Published: 19 September 2012 | Author: Bernard Clarke
Six months after its launch in the spring, the NewBuy scheme has made an encouraging start. With its focus on construction of newly-built property, NewBuy contributes to the government’s growth agenda, and is continuing to gather momentum. The number of participating lenders and builders has expanded since March, and there are now 1,300 reservations under an initiative, which – with the support of the government, house-builders and lenders – enables borrowers to take out 95% mortgages on newly-built properties. Earlier this month, the official NewBuy website recorded its 100,000th visitor.
In this context, therefore, Tuesday’s announcement by the Treasury of a consultation on new macro-prudential tools presents a timely reminder of the potential conflict in objectives – albeit unintended – from different arms of government, and the need for a co-ordinated and coherent policy framework.
More than half of those who have so far borrowed successfully through NewBuy are thought to have taken out mortgages with the maximum 95% loan-to-value ratio. A macro-prudential toolkit with loan-to-value and loan-to-income caps would therefore clearly be at odds with an agenda seeking to remove unhelpful constraints on creditworthy customers and encourage lending that is sustainable, but at higher loan-to-value levels.
Lender support for NewBuy
In the months leading up to the scheme, we worked closely with the government and home-builders to help deliver an initiative that would work for lenders and borrowers. We have sought to ensure that NewBuy works not only for first-time buyers who can afford monthly mortgage payments but not a large deposit, but also for "second steppers" and other existing owners who may wish to move but are constrained by a lack of equity.
Since the launch, we have sought to help explain NewBuy to potential buyers, and support the successful take-up of mortgages under the scheme, with our crystal-marked consumer factsheet. The factsheet explains how the scheme can help creditworthy borrowers wishing to buy a standard purchase home (buying under a shared equity or shared ownership scheme does not qualify for the initiative). The scheme operates only in England but policymakers are keen to replicate it elsewhere in the UK, and last week saw the successful launch of the similar MI New Home initiative in Scotland.
NewBuy is able to make higher loan-to-value mortgages available through a commitment by builders and the government to cover a limited amount of any future losses that lenders might otherwise have to bear. These could arise if a lender were forced to take possession of a property and sell it for less than the amount owed on the mortgage. Borrowers remain responsible for any shortfall between what is owed to the lender and the amount a property is sold for, and the scheme does not increase their protection. But it does improve their access to higher loan-to-value mortgages.
The government has identified increased provision of housing as an engine for economic growth. Earlier this month, it unveiled another package of measures seeking to boost construction, including the scaling back of affordable housing commitments for developers (but with additional funding for replacement affordable housing), state guarantees for infrastructure projects and housing, a boost for homes in the rental sector, the removal of planning restrictions and a £280 million expansion of the existing FirstBuy scheme.
Announcing the plans, the prime minister said the measures were intended to help "kick-start the economy." David Cameron described the package as a "comprehensive plan to unleash one of the biggest house-building programmes…in a generation." He outlined the benefits as "more investment around the country, more jobs for our people, and more young families able to realise their dreams and get on the housing ladder."
Earlier in the summer, we had reflected similar sentiments when, in a speech at our annual lunch, the CML’s chairman, Martijn van der Heijden, said that experience on both sides of the Atlantic showed that recovery from recession "requires support and strength in housing." His speech reminded the audience of former housing minister Grant Shapps’ view that "housing is centre stage on the road to recovery."
Progress to date
In assessing the impact of NewBuy so far, we must not forget that, although it has now been in place for six months, this autumn represents the first serious opportunity for builders to market it concertedly. Having been launched in March, NewBuy could have had only a modest impact on home-buying activity in the spring. Summer is usually a quiet time for the house purchase market, anyway, with buying activity this year further disrupted by the Jubilee celebrations and the public fervour for the Olympics.
Public awareness of the scheme has also taken time to grow and, given that housing transactions usually take several weeks or even months to complete, the number of purchases under NewBuy was always likely to be modest at first. But, the scheme has expanded since its launch. The three participating lenders on launch day (Woolwich/Barclays, Nationwide Building Society and NatWest) have now been augmented by Santander, Halifax and Aldermore. Meanwhile, the number of builders signed up to the scheme has grown from seven in March to 31 listed on the NewBuy website today.
Future demand from consumers will depend on a variety of factors, including the economic backdrop and the extent to which builders market and promote the scheme. Government policy will also affect the outcome, and it is possible that the recent announcement of enhanced support for the FirstBuy initiative could lead to some future substitution of sales that might otherwise have been completed under the NewBuy scheme.
What can NewBuy deliver?
At the outset, we said that NewBuy had the potential to fulfil three key objectives for the housing market. After six months, it is clear that the scheme has successfully achieved the first two of them:
- It has enabled lenders to advance a higher proportion of the purchase price without the level of risk usually associated with higher loan-to-value lending. But crucial in delivering the best outcome will be rules for the capital treatment of loans advanced through the scheme. We hope that the Financial Services Authority will take a favourable approach to this, enabling lenders to maximise their participation in NewBuy.
- The scheme has also succeeded in delivering a wider choice of property and options for customers who can afford regular mortgage payments but cannot fund a deposit of up to 20% of the price of a home.
After only six months, it is still far too early to deliver a verdict on the third broad objective that we identified for NewBuy – an increase in the supply of new housing as builders respond to increased demand, and the creation of more jobs in the construction sector. This can only be an objective for the longer term, and it may be several years before we can judge the scale of the contribution from NewBuy. But we have never suggested that NewBuy on its own is sufficient to kick-start the building sector.
Rates on mortgages offered under the scheme have edged down during the summer. Despite the guarantees provided by developers and the government, higher loan-to-value lending may still mean higher costs for lenders, and pricing must reflect the associated risks.
Broadly, there are two areas of risk for lenders associated with the scheme: the probability of default, and the scale of losses given default. It is important to remember that, while NewBuy offers protection for lenders from loss given default, it does not protect firms the possibility of default by borrowers. The pricing of mortgages must reflect all the risks and costs for lenders, including regulatory requirements for the capital treatment of loans advanced under the NewBuy scheme
After six months, the NewBuy scheme has made a solid start. The initiative was only ever likely to deliver a small number of sales in the first few weeks but it has gathered momentum, and broader participation by lenders and builders and increasing awareness among consumers have helped the scheme to grow. With 1,300 reservations to date, NewBuy is well placed to expand further in this autumn’s home-buying season.
For individual households capable of sustaining monthly mortgage commitments but unable to afford a deposit, NewBuy provides valuable assistance, and the scheme has already fulfilled some of its key objectives. But it is also important to view it both in the longer term and a broader policy context.
NewBuy is part of a wide-ranging package of government measures intended to help the construction sector fulfil its potential as an engine for economic growth. Other initiatives, like FirstBuy, may ultimately lead to some substitution of sales under NewBuy. Ultimately, that may not be important but, for the government’s package to work overall, we need a joined-up, coherent policy framework. This week’s announcement by the Treasury of a consultation on macro-prudential controls highlights the potential for unintended conflict in policy objectives.
Devolved administrations in the UK are keen to replicate the English NewBuy scheme, both as a means of assisting individual households and for the contribution the construction sector can make to economic growth. We welcome the launch of similar scheme in Scotland earlier this month, and will continue to work with other arms of government in the UK on initiatives that will widen access to sustainable mortgage borrowing.