Couples buying their first home in commuter towns outside London who typically ask their families for help with the down payment can now also turn to the U.K. government.
Eloise Allen, 24, and partner Ben Pirt, 25, got a 66,000-pound ($100,000) loan from the state last month for a down payment on a newly built three-bedroom home in Horsham, a town in West Sussex about an hour from central London by train. The money was critical to financing the 330,000-pound purchase in the commuter-belt stretch of the Kent, Sussex, Surrey and Berkshire counties, where prices have already risen 15 percent this year.
“It’s been a huge help,” said Allen, a sales and marketing executive whose sister contributed to the deposit. “We’d have had to wait a lot longer if we didn’t have this help and it means our mortgage payments aren’t quite as much of a stretch.”
Chancellor of the Exchequer George Osborne introduced the Help to Buy program in March in an effort to revive the U.K. economy by encouraging construction. While it’s helped lift home prices and mortgage approvals, the initiative has drawn a warning from the International Monetary Fund for its potential to stoke home price inflation, and been described as “moronic” by a Societe Generale SA analyst for encouraging Britons to add to already high debt levels.
Total gross mortgage lending in the U.K. rose 21 percent in May from the previous month to 14.7 billion pounds, the most since October 2008, according to the Council of Mortgage Lenders. House prices rose 0.4 percent in June, matching the biggest increase in six years, Hometrack data show, as the Bank of England’s Funding for Lending Scheme of cheap credit for banks also helped purchasers obtain loans.
The Help to Buy initiative, which offers loans of 20 percent of the value of a property worth as much as 600,000 pounds, has been used to reserve 4,000 properties in the first two months, according to the Home Builders Federation.
“Help to Buy is much bigger than anything we’ve seen before,” said Mark Clare, chief executive officer of Barratt Developments Plc, the U.K.’s largest homebuilder by volume. “The government has removed a major blockage in mortgage availability.”
It’s too early to judge the program’s success in creating jobs through construction and stemming surging house prices by increasing supply. In London, where homebuilders say a shortage of suitable land and strict planning regulations are preventing them from developing more properties, the average home price last month passed 500,000 pounds for the first time, according to property-website operator Rightmove. That’s more than nine times average earnings.
The average deposit for first-time home purchases in the city is 55,683 pounds, compared with 31,664 pounds for all of southeast England, according to Land Registry data compiled by the Shelter charity. The national average is 27,984 pounds.
Allen and Pirt had to raise more than double that for their home in Horsham, a town that’s popular with professionals working in central London where earnings are higher than the average for southeast England, according to the most recent census data.
Couples without children must typically save for seven years for a deposit with an affordable mortgage rate in the region, according to Shelter. Allen said that without the government’s help, it would have been much more difficult to buy.
In April, the average U.K. first-time buyer was 30 years old, and about half relied on their family or a government program to help fund their purchase, according to property broker LSL Property Services Plc. Buyers with parents who aren’t able to help them typically must wait until they’re 37 to enter the market, the National Housing Federation said.
Price gains have already been fueled by record low mortgage rates, which have been driven down further by the Funding for Lending program. This allows banks and building societies to borrow money from the Bank of England at low rates if they use the money to grant home loans.
The IMF warned in May that unless the U.K.’s efforts to boost housing increased supply, they would ultimately cause price increases -- a “result that would work against the aim of boosting access to housing.”
Albert Edwards, global strategist at Societe Generale in London, has said that by encouraging purchasers to take out mortgages, Help to Buy will add to the level of indebtedness, making it a “moronic” idea.
“Why are houses expensive in the U.K.? Too much debt,” Edwards said in a June 4 note to investors. The initiative “stands head and shoulders above most of the stupid economic policies I have seen implemented during my 30 years in this business.”
The program is split into two parts. The government will help first or second-time buyers who can’t afford a deposit by offering them interest-free equity loans for five years for new homes. The purchaser has to put down a 5 percent deposit and can receive a loan of as much as 20 percent of the property’s value interest-free for five years. The principal doesn’t have to be repaid until the house is sold.
The government also will offer 130 billion pounds of mortgage guarantees over three years, starting in January 2014, to encourage lenders to offer mortgages with loan-to-value ratios that are higher than the typical 80 percent. The initiative is aimed at first-time buyers and existing homeowners with the state backing 80 percent of the value of a loan for seven years. For this part, the homes don’t have to be new.
“Help to Buy is more likely to push up prices than to solve or give a material boost to housing construction,” said Ed Stansfield, Chief Property Economist at Capital Economics. The equity loans are “less harmful because you have to buy a new build-property, so although this program stimulates demand, it also directly links it to improvements in supply.”
The mortgage guarantee component “completely breaks that link because it’s available on existing homes,” he said. “It’s counterproductive and just pushes prices out of reach for the people that the scheme is supposed to be helping.”
The scale of the housing shortage is daunting. The U.K. needs 221,000 new homes a year to satisfy demand, according to government forecasts. Councils are targeting just 170,000, a shortfall of 51,000 new homes each year for a decade, according to a report by BNP Paribas SA. Only 18,380 homes were completed by the private sector in the first quarter of 2013, the lowest level for 23 years.
The mortgage guarantees will support the construction of new homes “by helping people move through the market,” Persimmon Plc Chief Executive Officer Jeff Fairburn said in a telephone interview.
“It’ll help homeowners sell their used homes to buy something new,” Fairburn said. “It’s generating interest and confidence.” Persimmon is the largest U.K. homebuilder by market value.
Construction activity last month expanded at the fastest rate since May 2012, led by housing, as new orders rose to the highest in 13 months, Markit Economics and the Chartered Institute of Purchasing and Supply said today.
Homebuilders moved their focus away from high-volume development toward single-family homes with wider margins after facing hundreds of millions of pounds of writedowns and falling sales after the 2007 housing collapse. Many, such as Berkeley Group Holdings Plc and Persimmon Plc, are prioritizing recovering pre-recession profit levels rather than volumes, according to Kevin Cammack, a construction analyst at Cenkos Securities Plc.
“They’ve thrown almost all the money at the private sector, who aren’t the most reliable vehicle to deliver you that supply growth,” Cammack said by phone. “Where that growth would be much more easily activated would be through social house building -- but that is a long-term commitment” and might be a drag on state funds, he said.
Homebuilders say they will provide the homes as long as the government makes it easier for them to gain planning permission. This is often harder to obtain where demand is greatest because of restrictions on building on green-belt land set aside to prevent large cities from expanding beyond a designated area.
“Supply will come through if we can unlock more planning permissions and get more public-sector land in developers’ hands,” Berkeley Group Managing Director Rob Perrins said. “The government has done very well on the demand side; now it must address the issues restricting supply.”
The Bloomberg EMEA Home Builders Index of nine stocks was down 2.2 percent at 2:35 p.m. in London. The index has gained 30 percent this year, led by Persimmon. The benchmark FTSE 100 Index has increased 6.6 percent during that time.
Treasury Chief Secretary Danny Alexander last month pledged 3 billion pounds to build cheaper housing from 2015 through 2018 as the government tries to make homes easier to buy for residents. The money will deliver 165,000 new homes, the most on an annual average basis in 20 years, he told lawmakers in Parliament.
All three of the main political parties have indicated that solving the housing crisis will feature in their 2015 general election campaigns. Ed Miliband, the leader of the opposition Labour Party, threatened to take land from companies that have planning permission and don’t build should he be elected. Permission has been granted for 400,000 new homes in the U.K. that have not been built -- equivalent to a city the size of Birmingham, he said in a speech last week.
For borrowers like Allen, a more pressing issue is ensuring they can keep up with the mortgage payments when interest rates increase.
“We’ve got this rate fixed for a couple of years and we’re all quite young, so I’m hoping we’ll have had pay rises by that point,” said Allen. “We haven’t stretched ourselves to breaking point, so I think we’ll be ready.”