Next week marks the launch of NewBuy, the government’s new plan to help first-time buyers on to the housing ladder. The big idea is to underwrite a portion of a new mortgage on a new-build house, so shifting the loan-to-value (LTV) ratio and allowing even buyers with a small deposit to get a loan.
It works like this. The buyer puts down a 5% deposit on a new-build. The bank lends the remaining 95%, but the government and house builders backstop nine of those percentage points. The house builders take on the risk of 3.5% by putting the equivalent in cash in an indemnity account, and the government guarantees another 5.5%. The result? A bank can offer a 95% mortgage but only be on the hook for an 86% loan. Magic.
Well, sort of magic anyway. The scheme only works if the banks fancy the idea of giving out 86% LTV mortgages. But right now it seems that 86% doesn’t really do it for them much more than 95% does, presumably because they know that the risks to house prices, and new-build prices in particular, are very much to the downside.
All the lenders say they support NewBuy as a concept. But as far as I can see, none of them have any mortgage products ready to go for next week. Here’s HSBC on the subject: “We still agree with the scheme in principle and we’re still considering our position. We just don’t have any definite plans for a launch date yet.”
Would-be buyers probably shouldn’t hold their breath. However, I wonder if they might not come to think of it as a lucky escape. The Financial Services Authority defines “mortgage prisoners” as people who are unable to move or remortgage because they have a LTV of 85% or over. That means that anyone jumping into a NewBuy deal would automatically and instantly become a mortgage prisoner. Nice.
Governments of all types persist in insisting that home ownership is a good thing in itself and in using policy to encourage it. This works. In 1900, only 10% of houses were lived in by owner occupiers. The other 90% were rented. Today around 70% of houses are owner occupied and the private rental market makes up only 17% of the total (the rest is social housing).
But is this high level of ownership really a good thing and something we want to take even further? The research (and the prisoners) suggest not. Andrew Oswald of the University of Warwick made the point a few years back that home ownership (especially in illiquid marginal areas) makes workers less mobile. That worsens unemployment and stifles recoveries.
So it is hard to see why, just when we need to be as mobile as possible, the coalition is still trying to pin us all down. Perhaps it has got to the point where we have to decide whether we want to be a nation of home owners or a nation with a flexible and highly productive workforce. Perhaps we can’t be both.