Can Cameron rebuild the housing market?

The Government's latest scheme to help first-time buyers may actually do more harm than good, says Simon Read

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The flat housing market of recent years has thrown up a generation of first-time buyers who can't afford to clamber on to the property ladder – now the Government has revealed its attempt at a solution to this seemingly intractable problem.

The NewBuy Guarantee, the latest government plan to boost the housing market, was yesterday trumpeted by David Cameron as being "a vital boost to the housing market" which will help up to 100,000 first-time buyers.

The shadow Housing minister Jack Dromey disagreed, of course. "It's too little, too late," he said, conceding: "But at least it's something from a Government that has done virtually nothing to tackle the worst housing crisis in a generation."

So, is the scheme likely to offer a housing boost? Or is it a desperate measure by a government that has let the property market collapse?

Under the scheme the Government – along with house builders – will provide security for mortgages taken out on a new-build house or flat.

It will allow lenders to offer mortgages on newly built properties to people with a 5 per cent deposit. The deal means that instead of a typical buyer requiring a £40,000 deposit for £200,000 property, they will only need £10,000. Security for the deal will be provided by the Government and developers. The latter will put 3.5 per cent of the purchase price into an indemnity fund for each property sold, while the government will provide a 5.5 per cent guarantee.

With that security in place lenders, in theory, will be happy to offer 95 per cent deposits. They will do so on the understanding that even if property prices fall and the borrower falls into negative equity and defaults, they will still be able to get their money back. Lenders already signed up include Barclays, Nationwide and NatWest.

Builders are also keen for the scheme to be successful as it will be a major boost to their business and allow them to get plenty of properties off their books. Those involved include Barratt, Bellway, Bovis, Linden Homes, Persimmon, Redrow and Taylor Wimpey.

But new-build properties may not prove to be bargains for many first-time buyers. For starters, they often include a premium on the sale price that can reduce as soon as someone moves into the property.

Also, anyone tempted by the lower rate, two-year fixed deals should think carefully, warns Mark Harris, chief executive of mortgage broker SPF Private Clients.

He has warned that it's not a good bet in the current low interest-rate environment when interest rates are not expected to rise for a couple of years.

"Because borrowers will only have a small deposit, if property prices do fall further over the next couple of years it could be difficult for these borrowers to remortgage again," he said.