On Monday 19 April, the government launched a new mortgage guarantee scheme, that was announced in this year’s budget, to encourage lenders to offer mortgages to buyers with deposits covering as little as 5 per cent of the property’s value. Under the terms of the scheme, the government will compensate banks and building societies if houses bought with these products have to be repossessed. In tandem with the announcement, five of the UK’s biggest lenders – Lloyds, Santander, Barclays, HSBC and NatWest – announced new 95 per cent mortgages. Bigger loans are now available to borrowers who cannot currently afford a higher deposit.
On the same day, the latest Rightmove House Price Index showed that the average price of a property coming on to market has risen by almost £7,000 in a single month, to the highest level ever. With demand for houses exceeding supply, properties are also changing hands more quickly than ever before.
Jonathan Cribb, a senior research economist at the IFS, says these figures are in part a consequence of a series of government interventions, including loan guarantees, tax breaks and savings schemes, that have kept the housing market buoyant. But if such measures work, why is more intervention needed? Who really benefits when the government heats up the housing market?
In July, the Chancellor announced that stamp duty would be suspended on the first £500,000 in property transactions, saving buyers up to £15,000. The tax break, which is applicable to England and Northern Ireland, has since been extended until the end of June, although it will continue to apply to homes sold for less than £250,000 until the end of September. Thanks in part to the stamp duty holiday, house prices increased by 7.3 per cent in 2020 – a substantial benefit to people who already owned homes, but a further obstacle to affordability for first time buyers.
Andrew Wishart, property economist at Capital Economics, says it’s not clear that the government’s action was necessary to prevent a fall in house prices during the pandemic, given that the incomes of mortgage-payers were already supported by the furlough scheme. “Government intervention has succeeded, and overcorrected, in its aim of preventing falls in house prices,” he says. “The tax cut… has pushed up house prices more than they would otherwise have risen”.
Thies Lindenthal, an associate professor of Real Estate Finance at Cambridge University, told me that this will also benefit the industries adjacent to the property market such as decorators, construction and DIY centres. “But then again, there could be other ways to [support them] … I think [the stamp duty holiday] is just trying to support people who own real estate,” he said.
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In fact, first-time buyers are arguably the biggest losers from the stamp duty holiday. Most were already exempt from stamp duty on properties valued up to £300,000. They now face not only higher prices – which, because they require higher deposits, may push home ownership entirely out of reach for many first-time buyers – but they also now have to compete with other, wealthier buyers who benefit from the tax cut.
The new 95 per cent Mortgage Guarantee scheme that launched on Monday is reminiscent of the Conservative-Liberal Democrat coalition government’s 2013 Help to Buy mortgage guarantee, which aimed to assist people to secure a mortgage with a lower deposit than usual. That Help to Buy encouraged lending to buyers with small deposits, Wishart said, suggests that the government’s new scheme will do the same. But banks are also saying they won’t apply the scheme to new builds because they view them as volatile, which could act as a disincentive to developers to build more homes. This could make the imbalance between the demand for houses and their supply even worse, with a still greater inflationary effect on prices.
It’s also important to remember that mortgages with a 5 per cent deposit are riskier for banks as well as for the government guaranteeing the loan. “The government is, in a sense, encouraging risky lending… that the banks don’t really want to make without this government kind of insurance,” Cribb says.
Cribb believes that this scheme will only partially offset the house price increase caused by the stamp duty cut. “Combined with the fact that younger generations have done worse from the economic effects of the pandemic, I’d expect that you’re going to have lower homeownership among younger generations, at least temporarily, and more people in the private rented sector.”