couple of years has been introduced more as a way of showing the people that it is trying to boost the economy rather than with any great expectation that it will do so.

Market economics will dictate when the property market will return to normal. This will happen as and when the lenders are capable of borrowing funds more easily and more economically, and when the consumers have more money in their pockets and therefore greater demand to buy.

Over the last 4 years I have been deluded as others into believing that there was something we could do to make lenders lend or to increase demand but I have reached the realisation that the housing market cannot be significantly manipulated by outside intervention (other than short term fixes) and that as with everything in economic cycles the market will return to normal when its good and ready.

NewBuy scheme – It’s good that the government are doing something to help a few but it is not going to have any major impact in improving the housing market in the short term

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