Imagine an environment in which house prices had fallen 10.5% in a year. An environment in which the risks to the market were considered to be so extreme that even the biggest lenders in it were too frightened of negative equity to lend money to anyone without a 30% deposit. One in which mortgage approvals have fallen 70% since this time last year and in which a mere 21,000 houses are recorded as changing hands in July (that’s down from over 100,000 in July 2007). And one in which every single commentator and analyst expects house prices to keep falling for some years to come. An environment a bit like the one the UK housing market finds itself in, perhaps.
Now imagine buying a house in that environment.
You might laugh. But there is someone out there doing just that – Communities Secretary Hazel Blears. I don’t mean that she is thinking of buying a house for herself. No, it’s you she imagines buying a house – so much so that she’s prepared to bribe you into it. Or that’s what she told the Today programme this morning, anyway. If a couple in their twenties came to you for advice “would you seriously say ‘buy now’?” asked her interviewer incredulously,”even with the market as it is?”
Her answer? Yes, she would. If a couple who couldn’t get a commercial loan (i.e. who were considered by the mainstream lending industry to be not well off enough or not financially stable enough to be eligible for one) came to her and asked her advice, she’d say to them “It’s your dream… Go for it.”
Then, she’d offer them the chance to do just that via the new HomeBuy Direct scheme whereby they’d get to borrow 30% of the price of the new house they want from the government and an appropriate housebuilder, interest-free for five years. The idea, I suppose, is that lenders would then consider them to have a 30% deposit and offer them a loan for the remaining 70%.
Why stamp duty change is little incentive to buy a house right now
There’s more. Just in case the HomeBuy Direct concept isn’t enough to lure our young couple into the market, the government has announced it is to temporarily lift the stamp duty threshold to £175,000.
Tempted? You shouldn’t be. The stamp duty business can be easily dismissed. The maximum possible saving here would be £1,750, small beer when it comes to the total cost of buying a house. What incentive can that possibly offer when prices are falling at 10% a year – and forecast to be down a good 30% from their peak by the time all this is over? Buy a house for £175,000 and there’s every chance you’ll be down £17,000 by this time next year, regardless of how much stamp duty you do or don’t pay. Buy a house for more than that and you don’t get anything off your stamp duty anyway.
The HomeBuy Direct scheme has ‘gimmick’ written all over it
The HomeBuy Direct business can be just as easily dismissed. It comes with very little detail for starters. You get the 30% somehow from the taxpayer and from the housebuilders. Then, despite the fact you couldn’t afford to borrow it in the first place (that’s why a real bank wouldn’t lend it to you), you have to pay it back at some point. Worse, you don’t know how or when.
All we know so far is that you will have to pay a ‘fee’ at the end of the five years. Of how much? And to whom? Who knows? The whole thing has ‘gimmick’ written all over it. And the timescale doesn’t help. Five years may seem like a long time, but in a housing market crash it isn’t. Let’s not forget that it took six years for the market to hit bottom in the last crash and a long 11 years for prices to regain their previous peaks. Buy now and you could easily be in negative equity for a decade.
So why would Hazel want you to buy a house quite as much as she does? Either it is because she is very stupid, has no idea how markets work and has bought into the absurd idea put about by her government over the last decade that home ownership is a good thing in its own right, regardless of the cost to individual or to country; or it is because she is an exceptionally unkind person who is putting the short term interests of the big housebuilders ahead of those of would-be homeowners (remember, the HomeBuy Direct scheme sticks you with the houses they don’t want). Either way, don’t listen to her. And don’t buy a house.
• This article is taken from Merryn Somerset Webb’s weekly Money Sense email. Sign up to Money Sense here.