The balance between re-igniting the property market versus sustainable economic stability was called into question over the weekend by Sir Mervyn King, the outgoing Governor of the Bank of England.
In an interview with Sky News Sir Mervyn raised words of warning over the Government’s ‘Help to Buy’ scheme which is designed to help new home buyers get onto the housing ladder. The scheme will run for 3 years from January 2014 and is made up of 2 elements – an ‘equity loan’ scheme and the mortgage guarantee. To take advantage of the scheme, buyers will need to raise a deposit of 5% of the value of the property being purchased and can then borrow up to another 20% from the Government. The latter element will be interest-free and the highest level of loan available will be £120,000.
This all sounds great for buyers – but the Governor, who is due to retire next month, warned that the Government could end up guaranteeing billions of pounds worth of loans whilst taking the risk of another downturn in property prices, akin to the housing crisis that hit the United States a few years ago. This could leave home owners in an effective negative equity situation, leaving the tax payer to pick up the bill if it goes wrong. Sir Mervyn argues that a more appropriate solution would be to get back to a more competitive, healthy and open mortgage market, similar to that of a few years ago, before the property market fell off the proverbial cliff.
What appears very clear is that first time buyers do need help to get on the property ladder. At Napthens we hear regular stories from clients who cannot afford to save for a deposit whilst living in rented accommodation, as rents continue to increase while there remains a shortage of starter homes in our local area. This might be great for our investor clients but not so good for those looking to buy their first home.
We will have to see how this new scheme works next year and whether it creates the desired momentum that the housing market requires.