Why the property market could be in trouble after the 2015 election

Help to Buy: on borrowed time?

If there was one winner from the Budget,  it seems to have been property.

Chancellor George Osborne has extended part of the ‘Help to Buy’ scheme all the way until 2020.

No wonder. He wants to be as sure as he can that the current property bubble (or recovery, depending on which part of the UK you’re in) lasts until the general election in May.

But I wouldn’t rush out to stick all your newly-freed pension money into buy-to-let.

You see, ‘Help to Buy’ comes in two parts, and the extension does not apply to the most aggressive part of the scheme.

On top of that, Osborne also announced a sting in the tail that could hit central London property hard…

Help to Buy – a scheme of two halves

It easy to forget that the Help to Buy scheme is divided into two parts.

Both allow a buyer to secure a mortgage with as little as a 5% deposit. But they operate in very different ways.

The first part targets only those who want to buy a new-build house. In this case the government gives them a 20% home equity loan, which is interest-free for the first five years.

Effectively, the government owns a chunk of your house. So if you sell up, or want to buy back the government’s stake, the price will reflect the value of the house at that point.

In other words, if you bought a house at £200,000 with a £40,000 loan from the government, and the price rose to £300,000, you would have to pay £60,000 to get full ownership.

We don’t think it’s a good idea for the government to be putting taxpayers’ money on the line in the housing market. But at least this only applies to new builds. And at least the taxpayer is exposed to the upside too.

In contrast, the second part of Help to Buy is much more dangerous.

Firstly, it applies to all homes under £600,000, not just new build. So it doesn’t directly encourage any new supply, but it does increase demand by enabling people to pay more.

Another flaw is the way in which it is structured. The government – ie the taxpayer – underwrites part of the mortgage equivalent to 20% of the home’s value. This guarantee means that banks can feel comfortable writing a 95% mortgage loan for a borrower, because in reality they are only taking the risk of a 75% loan.

So while the taxpayer takes the hit first if prices fall and the homebuyer defaults on their loan, we don’t get any profits if property prices rise.


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The shape of the post-election property market

The key point is that Osborne has only pledged to keep the first part of the scheme running until 2020.  He could reduce or even scrap the second part.

He probably won’t until after May’s election. And of course, the Conservatives may not win this election.

However, Labour appears even more sceptical of the scheme. Shadow chancellor Ed Balls has argued in the Evening Standard that “the taxpayer should not be guaranteeing mortgages on homes worth as much as £600,000”. So it seems likely that the second part of Help to Buy at least is on borrowed time.

Meanwhile, all the talk now is of boosting supply of homes. The decision to build a 15,000 home ‘garden city’ in Ebbsfleet may be a rehash of an old idea,  but it does show that the debate is shifting to a focus on more building.

Rising supply or a dip in demand (due to the second part of Help to Buy being scrapped) could help slow the market.

The rise of ‘ghost gazumping’

But there could be a more direct impact on the bubbliest of all the UK property markets – London. Almost every day we see a new piece of evidence that the market in the capital is completely out of control.

According to the FT, the latest fad is for ‘ghost gazumping’. Normal ‘gazumping’ is where the seller accepts an offer, only for a third party to gatecrash the deal at the last minute by offering more.

While this process is legal in most of the UK (the system is different in Scotland), it’s an extremely risky stunt to pull, as the whole deal can collapse in a riot of recriminations.

Yet under the new twist, estate agents are ringing sellers, and persuading them to re-list their homes at a higher price, even when there is no specific buyer available.

The fact that they are even able to convince some homeowners to forget the bird in the hand in favour of the two in the bush, reflects just how rapidly price expectations have shifted in a very short space of time – and the extent to which this is a sellers’ market.

But Osborne did announce one measure that could end up being a turning point. Until now, non-resident owners have been exempt from capital gains tax (CGT), just as your primary residence is exempt.

Combined with the eurozone crisis, and many other crises, this has made London properties, particularly prime ones, attractive as ‘safe havens’ for foreign money. Hence all the complaints about oligarchs of various nationalities buying up central London districts and leaving them as upmarket ‘ghost towns’.

But under the new system, which kicks in next April, just before the election, this exemption will end. As Athena Advisors points out, this makes London property less attractive than the likes of France (which also has CGT, but reduces the rate depending on how long you hold an asset for).

Given that there’s a growing irritation with the high price of property in the UK, we may even be reaching a tipping point where campaigning for lower prices becomes a net vote winner, rather than loser.

In any case, with interest rates also likely to rise after the next election (if not before), the housing market will face a tougher time next year. While that may not be such a problem for the cheaper UK markets, it could well be enough to stick a pin in the already over-priced London market.

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10 Responses

  1. 24/03/2014, GFL wrote

    I often hear a lot about help to buy creating another housing bubble, but I wonder how true this is. I agree help to buy is a shockingly bad policy, but at the moment it represents such a small percentage of the mortgage market, and it is really only applicable to mortgages under about 250k. I doubt very many are taking on a 570k mortgage with 30k down – unless of course they are on 120k+ and have other places they want to invest their money.

    I also agree house prices are getting out of control again; these last 9 months have been like nothing I’ve seen before. Even in zone 4 house prices have risen by about 11% – totally insane.

    The truth is there is too much money sloshing about – everything is at records highs – in this environment how long can inflation stay tamed? At some stage the market will have a correction, but who knows when. Also governments will do everything in their power to keep asset prices inflated.

    In the long run house prices should fall, but which crazy government is going to contract the money supply on their watch? Even if falling house prices are good for the voters, it’s not good for the banks – unfortunately a modern economy requires (semi) healthy banks. Not to mention how much more difficult the national debt will become with rising interest rates.

    The government is stuck between a rock and a hard place!

  2. 24/03/2014, Keith Jones wrote

    I have been wondering about interest rates for some time, wondering when they will rise. But following a recent article by one of your colleagues about our national debt, I wonder if interest rates will ever go up. If our national debt is in the order of £1.5 trillion pounds and would take 30 years to pay off at current interest rates, surely the government would do it’s best to keep interest rates down. I bet at those G8 (oops G7) meetings everyone is making behind the scenes agreements to keep rates low.

  3. 24/03/2014, RMM wrote

    I agree with Keith. The interest rate environment is largely being driven by managing government debt and borrowing, not managing house prices. While the deficit is still very high, it could clearly be much worse if interest rates were higher.

    Unfortunately, while London property and the pound are safe havens for foreign capital and foreign elites, it remains very susceptible to outside shocks. The global market sets the value of the currency and the gilt/ interest ratest. While it is a buzz in popularity at the moment, times change as sentiment changes – Remember Dubai in 2007, Tokyo in 1990, Dublin, Spain,etc. It all seems so rosy until it ends….

    I also wonder how much QE firepower is left within the Central Bank before the market begins to price it in the additional funds. Unlike Japan, UK debt is held predominantly by foreigners. If London falls out of favour with investors/ foreigners or the foreign demand beings to fall, it could have drastic effects on both the pound, interest rates and the most importantly the property market. Interest rates can only go up and they may not slowly rise as predicted.

    From the government’s perspective, at the moment, why would you stop foreigners from using their currency and hard earned capital from buying overpriced assets in London? Once the foreigners get burned the locals will be able to participate in a more regular market.

  4. 25/03/2014, Sam wrote

    Help to Buy is completely flawed in my case and people in a similar position to me. I’m a first-time buyer living and working in London. I require a 2 bed flat in a semi-decent area, so based on what is available I’m looking at properties around £375,000 mark which really doesn’t get you anything special – far from it. Fees involved with buying aside I need to find £18,750 myself (5% deposit). The government can loan me £75,000. Therefore, I need a mortgage of £281,250. Our household income is £75,000 so the absolute maximum we can borrow is about the value of the mortgage I’d require. Great. Except for the fact that if your household income is over £60,000 you aren’t eligible for Help to Buy. You can’t realistically buy a flat in London if your household income is below £60,000 because you wouldn’t be able to borrow enough. You can’t buy a flat in London if your household income is over £60,000 because you’re not eligible for Help to Buy. Me and other first time buyers in London are completely stuffed. Can’t believe this hasn’t been picked up before. I’ll be renting for ever more. Still, my cashflow is good :-)

  5. 25/03/2014, Boris MacDonut wrote

    Houses will stagnate in price by the year end. We seem to be heading very rapidly towards deflation,meaning low low rates for a lon long time. Good news homeowners, less good news mortgagees.

  6. 27/03/2014, Gavin wrote

    Boris – please do tell us more? If we have deflation is that not a good result for those holding cash rather than houses?

    • 05/04/2014, Boris MacDonut wrote

      Sorry Gavin. I meant good news for mortgage holders as the rate stays low. Equally inflation is a good thing too, yet another reason to have a mortgage I suppose, but I do now really fear deflation. Look at commodity prices copper down 20% , Oil down 8%,EU urged to do more QE and so on.

  7. 27/03/2014, agishen wrote

    Property bubbles have been the primary cause of many of the developed economic recessions over the past 50 years (UK, Japan, US among others). Over exposure to this asset class and the associated leverage and illiquidity of the underlying assets, at the point of maximum stress, leads to huge write downs for financial institutions, governments and individuals. That said, this article seems to be written by someone talking down the London property market, or someone watching it tick higher because they are not invested.

  8. 29/03/2014, tuesday wrote

    Will MW EVER write an article recommending London property? They have been talking it down for SIX years now. For sure it will decline one day but if you took their advice and sold then – or chose not to buy since, you will have lost out massively. Do they take their own advice? The writer of this piece was house hunting a couple of weeks back!

    First time buyers or those caught in the rental trap have my sympathy but isn’t this an investment magazine?

  9. 07/04/2014, gutbuket wrote

    I enjoy moneyweek. But over the last 8 years or so they have got it so consistently wrong about property that i don’t bother reading their articles on property.

    i haven’t read this one.

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