BLOG: Five concerns the PM’s low deposit ‘Generation Buy’ initiative raises
At the Conservative Party’s virtual conference last month, the PM announced some new thought-provoking initiatives to help the housing market, and reiterated others. It is widely accepted that housing market reform is urgently required, so these measures are welcome. However, it’s important the government gets the details right, and there are concerns that these measures may not go far enough.
Essentially, Johnson has indicated that regulations introduced in the wake of the 2008 crash to take risk out of the financial system could be reversed to help young people onto the housing ladder.
The PM said he wanted to create a ‘Generation Buy’ and has asked his ministers to draw up plans to allow more mortgages to be offered with a 5% deposit, to help first-time buyers who are currently locked out of the market by substantially reducing the size of the deposit they need to save.
However, as with most things in the current climate, this is easier said than done and raises a number of questions.
1) How will lenders cope?
Lenders were strongly encouraged to lend more prudently after the 2008 financial crash, which was partly caused by reckless mortgage lending in the US. Lenders also have little appetite for taking on riskier mortgages at present, when the future direction of the housing market is as uncertain as the rest of the economy, and they are currently receiving all the applications they can handle for safer mortgages at a lower proportion of the purchase price.
2) Is the government willing to take on the risk?
The government is likely to have to offer guarantees to bring back wide availability of mortgages for 90% or 95% of the purchase price, which would then expose the government to substantial risk if things go wrong in the housing market.
Suppose that the government ends up underwriting 10% of the purchase price for mortgages over 85% of the purchase price. Based on recent figures, it might have to provide such guarantees on 250,000 mortgages per year, for an average of £180,000, with the government guaranteeing £18,000 of that. That would expose it to £4.5bn of risk every year.
Of course, even in the event of another economic downturn and a house price crash, most mortgages would continue to be paid, but if there were such a crash in a few years’ time and 20% of houses bought on such mortgages were repossessed and sold for 80% or less of the purchase price, the government could face a bill for many billions.
The PM might prefer to reintroduce mortgage indemnity insurance, which is still required by some lenders but is less widespread than it was in the 1980s. This is where the buyer pays to insure the lender against the default risk. However, in the current uncertain climate, it’s by no means certain that private insurers would be keen to take on the risk, and it would, of course, push mortgage repayments higher, which would not help first-time buyer affordability.
3) Will the Bank of England re-assess the cap?
Another issue faced by first-time buyers is the limit on the total amount they can borrow. Since 2014, the Bank of England has capped the number of mortgages that lenders can take on for a multiple of 4.5 times the borrower’s income or more at 15% of the total number of mortgages sold by that lender.
With the current historic low interest rates, borrowers could easily afford a higher multiple of their income, and we believe the government should ask the Bank of England to review the operation of this cap, at least for long-term fixed-rate mortgages.
The cap seemed to be necessary to protect both buyers and the financial system against the risk of sudden large rises in interest rates making their mortgage payments unaffordable and leading to mortgage defaults and repossessions. However, for the long-term fixed-rate mortgages that the government is keen to promote, there is no risk of such increases in interest rates for many years, by which time the buyer’s income is likely to have increased by enough to make higher repayments more affordable.
4) Isn’t the housing shortage the real issue?
The BBC’s Housing Briefing report earlier this year estimated that the UK has a shortfall of 1.2 million homes to meet its immediate housing needs, about 5% of the total housing stock. There are 320,000 homeless people (most of whom are in temporary accommodation or staying with friends and family, not sleeping rough), a million homes that aren’t fit for human habitation and almost 800,000 households in homes that are too small for them.
So, while we welcome this ‘Generation Buy’ initiative to help more people onto the housing ladder, we would caution that it will be quite limited in its effects.
By itself, it won’t build any more houses, and so it won’t actually help to house anyone or to fix the long-standing housing shortage. It will, however, help to tip the balance in favour of first-time buyers and away from buy-to-let investors, which will enable more people to own instead of rent. But it can only do so by further pushing up house prices, thus reducing rental yields and making them a less attractive investment.
This brings us on to the other, and more controversial, initiative: addressing the shortage of new homes. The government proposes to relax planning controls to make it easier, quicker and cheaper to get planning permission for housing. However, builders will still be reluctant to build more homes and thus reduce house prices and their profit margins, and with the new build market effectively controlled by a handful of large builders, we don’t see such initiatives having much effect.
5) Is the government willing to overhaul the housebuilding industry?
Further measures to support housebuilding are needed, but they must encourage housebuilders to build more houses, rather than just make more profit from building the same number of houses.
We suggest a carrot and stick approach, with new taxes on land with planning permission for housing if it remains undeveloped for three years or more. There should also be rules implemented to prevent builders from simply delaying the planning permission applications on their land banks. In return, the process of applying for planning permission must be made quicker and cheaper, especially for small developments and small builders.
Making planning permission simpler to obtain is certainly part of the picture, since a small builder without a team of planning consultants can find it prohibitively expensive and difficult to get permission to build a small development, but it’s likely the government will have to get back into the house-building business itself in order to ensure that sufficient homes are built.
Of course, it’s not quite as simple as that, and it may well be impossible to build enough homes in the immediate future, since there aren’t enough skilled workers. It is likely to take several years to increase the country’s house-building capacity back to the required level, but urgent action should be taken now.
At the end of the day, what we really need is ‘Generation Build’ rather than ‘Generation Buy’.
Mike Scott is chief property analyst at Yopa