Help to Buy London, the latest government move to increase affordability in the capital, went live on 1st February 2016.
Banks have responded, altering their mortgage rates to help first time buyers get their own home, but the scheme has been met with a mixed response.
In principal the scheme is a sound one. First time buyers are partly backed by the government – up to 40pc of the value of their property will be provided through a loan. A deposit of just 5pc will be required, so what’s not to like?
Has Help to Buy Worked Until Now?
The statistical evidence say no. The original Help to Buy schemes resulted in a 60pc rise in the number of first-time buyers in the UK – 62,500 completions in 30 months. Of those, just 3,500 of the completions happened in London. More broadly, the number of first time buyers active in 2015 was below 2014 levels – the Governments initiatives to increase home ownership appear to be running out of steam.
This is one of the main arguments against Help to Buy. Only those who currently fall just outside the threshold of being able to buy will become applicable buyers. The scheme ignores those who are currently incapable of affording a property.
For each shift that moves affordability ‘down’ the earnings axis, a demographic of even lower earners are systematically pushed out of the equation until the next shift. In other words, a disproportionately small number of non-owners become applicable for ownership through Help to Buy London, while the ambition of the scheme obstructs the rest, and these are the people most likely to contribute to the private rental sector – the section of the market the government wants to minimise.
The Property Paradox
Every move to change the property market has knock-on effects. For example, once the demographic of ‘low earners’ makes their purchase, the rest of the market will respond – prices will go up. This will therefore expand the divide between those who can then afford property and those who can’t.
So, whenever housing policy is changed to make houses more affordable, the actual price of property will go up.
What Happens to the Buyers?
In essence, the government is allowing people who cannot afford property, to purchase property.
After five years, the 40pc loan given to buyers must start paying interest, a fee of 1.75pc, plus any Retail Price Index plus 1pc, to account for inflation. The loan must be paid back within 25 years or whenever the house is sold.
This doesn’t mean that the buyer gets a free mortgage, though. Given the likelihood of an interest rate jump in the next year or so, buyers will need to be wary that a non-fixed rate could leave them severely out of pocket, especially when they have to start paying back the government loan.
Lenders will be wary of these facts, and buyers who otherwise could afford a deposit and loan may find themselves being turned away from mortgage brokers – after all, they’re in an artificial position of being able to afford a property they admit to not having the money for.
How Does Supply Look?
Supply in London has fallen short by 25pc, despite the number of new houses built being the highest since 2008.
Lower supply means higher prices, which becomes even more exaggerated in an environment as competitive and skewed as London.
But are there Enough London Properties?
Bad news. A recent map of London published by the Telegraph shows that less than 50pc of London wards are affordable with Help to Buy.
There are also four London boroughs that automatically exempt themselves from the £600,000 cap.
Most available affordable housing is understandably away from Central London. See the map here.
So, if supply is deceptively low, and prices remain too high for prospective buyers, how useful can the scheme claim to be?
What Do Deposits Really Cost?
Data by Halifax shows that the first-time house cost a buyer £368,000. Under the new scheme, a 5pc deposit would be £18,400.
The average price of a property in London is roughly £500,000. That means a deposit of £25,000.
How do salaries match-up? The average salary in London is £34,800.
The average rent falls somewhere around £1,500pcm. Assuming every first-time buyer is renting in London, and is therefore paying an average rent of £18,000pa, that leaves an average salary of £16,000 to live, travel, pay other bills, and save.
In short, saving for a deposit in London is not easy, and you need to be earning an average salary of £50,000 a year to afford to buy a house.
A two person household on two average incomes would be able to buy in 17 of 28 boroughs.
What is Happening to House Prices?
One thing: they’re going up. A quick look at the House Price Index shows that house prices went up to £514,000 in December 2015, an increase of 12.4pc from December 2014.
Secondly, the law of unintended consequences has meant that buy-to-let investors are rushing to buy another property before the Stamp Duty changes, putting additional pricing pressure on limited availability stock. The Government might want to discourage further buy-to-let investment by small scale landlords but its policy change is having the opposite effect in the short term.
Consensus also shows that prices will increase faster than wages until 2020. If true, the affordability gulf will widen.
Ellis & Co is a successful London estate agent, with 20 offices inside the M25. Contact your local branch today to find out more about the London property market.