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Cover feature: Building on new build

Thanks in part to the government’s Help to Buy scheme, new builds are rising in popularity. Guy Anker investigates the ups and downs of owning a new house

The popularity of new build properties is rising and many credit the Help to Buy equity loan scheme with boosting demand. Meanwhile, it appears many buyers have shrugged off concerns about onerous leases to plump for new builds.

Figures from UK finance show that in the year to June there were 119,636 new build properties bought using a mortgage compared to 107,403 in the preceding 12 months and 98,470 the year before that.

In the second quarter of this year, 19 per cent of all homes bought using a mortgage were newly built, up from 18 per cent in Q2 2017 and 17 per cent for the same period in 2016.

New builds are popular because they are energy efficient and are usually ready for immediate habitation. The flip side is they do not always hold their value and some have leases that allow ground rent to double every few years.

What has helped demand is a raft of government schemes to aid the building sector – not just Help to Buy – that Westminster hopes will see the UK producing 300,000 new homes a year by the middle of the 2020s. While the country is way behind that target now, it is at least building more homes than it was.

Official government figures show the construction of 127,080 homes began in the 2012/13 financial year, rising in every year till 2016/17 when it hit 197,290. However, the number fell a touch in the previous financial year to 184,520.

Help to Buy is seen by many as the key catalyst for the increase over recent years. Under the scheme, buyers of new build properties in England worth up to £600,000 with at least a 5 per cent deposit can get an interest-free loan for up to 20 per cent of the value, or 40 per cent in London.

The availability of this loan on many purchases is one advantage of new build over second-hand properties as it gives buyers a leg-up on the housing ladder.

The Home Builders Federation says 170,000 homes were purchased through the scheme between April 2013 and March 2018. First-time buyers bought more than four out of five, it adds.

It says new home planning permissions, a strong indicator of future supply, are up 88 per cent in that time.

HBF executive chairman Stewart Baseley says: “It is clear Help to Buy has led to an unprecedented increase in house building activity.”
John Charcol senior technical manager Ray Boulger agrees: “Without Help to Buy, new build sales would be significantly lower.”

He adds that the scheme has also meant buyers have bought bigger properties than they might otherwise have purchased because the loan gives them that extra helping hand.

Yet it is unclear when Help to Buy will end. All we know is the government has committed to supporting the scheme until 2021.

Many worry that if it were to end then, large numbers of homebuyers would not get the leg-up they require onto the housing ladder.

Developers also fear the end of Help to Buy could hit them hard. The HBF says more than 3,000 companies – the vast majority of which are small builders – are registered as part of the scheme. Naturally, many will rely on the business it generates.

Accord Mortgages director of intermediary distribution Jeremy Duncombe says: “The demand for new build homes is thanks in part to Help to Buy. It would be a real blow to the housing market, and developers, brokers and homebuyers if the scheme ended in 2021.

“We appreciate the need to slowly wean the market off Help to Buy, but it is not ready for significant change now so we’d like the government to extend the scheme.”

Some think that if it is to go then the government should gradually pull back from Help to Buy.

Legal & General Mortgage Club head of broker relations and propositions Craig Hall says: “The last thing we want is a cliff edge scenario.”

Boulger thinks the government should start to phase out HTB by halving the amount of the equity loan from 2021. He adds that when it ends we could see a 10 per cent reduction in the number of new homes sold.

Help to Buy critics say it has helped to fuel high house prices by increasing demand. Boulger believes average new build prices would fall if it ended to reflect a drop in purchasing power.

There are, of course, other new build government schemes such as shared ownership.

New builds can polarise opinion. Their energy efficiency is attractive to many, while they appeal to people who want to move into a home with little work required and with that fresh, new smell and feel. Meanwhile, they often come fitted with new appliances as part of the price.

They also come with a two-year warranty under which the developer has to fix any snagging. There is also a 10-year warranty for major structural problems.
Depending on when in the build process the buyer agrees on the purchase, elements such as flooring, tiles, paint and other interior features can often be custom-made for their taste.

Hall says: “Buying a new build property offers peace of mind, providing protection for the homebuyer.

“While we all like to make our own finishing touches to our homes, new build properties will not need the extra lick of paint that an older home might desperately need. Buying off plan can give borrowers the chance to work with the builder to decide on any changes before they move in.

“In fact, buyers could save up to £45,000 when buying a new build against the costs of having to upgrade an older home to the same specification.”

On the other hand, traditionalists who prefer older architecture may turn their noses up at new builds. Some may also view them as difficult to get good value on as buyers often pay a premium to live in a brand new home so may not be able to make the same financial gain as a second-hand property when they sell. Then, of course, there is the thorny issue of onerous leases. This scandal hit national attention in 2016 when it became clear some homeowners had signed up to leases that allow the ground rent paid to the freeholder to double every 10 years or so. This is because their conveyancer probably did not flag the offending clauses.

Many leaseholders caught by this trap fear it could make their home unsellable because a prospective buyer could see that over a number of decades what was once a £200 annual charge could rocket to thousands of pounds.

Fairer leases are generally considered to be those where ground rent rises in line with inflation. London & Country director David Hollingworth says: “If ground rent escalates to such a degree that it impacts the ability to sell the property there are issues for the buyer and the lender.”

As well as the doubling of ground rent, the other scandal unearthed was developers selling leasehold houses, though this is now banned in England on new houses.

Leasehold is generally considered acceptable on flats where there is no one obvious owner of the land. Yet it is a different story on leasehold houses as the resident does not own the land despite being the only person to live on it. Critics say the extra administrative costs associated with a lease are therefore an unnecessary stealth charge on house owners.

The government said in December 2017 that there were 1.4 million leasehold houses in England, with the figure rapidly growing.

That statement came as it announced a ban on new leasehold houses in England, which followed a six-month consultation that attracted 6,000 responses, many from enraged leaseholders.

Then-communities secretary Sajid Javid said at the time: “It is unacceptable for home buyers to be exploited through unnecessary leaseholds, unjustifiable charges and onerous ground rent. It is clear real action is needed to end these feudal practices.”

However, despite the bad press and the reality that some leases are expensive, many experts insist the leasehold scandal has not impacted new build demand.

Hollingworth says: “There is nothing inherently bad in a leasehold property and the vast majority of flats will be leasehold which is the most appropriate structure. In fact, lenders may have issues with a freehold flat.”

Some lenders reacted to the leasehold scandal by toughening their criteria.

In May last year, Nationwide Building Society became the first major lender to make a big statement on the issue. From that point it has only allowed a minimum 125-year lease on a new flat and 250 years on a new house.

Its maximum acceptable starting ground rent on all new build leasehold properties is 0.1 per cent of the property value with “unreasonable” multiples not allowed, such as it doubling every few years.

Other lenders have tweaked their rules with most major banks now having language in their criteria which states leases and ground rents need to be “reasonable”, or words to that effect.

Interestingly, Accord allows for ground rent to double but states reviews can only take place every 21 years.

“Lenders have not stepped away from leasehold altogether and have instead sensibly put in place some parameters,” says Hollingworth.

Another change lenders have made over the years is to increase the maximum loan-to-value on new build mortgages. In 2009, as the credit crunch was taking hold, some lenders restricted new build lending to 50 per cent LTV, largely as a reaction to a sharp fall in house prices in some new developments. Now 95 per cent LTV is available.

“Historically, lenders have considered new build homes as higher risk but thankfully that’s starting to change,” says Duncombe.

With that element of criteria loosening and more homes being built, we can expect to see new builds remaining popular for now. The big question is what will happen to the market when – or if – Help to Buy ends.

New build pros and cons – Ray Boulger, senior technical manager at John Charcol

Pros

  • The ability if the purchase is agreed early to specify parts of the home, eg kitchen equipment.
  • The feeling of moving into something brand new.
  • The ability to use Help to Buy.
  • Having the developer on site to put problems right.
  • Very often others moving in to the area will be in a similar situation, making it easier to make friends.

Cons & risks

  • Paying over the odds compared to a similar second-hand property.
  • Too many new build properties have too many snagging issues.
  • Developers are not always keen to commit themselves to a firm completion date.
  • Pressure from the developer towards their year-end or half-year to complete before the property is really ready.
  • Onerous leases and service fees.

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