On Monday April 19, the government launched a new mortgage guarantee scheme, which was announced in this year’s budget, to encourage lenders to offer mortgages to buyers with deposits covering as little as 5 percent of the property’s value. Under the plan, the government will compensate banks and building societies if homes purchased with these products were to be repossessed. Along with the announcement, five of Britain’s biggest lenders – Lloyds, Santander, Barclays, HSBC and NatWest – announced new 95% mortgages. Larger loans are now available to borrowers who currently cannot afford a higher deposit.
The same day the last Rightmove House award Index showed that the average price of a property put on the market rose by almost Â£ 7,000 in a single month, reaching the highest level ever. With the demand for homes outstripping supply, properties are also changing hands faster than ever.
Jonathan Cribb, senior research economist at IFS, says these numbers are in part the result of a series of government interventions, including loan guarantees, tax breaks and savings plans, which have kept the dynamic housing market. But if such measures work, why is additional intervention needed? Who really benefits when the government heats up the housing market?
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In July, the Chancellor announced that stamp duty would be suspended on the first Â£ 500,000 of property transactions, saving buyers up to Â£ 15,000. The tax relief, which applies to England and Northern Ireland, has since been expanded until the end of June, although it will continue to apply to houses sold for less than Â£ 250,000 until the end of September. Thanks in part to the stamp duty holiday, house prices have increased by 7.3 percent in 2020 – a substantial benefit for people who already own a home, but another barrier to affordability for first-time buyers.
Andrew Wishart, real estate economist at Capital Economics, says it’s not clear government action was needed to prevent housing prices from falling during the pandemic, given that mortgage borrower incomes were already under pressure. load by the holiday program. âThe government’s intervention was successful, and overcorrected, in its goal of preventing housing prices from falling,â he said. “The tax cut … made house prices go up more than they would have gone up otherwise.”
Thies Lindenthal, associate professor of real estate finance at the University of Cambridge, told me it would also benefit industries adjacent to the real estate market such as decorators, construction and DIY centers. “But then again, there might be other ways to [support them] â¦ I think [the stamp duty holiday] just trying to support the owners of real estate, âhe said.
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In fact, first-time buyers are arguably the biggest losers from the stamp duty holiday. Most were already exempt stamp duty on properties valued up to Â£ 300,000. They now face not only higher prices – which, because they require higher deposits, can make home ownership totally out of reach for many first-time buyers – but they also have to compete with d other wealthier buyers who benefit from the tax cut.
The new 95% mortgage guarantee scheme which was launched on Monday is reminiscent of the Conservative-Liberal Democrat coalition government’s Help to Buy 2013 mortgage guarantee, which aimed to help people get a mortgage with a lower than normal deposit. This buying aid has encouraged lending to buyers with small deposits, Wishart said, suggesting the government’s new program will do the same. But the banks also say that they habit apply the scheme to new construction as they see them as volatile, which could deter developers from building more houses. This could further worsen the imbalance between housing demand and supply, with an even greater inflationary effect on prices.
It is also important to remember that mortgages with a 5% deposit are riskier for the banks as well as for the government guaranteeing the loan. âThe government is, in a sense, encouraging risky loansâ¦ that the banks don’t really want to make without this kind of government insurance,â Cribb says.
Cribb believes that this scheme will only partially offset the increase in house prices caused by the reduction in stamp duties. âCombined with the fact that younger generations have faced the economic effects of the pandemic worse, I would expect you to have a decline in home ownership among younger generations, at least temporarily, and more people. in the private rental sector. ”
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