Help to Buy could assist over 160,000 first-time buyers to acquire their first home over the next three years, a 25% increase in first home purchases on 2012 levels, according to our calculations.

The new two-part initiative announced in the 2013 Budget is the latest in a long line of government schemes designed to boost homeownership. It aims to help buyers with smaller deposits of between 5% and 20% purchase homes priced up to £600,000.

Given that the average first-time buyer’s deposit stood at £27,200 in 2012, the scheme will assist many aspiring buyers who are being forced to rent. However, it will not restore the number of first-time buyers to pre-credit crunch levels.

The years between 2003 and 2007 saw an average of 371,000 mortgages a year by first-time buyers. Even with Help to Buy, the number of loans to first time buyers is unlikely to exceed 75% of these historic levels.

There are a number of reasons for the limited impact.

With median full time earnings at £26,500 per annum and the average house price at £230,000, affordability remains the biggest hurdle for first-time buyers. The schemes do nothing to address this and some fear it may even push up prices further out of reach.

Unlike previous incentive schemes, Help to Buy is not targeted exclusively at first-time buyers but is available to all credit worthy borrowers. The equity loan part of the scheme, launched in April, is aimed at those buying new build while the mortgage guarantee scheme, which will come into force in January 2014, is open to purchasers of all property. Crucially, the mortgage guarantee scheme will also be available to existing homeowners who wish to remortgage.

Critics say that the equity loan part of the deal will do more to help housebuilders than new buyers. Although we expect the scheme to boost public sector building by 30%, housebuilders will not deliver schemes where an increase in supply could lead to price drops.

The 5% deposit myth

The most widely reported aspect of the Help to Buy schemes has been their aim to increase the availability of higher loan-to-value (LTV) mortgages, specifically those between 80% and 95%, to first time buyers.

However, the scheme itself does not increase the wholesale funds available to mortgage lenders. The intention is to decrease the risk profile of loans so that more funds are made available for mortgage lending. It is not clear that banks will be able to find sufficient funds to take up the entire mortgage guarantee potential. Neither is it clear how these loans will be treated for the purpose of capital requirements.

Given the limit on funds, lenders are still likely to show a preference for borrowers with larger deposits. Therefore, we believe it is unlikely that Help to Buy will inspire banks to start lending at loan to values in excess of 90%.

Furthermore, as the mortgage guarantee element of the scheme is also available to those remortgaging, we estimate that about £26 billion of the funds will be diverted to refinancing existing loans compared with £48 billion used for purchases.

Buying vs renting

There are still many questions surrounding the mortgage guarantee part of the scheme, not least whether the interest rates offered by lenders will be attractive. We do know that the loans will only be offered on a capital repayment basis.

While this structure is a more sensible way to ensure the debt is covered, it makes for higher monthly payments compared with interest-only loans. For a first time buyer, servicing a repayment mortgage at 80% LTV remains more expensive than renting an equivalent property and we expect this to continue over the next five years.

Private Rented Sector Will Continue to Grow

Help to Buy is unlikely to halt the rapid growth in the private rented sector that we have seen over the last 10 years.

Even before the credit crunch, when mortgage lending was readily available, there were problems with deposit and mortgage affordability. Following price growth of 15% per annum since 2000, the average first-time buyer deposit rose above 30% of income for the first time in 2003.

Between 2003 and 2007, the private rented sector grew at an average rate of 7% per annum, as entry into the owner occupied market became increasingly challenging.

However, we still expect the private rented sector to grow by at least 210,000 households per annum over the next three years. This is a similar level of annual growth to the 217,000 per annum seen between 2003 and 2007.

Accordingly, the Budget included incentives for housing providers to build more rental homes. The Build to Rent fund was increased five-fold to £1 billion. A first round of 45 projects are set to receive a share of £700 million. The schemes could deliver up to 10,000 homes.

Taken from
Residential Property Focus Q2 2013

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