November 21, 2011 10:36 pm

Coalition vows to unlock housing problem

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People buying newly built houses will need a deposit of as little as 5 per cent under measures designed by the government to help “unstick” the housing market.

David Cameron and Nick Clegg announced the housing strategy on Monday and vowed to make the “dream of home ownership” a reality for more people.

Housebuilding chart

Housebuilding chart

The centrepiece is a mortgage indemnity scheme aimed at helping 100,000 prospective buyers excluded from the market because of banks’ refusal to lend at high loan-to-value ratios.

During the financial bubble many applicants were given mortgages with minimal deposits, no deposits or even loan-to-value ratios of 125 per cent – a situation that has been reversed.

Under the indemnity scheme, housebuilders and the government will together offer to underwrite part of the loan, giving banks an incentive to relax lending criteria on new properties.

Ministers hope that by focusing the scheme on newly built property rather than all housing they will generate jobs in the construction industry.

Simon Rawlinson, head of strategic research at EC Harris, a property consultancy, said the government would have to ensure “widespread participation” to ensure it resulted in cheap mortgage deals. “The long term disadvantage may be the competitiveness of the rates offered on the 95 per cent deals,” he said.

Separately, Mr Cameron promised a £400m public fund to help developers “unblock” stalled housing projects that meet certain criteria, such as a commitment to affordable homes.

The government also fleshed out an existing plan for much bigger discounts of up to 50 per cent for social housing tenants wanting to own their own property through the “right to buy” scheme.

Mr Cameron said he did not want to create “another borrowing boom” but instead would help those who could not afford huge deposits: “When first-time buyers on a good salary cannot get a reasonable mortgage, the whole market grinds to a halt,” he said.

But Ed Miliband warned that the measures were “too little, too late” to make a substantial contribution to economic growth.

The £400m fund was only a 10th of the £4bn cut from housing investment last year, the Labour leader said.

The announcement of the mortgage indemnity fund prompted fears about potential losses to taxpayers in the event of a housing crash.

In the US, the government-sponsored mortgage guarantors, Freddie Mac and Fannie Mae, were placed into “conservatorship” in 2008 as subprime losses pushed them towards insolvency, since when they have absorbed more than $170bn of federal aid.

While the UK initiative is not on anything like the same scale it will raise questions over the “moral hazard” of encouraging people into the market.

The House Builders Federation said the indemnity scheme would help address the lack of mortgage availability since the 2008 banking crisis, which was “the biggest constraint” on new homes.

“This scheme will allow people to buy their new home on realistic terms and help, in particular, hard-pressed first-time buyers,” executive chairman Stewart Baseley said.

But the National Housing Federation, which represents social landlords, warned that increasing council house sale discounts could worsen the shortage of social housing.

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The main policies

Get Britain Building fund Some £400m will be spent on schemes that housebuilders have put on hold, for example because they cannot pre-sell enough homes or lack working capital. Ministers argue the money could support 16,000 new homes and 32,000 jobs. Critics point out this is a fraction of the billions the coalition has cut from housebuilding budgets.

New-build indemnity scheme Up to 100,000 people will be able to buy newbuild homes with deposits of 5 per cent because the government and builders will together underwrite 9 per cent of loans. This should boost sales. Critics say it is not the state’s place to subsidise an already overpriced market.

Right-to-buy discounts Increasing to 50 per cent the discount for council house occupants to buy their own home should trigger a surge in right-to-buy deals. But there are fears the total social housing stock will decline further. Ministers claim as many new council homes will be built via a new model involving higher social rents.

Jim Pickard

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