First-time buyer help is welcome but won't kick-start the housing market
Published: 30 March 2011 | Author: Bernard Clarke
For lenders and borrowers, the headline-grabbing measure in the recent Budget was the chancellor’s modest, but unexpected, funding for first-time buyers. But there were other initiatives in the chancellor’s announcement – albeit of a more technical nature – which could have a far more profound effect on mortgage and housing markets. Today, we assess the Budget measures and give our reaction to them.
The economic backdrop
The Budget was delivered against a challenging economic backdrop of rising inflation, weakening prospects for short-term growth and higher-than-expected government borrowing in the medium term. The chancellor had already set clear priorities for fiscal recovery in his emergency Budget last year, and did not deviate from them in his recent announcement. That left him little room – or money – for manoeuvre.
The Office for Budgetary Responsibility (OBR) sees growth continuing to accelerate over the next few years, but more slowly in the short term. It now forecasts 1.7% real growth in gross domestic product (GDP) this year (down from 2.1% previously) and 2.5% in 2012 (2.6%).
Given the economic and financial backdrop, and the chancellor’s commitment to stick to the fiscal script set out in the emergency Budget last year, it was not much of a surprise that last week’s announcements were broadly neutral in their overall effect. The OBR still anticipates the structural deficit being eliminated by 2014-15, and net debt as a share of GDP then abating slowly.
The housing market
Despite the chancellor’s efforts to present his Budget as a plan for growth, the reality is that this year will see significant spending cuts on top of January’s VAT increase to 20%. The cumulative impact on household finances is significant – the equivalent of more than a 2% drop in incomes for much of middle England, according to the Institute of Fiscal Studies (IFS) – and will exacerbate the squeeze on real take-home pay as consumer price inflation outweighs earnings growth. The IFS suggests that households are experiencing the biggest fall in incomes over a five-year period since the 1970s.
As a result, the big picture for the housing market and mortgage lenders is a negative one. One small ray of sunshine is that the Bank of England must continue to weigh the need to counter some of the deflationary impact of fiscal policy and this should moderate the speed and extent of rate increases this year. Measures affecting lenders announced by the chancellor included a £250 million FirstBuy scheme (a diluted version of HomeBuy Direct which ended last year) and a further one-year extension to support for mortgage interest (SMI) arrangements.
The CML's view: help for first-time buyers
We welcomed the assistance for first-time buyers, although the new FirstBuy scheme is less generous than its predecessor, HomeBuy Direct. Under the new scheme, a first-time buyer will be helped by a loan of up to 10% each from a developer and the government. Buyers will also provide a deposit of 5%, enabling them to take out an attractively priced mortgage at a 75% loan-to-value ratio.
Under HomeBuy Direct, however, first-time buyers were able to take out an equity loan of 30% of the value of the property, funded jointly by the developer and the government. The less generous terms for FirstBuy will help make limited government funding go further, but will deny access to some who would have been able to get a loan through HomeBuy Direct.
Like its predecessor, FirstBuy applies only to newly-built property because it has been launched with the financial support of developers, for whom the scheme may, ultimately, provide the greatest short-term benefits.
FirstBuy is intended to help 10,000 into home-ownership over two years, against a backdrop of 800,000 would-be first-time buyers that we estimate have been excluded from the market by affordability constraints since 2007.
The scheme will cost £250 million (£210 million for England, and £40 million to be administered by the devolved administrations in Scotland, Wales and Northern Ireland). Although the equity loan is free for the first five years, it will be repaid on the sale of the property.
Although lenders welcome support for first-time buyers at a time when government funding is under pressure as a result of the deficit reduction plan, the scale of the FirstBuy initiative is modest, even measured against an already significantly diminished existing first-time buyer market.
In each of the last three years, first-time buyer purchases have totalled a little over 190,000, figures that are dwarfed by the long-term average of around half a million annually. If FirstBuy succeeds in helping 5,000 buyers in each of the two years for which the scheme is scheduled to operate from September 2011, that would equate to help for around 1% of first-time buyers in a "normal" year.
Support for mortgage interest
The chancellor also said he would extend for another year both the reduced 13-week qualifying period for support for mortgage interest (SMI) and the raised capital limit of £200,000. Both will now remain in place until January 2013.
While this measure is also welcome, it would be more helpful for borrowers and lenders for the government to commit to providing this support in the longer term. Lenders would welcome a move away from what is in danger of becoming an annual cycle of uncertainty over access to SMI.
Benefit recipients also remain exposed to the kind of arbitrary change in benefit like the one announced by the chancellor in his emergency Budget last year. This led to a reduction from last October in the rate at which SMI is paid from 6.08% to 3.63%, equivalent to a 40% reduction in payments overall.
We would like to see the government undertake to help develop a better integrated system of support for borrowers in difficulty over the longer term, including a commitment to maintain benefits. The safety net of support for borrowers has already been weakened by the government’s cut in the rate at which SMI is paid and the planned withdrawal of the mortgage rescue scheme in 2012/13.
The private rented sector
There were several concessions in the Budget aimed at boosting investment in the private rental sector. Investors making bulk purchases of residential properties will, in many cases, be able to lower their stamp duty liability by opting for it to be based on the average value of dwellings purchased rather than their aggregate value. The government is also consulting on reforms to the real estate investment trust (REIT) regime, including removing the 2% conversion charge.
Owner-occupation has been in relative decline since 2003 and is unlikely to begin growing again in the short term, given the continuing shortage of mortgage funding. Meanwhile, pressures on government finance will keep investment in social housing in check. So, Budget measures intended to encourage investment in the private rented sector are focused on the tenure that already has the strongest prospects for growth in the short to medium term.
The stamp duty concession will be particularly welcome to buy-to-let landlords with large property portfolios but could potentially benefit any investor with two or more properties. The chancellor’s announcement is also a powerful incentive to commercial investors in property.
Despite the government’s announcement, we do not believe that proposals for REITs will have a significant impact on lenders.
The government intends to make a number of reforms to the planning system, including a default presumption in favour of development and consultation on proposals to make it easier to convert commercial premises to residential use.
Potentially, there is a risk of conflict between the government’s attempts to shape the planning system and its localism agenda. In current market conditions, obtaining planning consent is not the most significant barrier to housing supply. Generally, lenders favour a stable, predictable planning system that is capable of producing an adequate supply of the right kind of properties to meet consumer demand.
On the regulatory side, the government and the Financial Services Authority (FSA) will shortly publish a review of the UK’s regulatory framework for covered bonds. This will include proposals to increase the appeal of UK covered bonds to investors. The government is also setting up an industry working group to explore any tax issues associated with the development of new bank capital instruments in light of the Basel III proposals.
Imminent publication of the FSA’s review of the regulatory structure for covered bonds goes straight to the heart of one of the key issues for lenders – the shortage of mortgage funding. The review will set out the key strengths of the UK framework for covered bonds and consult on proposals to bring greater transparency to the market and make it more demonstrably comparable to Europe.
We welcome the aim of increasing the appeal of covered bonds to investors, which will potentially make it easier for lenders to raise funding. We look forward to working with the Treasury and the FSA with the aim of delivering improvements that will make the covered bond market more attractive for investors and improve mortgage funding.
Although we accept the chancellor had limited room for manoeuvre, the Budget realistically has not delivered measures that will make a significant impact on addressing the problems of mortgage and housing markets in the short term. The support for first-time buyers is less generous than the scheme it replaces, and will have only a modest impact on the market overall.
Perhaps the most significant measure for the mortgage market in the long run will be the work to improve the transparency and efficiency of the market for covered bonds. This gets to the heart of one of the key concerns for lenders, the shortage of mortgage funding. We look forward to working with the authorities to deliver the best outcome for lenders and borrowers from the proposed reforms.