Mortgage help sparks boom – and fears of another crash

If you think prices are rising, just wait until 2014, as the full impact of Help to Buy hits home. By Graham Norwood

It is widely accepted that the Government's Help To Buy scheme is already aiding the recovery of Britain's housebuilding industry, but analysts fear another initiative being launched in a few months risks creating a housing market bubble.

Under the Help To Buy Mortgage Guarantee Scheme, details of which were announced a few days ago, a buyer needs only a 5 per cent deposit, while participating lenders would have the next 15 per cent of any loan underwritten by the taxpayer.

So even if property values fell by 20 per cent, the lender would not be out of pocket: the buyer and the tax-payer would bear the loss.

To qualify for the guarantee, which comes into effect on 1 January next year, an applicant can be any age and can be a first-time buyer or an existing owner, but household annual income should not be above £150,000.

The home they want can be brand new or already built and owned, but must cost £600,000 or less and cannot be a shared ownership or buy-to -let property. In other words, the scheme is for existing or would-be owner-occupiers.

The scheme goes much further than existing government initiatives to kick-start the market, notably the Help To Buy scheme introduced earlier this year. That measure applies only to new-build homes costing £600,000 or less and involves buyers receiving a 20 per cent equity loan, interest-free for five years.

Despite such restrictions, Help To Buy has had a dramatic impact on the market. More than 7,000 buyers have signed up since it was launched in mid-April and some 1,250 have already moved in to their new homes. First-time buyer numbers are at a six-year high, with 25,100 loans issued in May, up 42 per cent on the same month last year, according to the Council of Mortgage Lenders.

This surge has forced the property establishment to revise its predictions for price growth. Halifax says values are now 3.7 per cent up on summer 2012 – the biggest rise in three years – and Savills, the estate agent, predicts that prices will soar 18 per cent by 2017.

But the new mortgage guarantee scheme is widely expected to create a much more dramatic rise in sales volumes, and therefore prices, setting off alarm bells.

"It's a racing certainty that buyers are going to fill their boots with tax-payer guarantees," housing industry analyst Henry Pryor says. "I expect sales of £450,000 to £600,000 homes to bounce as the Government helps people to buy what they would otherwise be unable to afford."

The estate agent Hamptons International says it welcomes the guarantee's overall aim of helping existing owner-occupiers whose equity has been eroded in recent years by house price falls of up to 25 per cent in parts of the UK, but it admits there are downsides.

Fionnuala Earley, Hamptons' research director, says: "It does raise questions about whether it's wise for borrowers to take on higher percentage loans when households are already heavily indebted." She also warns that mortgage guarantees may push demand for homes ahead of supply, "thus exacerbating both poor affordability and the need to borrow higher percentage loans to buy a house". These warnings follow the release of data showing higher loan-to-value lending: the latest Council of Mortgage Lenders figures show that in May the average first-time buyer secured a mortgage equivalent to 83 per cent of the property value, the highest ratio since November 2008.

Critics also cite a warning by the former Bank of England governor, Sir Mervyn King, that the UK should avoid repeating the errors in the United States where government-backed mortgage guarantee schemes have had to be bailed out.

However, the Government says there will be rigorous "stress testing" of applicants to ensure they have the income and credit records to ensure they can afford the new guaranteed mortgages. Ministers insist the existing Help To Buy initiative needs this mortgage follow-up to ensure the housing market recovery takes hold in the long term.

Housebuilders Bovis, Persimmon, Taylor Wimpey and Barratt have all reported increased sales and profits thanks to Help To Buy. Barratt's sales of 13,663 homes in the year to the start of July marks a dramatic 34 per cent rise on the previous 12 months.

Stewart Baseley, the chairman of the Home Builders Federation, which represents more than 80 per cent of all developers in the UK, says: "Large deposits to secure a mortgage prevented many from buying. The scheme helps consumers overcome that barrier and will undoubtedly lead to an increase in building. We're seeing companies revise build levels, which in turn will create jobs and deliver an economic boost."

Jeff Fairburn, the chief executive of Persimmon, explains: "In addition to helping [overcome] the housing shortage, this will have benefits for jobs and the economy. For example Persimmon has already decided to make significant further investment in trade apprentices this year to support the anticipated increase in output." While the mortgage guarantee scheme will apply to the whole of the UK from the new year, the Help To Buy initiative applies only to England. However, regional governments are now following the Coalition's lead.

The Welsh Government is to introduce its own version along with a separate initiative called NewBuy Cymru – a Welsh variant of a measure operating now in England, which involves property developers and the Government jointly underwriting mortgage lenders. This allows buyers to secure a home with a lower-than-average deposit.

The Scottish Government has announced a £120m version of Help To Buy which, like the English version, applies only to new builds.

But doubts remain. Peter Williams, an analyst at the Acadametrics housing consultancy, says: "There's a general view that the short-term outlook is quite promising. But in the medium term, as government initiatives fall away, market uncertainty will return."

News
peopleFrankie Boyle responds to referendum result in characteristically offensive style
Arts and Entertainment
Friends is celebrating its 20th anniversary this year
tvSeries celebrates 20th anniversary
News
news
Life and Style
Jack Cooksey goes for the grand unveiling - moments before dropping his new iPhone 6 on the floor
iphone launch
PROMOTED VIDEO
Arts and Entertainment
Liam Neeson said he wouldn't
tv

Liam Neeson's Downton dreams

Sport
Yaya Touré (left) and Bayern Munich’s Spanish defender Juan Bernat
football
Arts and Entertainment
A spell in the sun: Emma Stone and Colin Firth star in ‘Magic in the Moonlight’
filmReview: Magic In The Moonlight
Sport
A 'Sir Alex Feguson' tattoo
football

Arts and Entertainment
Ben Whishaw is replacing Colin Firth as the voice of Paddington Bear
tv

Thriller is set in the secret world of British espionage

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Senior BA - Motor and Home Insurance

    £400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

    SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

    £320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

    Head of Audit

    To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

    Audit Manager Central Functions

    To £85,000 + banking benefits: Saxton Leigh: You will be expected to carry out...

    Day In a Page

    Mystery of the Ground Zero wedding photo

    A shot in the dark

    Mystery of the wedding photo from Ground Zero
    His life, the universe and everything

    His life, the universe and everything

    New biography sheds light on comic genius of Douglas Adams
    Save us from small screen superheroes

    Save us from small screen superheroes

    Shows like Agents of S.H.I.E.L.D are little more than marketing tools
    Reach for the skies

    Reach for the skies

    From pools to football pitches, rooftop living is looking up
    These are the 12 best hotel spas in the UK

    12 best hotel spas in the UK

    Some hotels go all out on facilities; others stand out for the sheer quality of treatments
    These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

    Widespread fear of Isis is producing strange bedfellows

    Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
    Topshop goes part Athena poster, part last spring Prada

    Topshop goes part Athena poster, part last spring Prada

    Shoppers don't come to Topshop for the unique
    How to make a Lego masterpiece

    How to make a Lego masterpiece

    Toy breaks out of the nursery and heads for the gallery
    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
    Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

    Ian Paisley’s decision to make peace with his IRA enemies

    His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
    'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

    'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

    Exclusive extract from Janis Winehouse's poignant new memoir
    Is this the role to win Cumberbatch an Oscar?

    Is this the role to win Cumberbatch an Oscar?

    The Imitation Game, film review
    England and Roy Hodgson take a joint step towards redemption in Basel

    England and Hodgson take a joint step towards redemption

    Welbeck double puts England on the road to Euro 2016
    Relatives fight over Vivian Maier’s rare photos

    Relatives fight over Vivian Maier’s rare photos

    Pictures removed from public view as courts decide ownership
    ‘Fashion has to be fun. It’s a big business, not a cure for cancer’

    ‘Fashion has to be fun. It’s a big business, not a cure for cancer’

    Donatella Versace at New York Fashion Week