Press Article
METRO - 1 December, 2011
Government housing strategy
By Jo Eccles
Last week the government unveiled its housing strategy. As well as outlining proposals to encourage more homes to be built in the UK, particularly affordable ones for first time buyers, it also addresses the financial obstacles faced by first time buyers.
One proposal by the government is a mortgage indemnity scheme that will allow larger mortgage lenders to offer 95% loans on new-build homes, meaning that buyers only need to save for a 5% deposit, rather than 20-25% which is the common requirement at the moment. Whilst we should certainly applaud the fact that the government is taking seriously the difficulties first time buyers face, I’m not convinced this is a sustainable answer.
One of the basic problems with the UK housing market is that prices are too high in relation to the average salary taken home after tax, therefore properties are unaffordable. Thus, the government’s proposal is helping first time buyers to buy into already inflated prices.
As well as incurring significant debt, first time buyers will inevitably face interest rates rising at some point from their current historic lows, which will increase their monthly mortgage repayments. On top of rising monthly mortgage repayments, if property prices fall, first time buyers will be pushed into negative equity where their home is worth less than their mortgage.
Our economic outlook is fairly bleak, and in bad times, deposits need to be large to protect the financial system, so if prices fall, home owners will have enough equity in their homes to withstand this. Small deposits only work if everyone is sure that house prices are bound to increase. If these first time buyers do fail to repay their mortgage, it will be the tax payer who is ultimately liable for these losses.
I am absolutely on the side of first time buyers and am in favour of any sustainable scheme which will help them, but I just don’t think this is it; whilst it will boost home ownership in the short term, it’s likely to cause even more issues in the long term.