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Experts calculate the potential of UK’s New Help to Buy scheme

Announced yesterday by Chancellor George Osborne in his 2013 Budget, the £3.5 billion scheme has been widely welcomed as a way of boosting the sales of new homes, getting more first time buyers onto the housing ladder and helping the second steppers who are struggling to move up.

It is divided into two parts; an equity loan scheme and a mortgage guarantee scheme. Under the first buyers will be able to enter into a shared equity loan with the government to buy a new build home. This is an extension of the current First Buy scheme, but will be available to all buyers, not just first time buyers.

Buyers will put down a 5% deposit, the government will provide 20% and the lender will advance a 75% mortgage as usual. If the house is repossessed and sold for 75% of the purchase value, the government will take the losses. The buyer can repay the government during the term of the loan or when they sell their home.

The second part of the scheme is the mortgage guarantee, an extension of the current New Buy scheme, but with one crucial difference; under this new version, house builders will not have to offer any guarantees, which they do at present, and the scheme will be rolled out to existing homes as well as new build.

According to Lucian Cook of Savills research these two initiatives will have a much bigger impact on the housing market than the current schemes which are much narrower. Also he pointed out that recent budgets have challenged the top end of the market but this one looks to support the bottom end.

‘We still expect a top down recovery as we’ve seen in previous cycles, but this budget should give a boost to the lower tiers of the housing market. We believe that the Help to Buy initiatives will have a much bigger impact on the functionality of the market and transaction levels than previous government schemes such as FirstBuy and NewBuy,’ he explained.

‘We also expect the schemes announced to give a bigger boost to house building, although we still forecast levels of construction well below the 230,000 new homes needed each year,’ he added.

Savills research estimates that the equity loan scheme has the capacity to support 75,000 new homes sales over the next three years, the equivalent of 25,000 more sales a year.

‘Whilst that would only increase transaction levels across the whole of the housing market by around 2.5%, it is likely to have a much bigger impact in the first time buyer and second stepper markets which have been most affected since the credit crunch,’ said Cook.

He also pointed out that transaction volumes have typically run at 55% of a fully functioning market, such have been the constraints on aspiring home buyers unable to climb the deposit mountain. As a result house building volumes have inevitably been constrained by the same lack of deposit.

Private sector  building completions are currently running at 90,000 a year. Savills research estimates that the equity loan scheme could deliver a 28% increase in new build sales if it is fully taken up. The extension of the Funding for Lending scheme, which reduces the cost of mortgage debt, makes these targets more achievable.

‘Previous measures have largely ignored the plight of second steppers who have found themselves stuck on the first rung of the housing ladder having seen their housing equity at best standstill, these measures given them some hope of trading up,’ said Cook.
 
The new mortgage guarantee scheme, which is extended to existing homes as well as new build, should give the market a further boost. According to calculations by the Savills Research team, the mortgage guarantee scheme has the capacity to enable 550,000 extra house sales over the next three years if it translates in to £130 billion of mortgage lending. The would represent a 34% boost to current mortgage reliant sales and increase the overall number of housing transactions, including cash sales, by 19%.

‘However it remains to be seen whether £12 billion of guarantees can translate into mortgage lending over 10 times that figure, particularly given the conditions applying to the grant of mortgages that can receive support,’ explained Cook.

On top of this is a potential boost to for the build to rent sector. Experts point out that a commitment from the Chancellor to the Build to Rent scheme by making a five fold increase in the fund available for build to rent schemes from £200 million to £1 billion will also help the housing sector.

‘This is clearly another small push for the sector and a sign that the government remains committed to promoting build to let. It would be a plus if the HCA is able to channel the money in the direction of entrepreneurial investors rather than Registered Housing Providers, since the future direction of the market is reliant on new and innovative approaches to the current stalemate,’ said James Mannix, head of Knight Frank’s Residential Investments.

‘If this is coupled in due course with changes to the planning framework, allowing build to rent schemes to avoid some Section 106 and affordable housing payments, then it should help to start balancing the scales with traditional build to sell development,’ he added.

Cook described the five fold increase in the Build to Rent Fund as very welcome. ‘We should not lose sight of the fact that even if this increase in housing transactions is fully delivered, they will still remain 30% below long term trends, meaning continued pressure on the private rented sector,’ he said.

‘In the long run its success is more important to generation rent than measures to improve access to home ownership,’ he added.

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