Much of the recent criticism of the Government’s ‘Help to Buy’ scheme is informed by the collapse of the sub-prime market in the United States. The comparison has been made between this and the National Homeowner Strategy launched by the Clinton administration.
Whilst ‘Help to Buy’ looks and feels like sub-prime, is it? The new scheme still requires buyers to put down a deposit, and as a Financial Times piece points out, whilst there is a positive correlation between the Loan to Deposit Value (LDV) and defaults, the significant increase in default rates occurs at or above 100% LDV.
In addition to a 5% deposit, people will not be able to access the scheme if their credit history does not meet the Financial Conduct Authority’s ‘impaired credit’ standards. A Treasury spokesman added, “borrowers must also be able to afford the mortgages, with income verification and stress testing as set out in the FCA’s mortgage market review.”
Furthermore, whilst house prices are expensive relative to incomes, they are undervalued relative to rent, a trend confirmed in the first quarter of 2013. Simon Ward, Chief Economist at Henderson Global, points out that rental yield reached a low in 2007 indicating that house prices were overvalued. Yields have since rose strongly reflecting falling house prices since 2008. This leaves room for an upward adjustment in prices.
Concerns that prices will soar due to a lack of supply may also be over-stated. We saw many developers buy land during the recession which they are now building on. House construction reached its highest level since 2010 in June. The latest Markit/CIPS UK Construction Purchasing Managers’ Index (PMI) signalled “a solid increase in construction employment levels and the strongest degree of positive sentiment about future output since May 2010.” The index jumped to 57 from 51.0 in June, where a figure above 50 indicates expansion.
All things considered, ‘Help to Buy’ need not lead to an unsustainable bubble. Lenders are also operating in a risk averse market making them less likely to repeat the same mistakes; no one is talking about 100% plus mortgages anymore. Lightening, as the saying goes, rarely strikes twice.
In the wake of the sub-prime collapse in the U.S, there is understandable caution about government sponsored attempts to help people on to the property ladder. But perhaps it is a risk we can take if it helps those for whom high rents make it almost impossible to save a 10% deposit.