Through The Keyhole – Help-to-Buy

Helping to buy or not helping at all?

A landmark scheme from the government has been launched this week, months ahead of schedule, with the aim of helping first-time-buyers get on the property ladder.

Sounds great right? Well it has been met with a decidedly frosty reception by, unsurprisingly, the Labour party opposition and, much more surprisingly, by the International Monetary Fund (IMF), among others.

So what is the scheme, how is it supposed to help and why is it unpopular in some quarters.

Help-to-Buy is an extension of Right-to-Buy, a program introduced during the Thatcher years where council house residents could buy their home at a substantial discount.

This policy is aimed a little higher up the market and offers a three part mortgage deal, a 5% deposit from the buyers, an equity loan from the government of up to 20% and a standard mortgage covering the remaining amount.

The idea behind it is average income earners will no longer have to save up for years to afford a deposit, equating to around a quarter of the value of the house.

On the face of it this is a great idea, in a market currently dominated by the buy-to-let market, so why are some convinced it is flawed?

The first problem is the policy only creates the illusion of making housing cheaper, in fact it arguable makes them more expensive.

A standard mortgage involves a large deposit and paying off the remained over an extended period of time.

Help-to-Buy involves a much smaller mortgage, but paying off a much larger proportion of the property’s value.

It also makes an assumption about a 5% deposit being an affordable target.

Yes, it is easier to save up 5% than 25%, but either way these are still large amounts of money.

A £300,000 home will require a £15,000 deposit, while a £150,000 property will still involve saving £7,500.

Couples on average incomes will be able to afford this much sooner than a £50,000 deposit, for example, but it will still involve making sacrifices.

Lower income earners with children, the group who benefited the most from Right-to-Buy, however, will still really struggle to see this as a logical option.

Unfortunately some even greater issues arise once the deposit is found.

When people find a home they will have to repay 95% of its value, the 75% mortgage plus the 20% equity loan, with the later only interest free for five years.

With conservative estimates on average property values, people will still be looking at over £1,000/month in repayments before interest, just on the mortgage without the equity loan, over a 25-year period (Based on Clydesdale and Yorkshire Banks official figures).

Admittedly, this is not dissimilar from the average rent in London, but similarly house prices are higher in the capital resulting in higher repayment levels.

There is a serious irony about a government fixated with cutting the national debt level, while encouraging people to incur large amounts of long-term debt in the name of the national obsession that is home ownership.

It also needs to be taken into consideration the people applying for these mortgages will probably not be getting preferential rates from their bank. They are after all those who would have struggled to get a mortgage without it.

On top of this buyers will also have to pay over £1,000 in bank and lawyer fees, not to mention also remain able to maintain rent on current property, energy bills and food.

The issues with this can best be summed up by the comments of Martin Lewis, founder of MoneySavingExpert.com.

Lewis said Help-to-Buy mortgages were “still very costly compared to normal mortgage rates.”

He went on to say those considering small deposit mortgages should consider a 10% deposit to get a better repayment package.

If this is starting to sound strikingly similar to the sub-prime mortgage collapse in the USA, where people were given mortgages when they clearly could not afford to pay them off and which was a significant factor in the banking collapse, then you are not alone.

There are also economic issues, which is where the IMFs issues start to come into play.

Supply and demand is a basic premise of economics, with the idea being as demand goes up, price comes down.

However, in housing this idea is flawed as supply is not rising to meet the demand.

Throw into the mix the fact the housing market does not suffer from a lack of demand and the problems become clear.

Static supply meets rising demand in an already overcrowded market place and already inflated house prices rise even further making it harder still for first time buyers to get on  the property ladder.

This scenario is by no means a certainty, but is a very real possibility.

Unfortunately, this demand issue brings with it a much more real problem for the would-be home owner.

Ask anyone under 35 years old who is trying to buy a house on a moderate income and you will hear the same stories.

They had the mortgage in place, found the house, but were then out-bid by a rival buyer. Help-to-Buy does not stop this happening.

Some will claim this is the nature of a free-market economy, every commodity has a different value to all people and those who want it more pay a higher price, but it is of little consolation to those who will either have to take out a larger mortgage or settle for a cheaper home.

Then there is the knock on effects this could result in.

People tied into long term debt to such a large extent are unlikely to consider major renovation works, such as new kitchens, bathrooms, and conservatory’s, redecoration, or even expenses in the service sectors like retail or tourism.

While consumer spending is certainly not the be-all-and-end-all of a recovering economy it is a major factor.

People who spend money have disposable income and thusly feel secure in their jobs and are positive about the future.

In fact the employment rate amongst builders, decorators and other tradesmen is a significant indicator of economic health.

There is a reason the phrase for an economic recovery is called ‘green shoots’, it is because economics works from the ground up, not top down.

Although, as this blog has previously published, there are serious doubts about the long-term validity of the UKs desire for home ownership (New World Order – Pensions, Retirement and Saving 6-9-13), people should not be discouraged from buying a home.

Being a property owner brings with it many benefits, greater retirement income, improved credit rating and long term cost-of-living reductions to name a few.

However, if people are continually stuck in a cycle of long-term debt the clear and present problem of economic growth is forsaken, which has a detrimental effect on everyone.

Despite its many flaws, Right-to-Buy at least made buying cheaper, whereas Help-to-Buy does not and in the long run is probably more expensive.

The problems of rapidly rising house prices, a lack of construction and unrealistic financing systems needs to be addressed, but with so many flaws and potential pitfalls this system seems to tick very few of the boxes.

Help-to-Buy encourages buyers, but in the wrong way.

New World Order – Pensions, Retirement and Saving

Worried about your nest egg?

The financial crisis has not had the seismic effect many were expecting on the capitalist system, but in its wake is it time for us to rethink how we go about living and saving?

Since 2009 salaries in both the public and private sector have stagnated, while inflation has risen making everything from the weekly grocery shop to housing costs more expensive.

Pension funds took a battering on the stock market, with many now planning for retirement with much less in the bank.

House prices, particularly in London, have continued to rise, and the cost of renting in the capital has become unsustainable for those on lower salaries.

All this has resulted in low consumer spending as people scrimp and save to afford life’s basics.

However, for younger people in particular should this actually be seen as an opportunity to change the way we pay for life and more specifically cope with retirement.

A recent press release by financial advisors deVere suggested people should be saving over £800/ month by the time they are 30 to afford to maintain their lifestyle during old age, while a Barings Asset Management survey suggested people under 35 expect just 40% of their retirement income to come from a traditional pension.

The key issue with both of these statistics is they assume what could be a called a “traditional retirement”, but the kind post-work lifestyle our grandparents, or parents will be able to enjoy will not be available to the current groups of under 30s.

The main reason for this is the current crop of whippersnappers is the first generation who will probably never be able to afford to buy a house. This might seem extreme, but it is true.

Currently statistics suggest people are having to borrow, on average, £200,000 to get on the property ladder and pay about £50,000 up front as a deposit. For the vast majority of people this is unrealistic.

In the past this was less of an issue as people could expect to inherit a property, but with these conditions our children, and even us, might not even have this luxury.

However, panic not, because this could end up being the saving grace for our generation.

House prices are high because developers are not building anything affordable. Instead they build more expensive houses which are then sold as buy-to-let properties, which are rented out at highly inflated prices.

Although there has been outcry over the cost of renting, so far little has been done to tackle the problem, but this is likely to change.

The last 10 or 20 years have proved no amount of well-meant rhetoric is going to get low-cost housing built in this country, because private developers make more profit with selling to the buy-to-let market, which realistically could result in a renters, rather than a buyers, market.

Over the course of your lifetime renting is of course more expensive, however, on a month-to-month basis is not as financially challenging as saving for a deposit or paying of a mortgage.

Renting also ticks the social mobility box. With jobs likely to start migrating from the capital, renting rather than owning offers a level of flexibility the younger generation is keen on in their working lives.

People who own a home are far more socially immobile as they have set roots, whereas renters are able to move much more freely, particularly when it comes to taking a new job, or moving to a different part of the country.

Germany offers an interesting comparison here. In das Vaterland home ownership is not the obsession it is in the UK. For example, in 2011 90% of the residential property in Berlin is rented.

Even in German states where buying is the most popular option, renting still accounts for 40% of the market.

There are many reasons for this, including Germany not experiencing a housing boom like the UK, but rental costs are still 30-45% lower than UK equivalents.

How they have managed this is quite simple. There is so much competition for rented property landlords put prices down, not up.

This model is something the UK, and other countries suffering from similar problems, will have to look at.

Admittedly it would be impossible to recreate the situation in Germany, but a sensible approach to how much rent can be charged (maybe based on Council Tax brackets) could help make housing far more affordable and remove the rather out-dated concept of home ownership.

Pensions are another area where the current crop of under-35s could manufacture for themselves a better future by ignoring traditions.

Every survey and statistic is based on leaving the workforce at the current retirement age, but this assumption corrupts the results.

Hopefully this will come as no surprise to anyone, but anyone under 40 will not get to retire at 65, mainly due to the pressures an aging population is putting on the public finances.

When President Franklin Roosevelt introduced the New Deal in the 1930s people were only expected to live 10 years after retirement. Today, thanks to medical advances, better nutrition and generally healthier lifestyles, people could quite reasonably expect to enjoy 20 or even 25 years after leaving the workforce.

Although no concrete legislation has been passed on this issue, those yet to reach the big three zero can probably expect to be working until their mid-70s and possibly longer.

This results means, unlike our parents, the younger generation will have at least a further 10 or even 15 years to save for a shorter retirement, with the only unknown factor being the increase in life expectancy, which many experts expect to rise at a much slower rate in the coming decades.

In fact we have already started to see this happen, with older people staying in work longer, or taking part-time work during retirement to get themselves through the financial crisis, a factor which is having a detrimental effect on the employment prospects of those just entering the job market.

The idea of having to work later into life might seem depressing, but this is not just a vague theory, it is in fact an economic reality we will all have to learn to live with.

While the raising of the retirement age will come in naturally over time, moving the UK on from the addiction to home ownership and towards a rent-driven housing market is a much tougher proposition and will not be easy to implement.

However, as fewer and fewer people become able to buy a house this too might end up happening naturally.

For the first time in modern history, due to high house prices and the cost of old-age care provision, children can no longer expect to inherit a home, which consequently harms their chances of being able to get on the housing ladder.

This, in time, should result in a competitive rental market where rents are driven down by increased long-term demand, rather than up as landlords try to appeal to more affluent tenants.

Overall, the most important factor in this change may be growing demand for flexible housing as people travel further for work and as a result require more leeway in their housing arrangements.

There are already numerous economic and human resource studies which indicate generation Y in particular will change jobs more frequently and demand increased workplace flexibility.

People should certainly not be discouraged from aspiring to own their house or even taking early retirement if finances allow, but the underlying point here is these economic forecasts are fundamentally flawed because they assume a static retirement age and a maintained level of home ownership, one of which is impossible and the other undesirable.

So next time you start worrying about how you do not earn enough to buy a house or start saving for retirement take a deep breath a remember the basis of society is changing and making assumptions about your life 30 or 40 years in the future based on current conditions is a pointless exercise.