The state should provide insurance cover that enables banks to lend as much as 90 percent of a home’s value or give tax breaks to first-time buyers, Morgan said today at a property conference in Newport, Wales. The market won’t improve until more people can purchase their first home, helping other buyers and sellers complete transactions.
“The whole thing is a no-brainer, it would cost very little to the public purse,” Morgan said. “It would enable banks to lend at much lower rates and make a huge difference in cost to the buyer.”
The financial crisis forced every major U.K. mortgage provider to stop making loans for 100 percent or more of a home’s value by April 2008. Concerned by further falls in house prices and a perceived higher risk associated with first-time buyers, they raised the typical down payment to as much as 25 percent, regardless of the ability to meet monthly payments.
First-time buyers typically needed a down payment of 6 percent before the financial crisis, Morgan said on a Sept. 9 conference call. Lower deposits would increase purchases, boosting tax revenue and employment in industries like construction, he said.
“It makes a lot of sense,” said Chris Millington, an analyst at Numis Securities in London. “The bottleneck most of us are seeing is in mortgage lending. The government wants to support house building in the country, it can’t afford the housing market to fall off a cliff.” Any such plan would depend on the cost, he said.
Helping insure banks against borrower default to boost lending would cost “next to nothing,” Morgan said.
Redrow, based in St. David’s Park, Wales, completed 2,587 homes in the year through June. That’s up from 2,113 units a year earlier.
U.K. homebuilder Bovis Homes Group Plc in June introduced a mortgage with a 10 percent down payment in cooperation with Barclays Plc, Britain’s third-biggest bank. To reduce the bank’s risk, Bovis pays for Barclays’s insurance against buyer defaults. The homebuilder will also provide unemployment cover for the home owner for up to 12 months.
Bovis expects 20 percent of sales next year to come from the new product, called ‘Perfect 10,’ Chief Executive Officer David Ritchie said in an Aug. 23 interview. Other homebuilders were offered the arrangement but deemed it too expensive, Numis’ Millington said.
Aside from larger down payments, first-time mortgages are more affordable than before the credit crisis. The proportion of a new homeowner’s disposable earnings spent on mortgage payments fell to 28 percent in June 2010 from 50 percent three years earlier, Halifax, the mortgage-lending division of Lloyds Banking Group Plc, said on Aug. 19. That’s less than the 34 percent average over the past 25 years, the bank said.
The U.K. government also needs to relax planning rules to support homebuilding, Morgan said. Several of Britain’s biggest house builders say they are concerned that a government pledge to give local councils more power over planning decisions will slow development.
A U.K. housing-market gauge last month fell to the lowest since May 2009 as more people sought to sell their homes, pushing down prices, the Royal Institution of Chartered Surveyors said on Sept. 14. The government is due to announce the biggest spending cuts since World War II next month, which may deter buyers and prompt banks to restrict access to loans.
Morgan’s suggestion “has a lot of logic to it,” said Keith Miller, chief executive officer of Miller Group Ltd., the U.K.’s largest privately held homebuilder. “There is huge unfulfilled demand from first-time buyers because of funding constraints.”
The average age of a first-time buyer without a family or state assistance rose to 37 years from 33 in 2007, according to the National Housing Federation. Today’s 21-year-olds may have to wait until they’re 43 before making a purchase. In London, the age is 52, the NHF said.
Not everyone agrees with Morgan’s idea or thinks it will take hold. “Banks know that 95 percent mortgages got them into a mess and they are more concerned about prices going down,” Alastair Stewart, an analyst at Investec Securities, said in an interview. “Privately, it’s the last thing they want to do, and I don’t think this government wants to help the house builders.”
The previous U.K. government of Prime Minister Gordon Brown scrapped the stamp duty, a tax on property purchases, for first- time buyers spending 250,000 pounds ($390,000) or less.
The Bloomberg EMEA Home Builders Index of eight stocks has declined about 12 percent in the past six months, while the FTSE 100 Index has fallen 1.3 percent.