Today, the government has announced its NewBuy scheme, with Housing Minister Grant Shapps insisting that it ‘will really help people get on the housing ladder’. Far from it, the scheme will be a disaster.
The NewBuy Scheme
The scheme works like this.
At the moment, numbers of young people are being stopped from getting a mortgage by the 20% deposits being demanded by the banks.
If you want a £200,000 mortgage and your mortgage lender demands a 20% deposit, that means you have to save £40,000 – on top of all the other costs of buying a house – and it is simply beyond most young people.
So no people getting on the housing ladder = no people selling to them and moving up it themselves = stagnation and falling house prices.
The NewBuy scheme hopes to overcome this, basically, by pitching in with help with the deposit.
New-house buyers buying a new house will only have to find a 5% deposit. The rest of the deposit will consist of a 3.5% contribution for 7 years made by the builder, and a further guarantee of 5.5% from the taxpayer.
This will, says the government, help those people who could well afford the mortgage payments but cannot save the deposit whilst they are paying rent.
It is claimed that the scheme will help the construction industry and – to any extent that this is true – then there is cause to welcome it. The building industry provides work, not only for a disproportionate number of unskilled and low-skilled workers (MUCH-needed), but also for lots of local sub-contractors, which pumps a disproportionate amount of money into the local economy, rather than simply making profits for absentee shareholders.
When Gordon Brown wanted to save the economy in 2008, he knew that it was construction he needed to stimulate in order to stimulate the economy.
However, having said that, one has to have massive doubts whether this scheme will do any good and, indeed, the fear is that it will do great harm to the housing market.
The NewBuy Scheme will not help first-time house-buyers
Firstly, will the scheme help first-time house-buyers?
It will certainly reduce the burden of raising a huge deposit, and so there many indeed be some buyers out there who are consequently enabled. According to the BBC, one of Britain's biggest housebuilders, Barratt Homes, has said that 20,000 people have already registered for more information about the scheme.
But will they be getting such a good deal?
A buyer taking a £160,000 fixed-rate mortgage (after a £40,000 deposit) with the NatWest (currently available at 4%) will find themselves paying £850 a month.
That same buyer using the NewBuy scheme will, of course, get away with only a £10,000 deposit, but they are therefore going to have to take out a £190,000 mortgage … at a scheme rate of interest of 4.99% – i.e. incurring a monthly payment of £1122.
Given that the builders are likely simply to slap their 3.5% share of the deposit straight back onto the price of the house, you might well find that a £200,000 house bought under the scheme will be costing you £1163 a month – an eye-watering 37% higher than the £850 a month you would have been paying before.
So you need to be careful.
The second problem for prospective house-buyers, of course, is that the large required deposit is not the only thing holding them back from buying a house. For most of them a much bigger problem is the danger of negative equity, and the dangers associated with not being able to sell the house easily if they lose their job, or have to move for a new job, or for a bigger family etc.
The NewBuy scheme offers such hesitants nothing at all.
The scheme explicitly states that it ‘does not cover the borrower against negative equity or a shortfall between the sale price and the outstanding debt’.
Even worse, since the NewBuy scheme is only available for new-build homes, it is introducing an imbalance in the market in favour of new-build homes.
It is NOT a scheme for first-time buyers.
The problem with this for our prospective NewBuy buyers, of course, is that – immediately they have bought their new-build home – it will cease to be a new-build home. Thus, should they need to try to sell their house (e.g. because they have lost their job), they will find themselves having to reduce the price to compete in the first-time-buyer market with more easily-purchasable new-build NewBuy houses!
The basic fact about buying a NewBuy home, therefore, is that as soon as you move in, you will have to knock at least £30,000 off its value, because the only way you will be able to compete with a £200,000 new-build house offering a 5% deposit will be by offering to sell your house for £160,000.
Thus you have to accept that the scheme will only help a very specific kind of buyer – someone wealthy enough and secure enough in their job to be able to afford a terrifyingly-high mortgage, and someone who intends to buy and stay, and is not worried by negative equity in the short term.
My guess is that anyone with any sense will treat the NewBuy scheme with intense mistrust.
The NewBuy Scheme will damage the rest of the housing market
At the same time, my guess would be that the NewBuy scheme will damage other home owners. If someone selling their non-new-build starter home is going to have to knock off £30,000 in order to match a new-build home under the NewBuy scheme, then that £30,000 cut is going to have to work its way up the market to second- and third-buy bigger homes.
One of the biggest problems in the housing market at the moment is not mortgages or even falling prices, but the imbalance in the kinds of house available.
House-builders who bought land at fantasy-figures during the boom have been building far too many of the kind of house which yields them the greatest return – four-bedroom detached houses. You cannot sell such a house for love nor money.
But of the kind of home that starter-buyers need (the two-bed semi) there is an absolute dearth.
The other problem afflicting the housing market lies in the fact that, for many older people, their house represents their equity … and their saving for their retirement. Whilst wealthy pundits might welcome the fall in house prices to ‘realistic’ levels, many older people are trapped, unable to realise their equity by selling their house, but meantime watching their ‘savings’ drain away as its price falls.
What these people need is not a stimulus to house-building, and EVEN MORE four-bed detacheds coming onto the market – they need a stimulus which will help new buyers buy an existing starter-home, thus allowing that home-owner to ‘move up the ladder’ and buy their home from them.
The government’s NewBuy scheme will do nothing to solve this problem and indeed, by taking 3.5% off the builders for every home they sell, it will tempt them to build EVEN MORE even more four-bed detacheds.
And all that will do is fuel the most massive deflationary crash in house prices.
The NewBuy Scheme will not help the construction industry
Meanwhile, you have to wonder whether the NewBuy scheme will do all that much to help the construction industry.
Yes, it MAY tempt more first-time buyers to buy new houses, but only at the cost of the builders stumping up 3.5% of the purchase price into ‘a special account held by the lending bank’.
Not only will the builders at least forgo that money for 7 years, but if during that time there is a problem with the loan there is a real danger that they will lose it altogether … to indemnify the bank (as lender) against any negative equity. As we have seen, since the NewBuy scheme is introducing into the market an imbalance in favour of new-build houses, this will almost certainly be the case for any ‘now-no-longer-new-build’ house that has had to be repossessed.
So the NewBuy scheme is not really there to benefit the builders – which may explain why the number of builders signing up to the scheme has dropped from an original 25 to just the seven biggest companies.
The Cuckoo in the nest
So, you might be asking, IF the NewBuy scheme is not going to help first-time buyers, and is not going to help the house-builders, and is only going to damage the housing market, who IS it designed to help?
Well – of course – you’ve guessed straight away … it’s the banks!
The scheme is yet another government scam to pour money into the banks in a desperate attempt to bribe them to do what they ought to be doing anyway.
By the time the buyer has stumped up a 5% deposit, bolstered by 3.5% by the builder, and a 5.5% guarantee against a fall in house prices by the government, the bank will still be receiving a 14% deposit on every mortgage … which is quite secure enough against default.
Add to that the fact that they are adding a sly 1% onto the rate of interest whilst joining the scheme, and NewBuy turns out for the banks to be yet another ‘nice little earner’.
The banks really have become the cuckoo in the nest. They have pushed out the public sector, the students, the public sector pensioners, the unemployed and disabled and now the NHS, and they sit there alone, open-mouthed, whilst the government – genetically pre-programmed with some self-destructive instinct to feed them – rushes around trying to find still more juicy morsels to feed their insatiable appetite.
What this country needed was not yet-another-stimulus to get the banks rich quick, but a realistic scheme which would have provided (through both social housing providers and private builders) the cheap starter-homes that young people so desperately need.
And the NewBuy scheme FAILS spectacularly to achieve this.