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Government in cloud cuckoo land with NewBuy scheme

As we woke up this morning, the web was awash with articles on the government’s NewBuy Guarantee scheme, which is intended to get the property market moving again.

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NewBuy, housing minister Grant Shapps and co were telling us, is set to repair the ’broken’ first rung on the property ladder. This, of course, is a lot of old tosh. These types of schemes are great in theory, but amount to very little in practice.

The bottom line is that the property market will come back when it is ready to come back — schemes like NewBuy are mere tinkering around the edges. If the government thinks this scheme will kickstart the property market then it is in cloud cuckoo land.

One concern of mine is that NewBuy is intrinsically leveraged, and we know where leveraging got us in the past. It’s kicking the can down the road once again.

Through NewBuy, people can get onto the ladder now, but they’re doing so at very high LTVs. Is that what a government should be encouraging?

We all want to see more people owning their own homes but the values of conservatism should not be superimposed on the forces of the market. And that’s what I feel is happening here.

In my opinion, people should buy when they are genuinely in a robust position to do so, not because a bank, backed by a government with an agenda, says they can buy.

Contrary it may be, but sometimes if something is broken, don’t fix it. If we are to have a strong property market in the long term, we should avoid quick fixes in the short term.

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  • Adam Guratsky 12th March 2012 at 4:52 pm

    There are multiple problems with this plan:
    1. The risk of negative equity which we are all aware of caused partly by a wide-ranging falling of house prices and also, like new cars, new houses depreciate very quickly.
    2. The tendancy of valuers to value below the purchase price is still widespread.
    3. Grant Shapps will need to convince lenders that 95% mortgages are in keeping with reducing bank risk.
    4. If a FTB purchases a new house, there is nobody above on the ladder so movers will still be stuck.
    5. Has anybody told Grant Shapps to look at mortgage interest rates for 95% loans. I don’t know many FTB’s able or willing to pay these costs and if they could why could they not save a deposit.

    Seems developers will keep building new homes with government backing, but as with all these schemes, the few buyers to benefit will be in the small minority compared to the high numbers that can’t afford to pay 95% mortgage rates.

  • Maurice Edgington 12th March 2012 at 4:22 pm

    Everyone, including Jonathan Samuels, seems to have missed the point. NewBuy is only there to help the housebuilding industry. This is obvious no matter what phrases are used. The housebuilding industry has been suffering for many years now and this affects trades employment, suppliers etc etc. So the real benefit is not to the mortgage market or the property ladder but housebuilding as an industry where more sales would see more tradesmen re-employed and more building products needed and that must be good for the economy generally.

  • Paul Cullen 12th March 2012 at 4:00 pm

    To the article and expert brokers moaning, well the Government should do nothing until Labour returns.
    Give the idea support as it just may help people to buy their houses and just may help the economy too

  • Michael White 12th March 2012 at 3:47 pm

    Potential negative equity is resolved by replicating a product being offered in N.Ireland only.

    The ‘momentum mortgage’, from Ulster Bank a subsidiary of the bank majority owned by the tax payer, Royal Bank of Scotland. This is a scheme exclusively for FTB customers purchasing a property in one of the participating developments.

    The scheme is a 5 year proposition where customer can apply for a 95% mortgage with the remaining 5% being paid by the developer who retains a second charge for the 5 years. If the property falls in value the 5% is not repaid…..

  • michael White 12th March 2012 at 3:42 pm

    And let’s not forget where the real issue lies at present…
    Although the likelihood is that a FTB will move within the first five years, one might argue what is the point of paying anything other than the interest on the mortgage when they will be moving and in all probability, taking up another 25-year mortgage term? Generally, first-timers are likely to have 30/35 years of paying a mortgage in front of them, with perhaps various moves and changes, therefore why have a repayment mortgage for that first property? Why indeed….
    The core thinking behind this ‘hardline stance’ is worthy, some might even say laudable and some may have other views….. however, regardless of market views, the FSA does not want borrowers to come to the end of a interest-only deal having paid off the interest on the mortgage but having no funds in place to pay off the capital part of the mortgage. In the past you could say that you would sell the home to fund this part of the mortgage; the regulator is unfortunately not keen on this as the price of the property could, in theory, fall in the next quarter of a century or more to a level below that of the mortgage and the borrower will be still be left with a short-fall to find…mmmmmm.

  • Bob Riach Riach Independent Financial Advisers 12th March 2012 at 3:22 pm

    will they explain about the possible negative equity for first time buyers buying these properties with such a small deposit and with many new builds overpriced by the builders to cover the cost of all the so called FREE offers they include to tempt buyers, is this not why most lenders will only lend 80% on new build houses and 75% on flats.
    The government appears to be using this scheme to boost the building trade and employment, but not considering the first time buyers buying over valued new builds that could leave them in a negative equity position as soon as they move in. and they could be trapped in the property for same time waiting for prices to rise before they can sell and move up the ladder.
    I national developer in my area is offering 100% mortgages on certain properties. How can this be good financial advice and how can lenders be seen to be lending responsibly.

    Also if this scheme is successful for new builds, I could cause more problems in the resale market place when house sales are already very poor, if first time buyers don’t buy in the resale market, then the sellers will not be able to move up, this will spiral upwards

  • Bill Wells 12th March 2012 at 3:02 pm

    The government should be building decent social housing (about 5 million homes) – they did it after WWII with prefabs – with modern construction materials and techniques and 5 million people ‘unemployed’ they should be able to complete a program to make a difference within a few years. Unfortunately, with planning laws and the ill-conceived idea that everyone needs to OWN their home, the problem will not be addressed properly.

  • T P 12th March 2012 at 2:49 pm

    I can see how this benefits the builders; and also to the few brokers who have managed to “tie” themselves to those builders. It does not help the property LADDER in any way whatsoever; in fact it takes potential first time buyers away from those who are trapped in their own first rung houses. Builders got lucky when they persuaded Govt. this was a good idea. Govt. feels obliged to be seen to be doing something. I would rather they concentrated on the bonfire of the QUANGO’s; but that seems a distant memory 🙁

  • Mukesh Patel 12th March 2012 at 1:40 pm

    How do they expect to repair the first ‘rung’ on the property ladder when this is only available to new builds only.

    You need to build a chain in order to get on the ladder, with the first time buyer on the first’rung’ so the next time buyer can move up the ladder.