U.K. Chancellor of the Exchequer George Osborne is taking a leaf from the U.S. playbook in expanding government help to homebuyers to stoke the country’s sagging recovery.
Osborne yesterday pledged 3.5 billion pounds ($5.3 billion) to help buyers of new homes with loans of as much as 20 percent of the property’s value, broadening an existing program beyond first-time purchasers. He also announced a plan to guarantee as much as 130 billion pounds of new mortgages to fuel demand from purchasers with limited cash for a deposit.
Prime Minister David Cameron’s goal is to stimulate an economy at risk of its third recession in four years and counter criticism that the government’s austerity measures are exacerbating the slump. The latest measures come after the government sought to ease lending and spur construction by simplifying planning laws. Real estate accounts for about 9 percent of the country’s gross domestic product, according to data compiled by Trading Economics.
“The level of incremental lending this is likely to encourage could be substantial,” Stephen Noakes, mortgage director at Lloyds Banking Group Plc, said by telephone.
U.K. homebuilders rallied after Osborne’s announcement to the highest levels in almost five years. The Bloomberg EMEA Homebuilders Index rose 0.7 percent today at the 4:30 p.m. close of trading in London after climbing 3.7 percent yesterday. The index has gained 51 percent in the past year led by Taylor Wimpey Plc and Barratt Developments Plc, the industry’s largest company by volume.
Loan approvals are about half what they were in the boom decade that ended in 2007, following the collapse of mortgage lender Northern Rock Plc. In July of that year, there were 22 mortgages available for 110 percent of a home’s value, according to personal finance website moneyfacts.co.uk. Lending dried up after mounting losses and plummeting asset values forced several banks to accept bailouts from the U.K. government.
The government’s “Help to Buy” plan broadens an existing program beyond first-time buyers and is a “dramatic intervention,” Osborne told lawmakers at the House of Commons in London yesterday during the annual budget.
Increased involvement in the housing market comes a decade after Gordon Brown, at the time Chancellor of the Exchequer, weighed policy proposals to introduce longer term fixed-rate home loans, a change that may have required a U.K. equivalent of U.S. mortgage guarantors Fannie Mae and Freddie Mac, which guarantee home loans and package them into securities.
The two mortgage financiers have been under U.S. conservatorship since 2008 and have drawn almost $190 billion in taxpayer aid to stay afloat during that time after the property market collapse triggered a global financial crisis and losses on mortgage debt.
The two agencies, along with U.S.-owned Ginnie Mae, are financing about 90 percent of new lending even as steps are taken to reduce their dominance, including increases to the fees they charge for mortgage guarantees.
The Federal Housing Administration, which backs home loans to first-time buyers with down payments as low as 3.5 percent, insured $213.3 billion of mortgages in 2012, three times the amount seen in 2007. Another government effort, the Home Affordable Refinance Program, has helped more than 2 million borrowers refinance, including homeowners who owe more than the value of their properties.
New U.K. mortgage lending has fallen 52 percent since 2006 as banks retreated from the market following the housing collapse of 2007, according to the Council of Mortgage Lenders.
Loans for home purchases last year totaled about 81 billion pounds, down from 156 billion pounds in 2006, the group said. First-time buyers received 27.5 billion pounds in 2012, down from 48.6 billion pounds in 2006.
Osborne’s Help to Buy program will provide potential buyers equity loans for newly built homes worth up to 600,000 pounds starting in April. To qualify for the program, which lasts three years, potential homebuyers will need a down payment of 5 percent.
It also offers guarantees to support 130 billion pounds of mortgages for existing and newly built homes. Under the program, which starts in 2014 and runs for three years, lenders can buy a state guarantee that compensates part of their losses in the event of foreclosure, and the government will charge a fee for the assurance.
Since 2011, the Conservative-led coalition government has sought to reduce borrowing costs for home buyers by providing guarantees. The most-recent program, NewBuy, helped buyers get loans with a 5 percent deposit, with some losses incurred by defaults split between the state and the homebuilders to help protect lenders.
Home prices have gained 1 percent to 162,441 pounds in the year through January, while values in London have gained 7.1 percent, according to the Land Registry. The U.K.’s housing market boomed in the decade through Nov. 2007, when they almost tripled to an average of 182,178 pounds.
The programs still fall well short of the level of U.S. intervention in housing and in the short-term, the impact will be limited, according to Capital Economics Ltd.
“This isn’t going to transform the mortgage market over-night,” Ed Stansfield, the London-based group’s chief property economist, said by phone. “The government has announced these measures without finalizing them with some of the major lenders who are still shrinking their balance sheets and this scheme is unlikely to stop them.”
The government yesterday cut its economic growth forecasts for this year and next to 0.6 percent and 1.8 percent, respectively. Osborne said three years ago he would erase Britain’s budget deficit by 2015 to protect the top credit rating on government bonds. He has failed on both counts and yesterday he said spending cuts will carry on for three years after the 2015 election.
David Cameron’s Conservatives are trailing the Labour opposition in the polls as voters blame the government’s austerity package for a persistent economic slump.
“House building has a key role to play in the economic recovery,” Persimmon Plc Chief Executive Officer Mike Farley said by e-mail. “Help to Buy will be particularly helpful to capital constrained small- and medium-sized house builders, providing a boost to sales and build rates, which should be good news for jobs and economic growth.”