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Would Loan-curbing Proposals From Chancellor Osborne Affect New Home Buyers?

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By Author: Chris Westerman
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The Help to Buy scheme has proven effective for home buyers and builders. But the Chancellor’s concerns about a house price bubble may, errantly, cause a cut back.


Chancellor George Osborne has publicly articulated a fear that many in the financial and policy sectors of the UK have been feeling in the past two years. It is that a new housing bubble might be underway, and that all homeowners and new buyers are at risk of the same financial troubles that occurred in 2008-2010.


To that fear, Osborne has floated ideas in public statements at mid-2014 that the size of mortgages needs to be reined in, with caps on the mortgage loan-to-income (LTI) and loan-to-value (LTV) ratios. Business Secretary Vince Cable believes that all mortgage loans should be capped to 3.5 times earnings. The Bank of England, by way of governor Mark Carney, noted that prices were up 10 per cent since 2013 when the Government’s successful Help to Buy (HTB) scheme began implementation.


There are many counter-arguments to this. One is that the outsized rise in home prices in London - largely driven by wealthy foreign buyers and investors seeking safe haven and an enviable estate, far away from the unstable economies and monetary systems of their home countries – is skewing price averages. Another is that the buoyed economy in England is simply driving demand among middle class English buyers.


All that said, investors in house building - developers, homebuilders, institutional investors (such as insurance multinationals), and those who make strategic land investments - are forging ahead. The sharp need for more housing, if anything, is what drives prices skyward.


What Chancellor Osborne has to take into account is that at long last, first-time home buyers are able to take that initial step on the property ladder. About 4,300 households bought property in June 2014 with the assistance of the Help to Buy programme, the highest number since its inception a year earlier. Total purchases with HTB now are up to 27,000 households, with the median value of all homes under the scheme at £187,000, with a quarter of purchases at under £150,000.


Notably, The Guardian reported in July 2014 that fewer than 1 per cent of HTB users, about 250 households, were using the scheme to buy properties worth more than £500,000. Eighty per cent of HTB purchases were by first-time buyers. Housing minister Brandon Lewis says the programme was stimulating house building. “It’s no accident that since the start of the scheme private house building has shot up by a third and continues to climb,” he said. “Developers are increasing their output, and taking on new workers at the fastest rate since records began.”


Stewart Basely, executive chairman of the Home Builders Federation, echoed Lewis’ comments: “Indicators suggest increases in house building activity in the region of 25 per cent in the past year which has seen the steepest increase in new housing starts for around 40 years,” he said.


If the programme were curbed, it likely would have a cooling effect on this economic trend.


Investors in housing understand the market potential, as by some estimates the country is short of one million homes. This is happening through traditional development organisations as well as such means as joint venture land opportunity assemblies (speculative investors who identify land that needs re-zoning; once achieved, the land is partially or fully developed and sold to homebuilders or home buyers).


Individuals who are thinking about land or built-property investments should do so under the guidance of an independent financial advisor.

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