Who Gets Helped By Help To Buy?
Prompted by the recent release of the multi-Oscar nominated film, I have just finished reading Michael Lewis’ excellent book The Big Short. If you read this when it came out in 2010 you are probably wondering what took me so long. If you haven’t read it, the book tells the story of the sub-prime mortgage and credit default swap driven, boom and collapse in the United States in the 2000s, giving insight into the motivations that drove the behaviour and decisions taken to cause it. There are a range of factors involved, including human greed, poor regulation, poor risk measurement, and more greed.
At the root cause of the story is the issue of lending money to those who cannot afford to repay it. Often putting down no deposit, customers on incomes as low as $15,000 per year were able to buy homes as expensive as $750,000. The mortgages had tempting introductory rates, making the initial ownership period more affordable, but once the period ended the rate increased, resulting in higher repayments and a higher default rate on mortgages. It was this shift from an affordable start to a higher level of repayment that raised a question for me about one of the UK’s new policies, the Help to Buy scheme. Are we really helping a first-time buyer by lending them so much money?
The Help to Buy policy, boosted for London buyers, provides financial help to allow first time buyers purchase a home. If the buyer can provide a 5% deposit, then the government will contribute up to 40% to the pool, with the remaining 55% being covered by mortgage. This means a buyer will enter their new home carrying a loan-to-value ratio of 95%. The 40% from the government is covered for five years, but will then incur interest and need to be steadily repaid. Sub-prime and Help to Buy are very different but this one area concerns me.
Owning a home in London over the last twenty years has been a great investment, giving a family the effect of adding another full-time income through the increasing value. This growth has been so consistent that it becomes easy to assume that it is permanent or limitless. What if it isn’t though? How will these buyers cope with an increase in interest rates? Will a slowdown or decrease in house prices leave them in negative equity?
The idea of leveraging people into properties that technically they can’t afford to buy outright is the point of a mortgage. But this method and the potential for a poor match between property value and income of the owner seems risky. The cynic in me thinks it is just a way of maintaining the demand in a market that is already inflated. Although buying your first home is a great thing to aspire to, is there a point where, from the buyers perspective, it’s just better not to?
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