The referendum result has seen a number of buyers pulling out of deals, but brokers say Help to Buy could be extended to stem market fears
The new-build property sector has been rocked by the Brexit vote. Uncertainty surrounds the future of Help to Buy, share prices for housebuilders have plummeted, and key lenders have also seen their share price fall.
Mortgage Strategy examines what the implications of a post-Brexit world are for mortgage brokers attempting to guide their clients through such turbulent waters.
David Cameron will step down as Prime Minister on 2 September and be replaced by a new leader.
While some experts believe that a change in government, twinned with economic uncertainty, could open the door to extensions for the Help to Buy scheme, or possibly even further government support for new-build, others are more pessimistic.
London & Country mortgage specialist David Hollingsworth says buyers are already pulling out of new-build deals.
“We have seen some instances of buyers electing to take a break from the purchase,” he says. “They have either walked away with a view to coming back later or have just withdrawn. It is not a huge proportion but there is some evidence of withdrawals, which is a by-product of the uncertainty we face.”
Your Mortgage Decisions director Dominik Lipnicki has also seen clients walk away from new-build deals over Brexit.
“It will definitely have an effect,” he says. “People are not going to do anything as they are waiting and it paralyses everything. I have several clients who have put off purchasing a home until they see what is happening. The more people do wait, the more of a vicious circle it will become and it will push us into recession.
“Builders buying land will wait and see what happens. You hope it will be sorted out quickly, but I fear it won’t be, with political elections in both parties and a possible snap general election. It all brings uncertainty and markets hate it so it will stifle the sector.”
The latest Office for National Statistics data shows new-build house prices outstripping second-hand prices by 4.6 per cent in April and 10.2 per cent in the previous 12 months.
This compares to just 0.3 per cent over the month and 8 per cent over the year for second hand property. The average new-build property cost £254,604, compared to £205,914 for second-hand properties. Some economists have predicted a post-Brexit house price fall of up to 25 per cent, although others claim London could be boosted by foreign investors attracted by low Sterling costs.
The UK vote to leave the EU precipitated a huge fall in leading housebuilder share prices when markets opened the next day. Major housebuilders such as Taylor Wimpey, Barratt Developments and Persimmon saw share prices plummet nearly 40 per cent as trading opened on Friday morning after the Brexit result. They remain volatile.
FCA data shows Berkeley Group was one of the biggest stocks sold short by hedge funds betting on share price drops on 24 June. “Housebuilders have been badly affected by Brexit,” says GPS Economics founder Gary Styles. “The worst share prices were about 40 per cent down the day after Brexit. There has been a massive downgrade in the outlook for their own sectors.”
It is not just housebuilders but estate agents, lenders and mortgage brokers who have also seen sharp falls. Mortgage Advice Bureau shares have fallen from 320p on close of trading on 23 June to 231p on close of trading on Monday 27 June, a 28 per cent drop.
Countrywide, one of the country’s largest brokers with a particular focus on new-build sales, has fallen from 349p to 251p over the same period, a 27.5 per cent drop.
If anything lenders have suffered more as they are tied into the wider financial ecosystem. The Royal Bank of Scotland and Barclays saw huge drops in the aftermath of Brexit and trading was suspended briefly in both on 27 June. Lloyds Banking Group has also seen its value plummet by around 30 per cent.
But brokers say it remains unclear what affect the shock will have on housebuilding, mortgage availability on new-build or building volumes.
“Despite the Brexit markets, lenders are well-capitalised and better placed than they were in terms of the new-build market,” says Coreco director Andrew Montlake. “There are always concerns with new-build property and values but hopefully it should stabilise pretty rapidly.
“New-builds are judged on a development by development basis. You have some very good developers such as Battersea Power Station, which people feel very optimistic about – it is basically a mini-village with a tube station.
“For good projects such as that then there should be no issues. Maybe there are the biggest concerns about out of town blocks that have been built willy nilly. People will still need to move and buy houses and they will still be enticed into places like London.”
Montlake also suggests that lower Sterling rates, which collapsed in the immediate aftermath of Brexit, could encourage foreign investors to buy into London and create more building opportunities. And some lenders have made recent moves into opening up their new-build offerings that are unlikely to be reversed any time soon.
On 20 April, Skipton Building Society opened up its new-build lending at 90 per cent LTV to all intermediaries. Previously, higher LTV products were only available to selected brokers. Skipton also launched a new-build two-year fixed product to 90 per cent LTV at 3.15 per cent, exclusively to intermediaries for two weeks.
Help to Buy
The Help to Buy scheme was a flagship housing policy of the Cameron Government designed to boost first-time buyer access to property through higher LTVs. The scheme was launched in October 2013 and has two parts. Under the mortgage guarantee scheme, lenders are provided with government support to offer 95 per cent LTV mortgages.
Under the equity scheme, borrowers take 80 per cent of the value, while lenders and government split the other 20 per cent between them as support. The first scheme is due to end in December, while the equity scheme, which has proven more popular, is due to end in 2021.
The scheme was used to address a specific market problem of lenders offering significantly lower LTVs on new-build properties after the crisis. John Charcol senior technical manager Ray Boulger says many lenders still have lower LTV limits on new-build than second-hand properties but Help to Buy has narrowed the gap.
“A very high proportion of new-build properties bought with 5 per cent deposits are being bought through Help to Buy equity schemes,” says Boulger.
Moneyfacts data shows the Help to Buy scheme caused 95 per cent LTV loans to increase 383 per cent to 271 products from 56 when the scheme was launched. Many lenders like Precise are still using the mortgage guarantee scheme and launching new products such as Precise in January despite the scheme ending in December.
Brokers say the Brexit vote and economic uncertainty may have changed the calculus for a new government in September.
“Certainly the post referendum environment could theoretically affect the political approach to the extent or timing of various schemes, but as yet there are no indications of such moves,” says one senior lending source close to policymaking.
Instead of working out how to safely wind down schemes the focus could turn to propping up the housing and mortgage markets.
“After Brexit there is an argument that the Government might extend the Help to Buy scheme but it will be down to whichever new government takes power,” says Montlake. “There is the possibility that it might be extended.”
Styles of GPS Economics says the Government may even feel obliged to commit to more housing support schemes as well as extending Help to Buy.
“I have long been concerned that there is no clear exit plan for these schemes,” he says. “As is always the case, the Government can launch a scheme that provides support for the market and a lot of the impact has been to boost profitability of housebuilders.
“They have seen substantial growth in profits and dividends but we haven’t seen a massive increase in housebuilding. People don’t want to talk about how to exit the schemes for taxpayers or the long-term health of the sector. That is something that hasn’t been well thought through.
“There is an issue that is not about the short term but the medium term and how you wean the sector off those schemes. I can see a scenario where there is clamouring for more support schemes, not less.”
Boulger agrees that the market is highly dependent on support from Help to Buy and argues that options are limited from lenders outside the scheme.
“Some developers say up to 80 per cent of properties are being sold under the Help to Buy equity scheme,” he says.
“Overall, about 40 per cent of new-build properties are being sold using the equity scheme so the Government getting involved has been really important. The mortgage guarantee scheme is set to end in December. The Government has been firm that will happen and a week ago I would have said there is no chance of it being extended and I still think it is unlikely.
“If the market did suffer badly as a result of Brexit then one quick fix could be to extend Help to Buy – I wouldn’t rule it out. There is no doubt the new-build market is very dependent on it.”
But there were signs some lenders are already pulling back from the scheme, with Santander dropping out recently of Help to Buy guarantees while Nationwide has never used it.
Hollingworth says he expects the guarantee scheme to still end although circumstances have changed since the Brexit vote.
“It does open a question mark around the guarantee,” he says.
“My view is there are enough lenders offering 95 per cent options without the need to rely on government guarantees. I’m still dubious whether Brexit will blow that out of the water. No lenders have moved to withdraw 95 per cent LTV deals yet so it is not problematic but we will have to monitor what happens with rates going forward.
“If there was a feeling that there would be a withdrawal of the guarantee in that market then there would need to be a discussion about whether to extend it. There is still a strong argument that high LTV mortgages can stand on their own two feet but all bets are off at the moment.”
As well as helping borrowers to get on the ladder, brokers claim the Help to Buy scheme has lowered mortgage rates and boosted affordability. Some say it has created more competition between lenders and, alongside historically low interest rates, it has seen monthly payments fall. Boulger says this has allowed Help to Buy users of the equity scheme to buy higher value properties at lower costs.
“The average purchase price on the Help to Buy equity scheme was £220,825 at the end of last year, while on the guarantee scheme it was £155, 897. That shows that people are able to afford higher value properties under the equity scheme for the same monthly costs.
“They are not directly comparable as the equity scheme is across the UK whereas the guarantee scheme is devolved to Wales, Northern Ireland and Scotland so that will skew the figures but it will not have skewed that much as England remains the largest market.”
Boulger adds: “As people are trading up in terms of the first property they are able to purchase it will take much longer before they need to make their next step up the ladder. Not only will they be able to live in a bigger and nicer property but they are saving the cost and hassle that would normally be involved in a first move. There are considerable benefits to buyers.”
Speculation about changes to Bank of England interest rates could hit mortgage costs in the coming months, whether it be a rise to tackle inflation or a fall in order to stimulate economic demand.
Lipnicki of Mortgage Decisions says mortgage rates could rise as a result of rumours of a bank rate rise owing to unstable banks and higher borrowing costs associated with weaker credit ratings. The UK has already lost its AAA credit rating with Moody’s and Standard & Poor’s, while UK banks are expected to be hit with a downgrade shortly too.
New-build property and house price growth has been a key government focus in recent years for both economic and political reasons. The uncertainty unleashed by Brexit could be temporary or it could provoke a profound market shift on government support, house price inflation and building rates. The industry must hope for the best and be ready for the worst.