The National House Building Council announced that the number of new build houses built in the UK between from the month of March to May rose by 4% year on year (2013-2014). Within these three months, there was a total of 37,975 new houses registered. If we annualise this i.e, multiply by 4 to give us an estimate for the year, just over 150,000 homes are being built annually. This is just over half the amount of houses the Future Homes Commission recommended the UK would need to build each year to keep up with household and population growth, not to mention the vast interest from foreign investors in the UK’s thriving capital, London. The current demand is estimated to be almost double the supply, there is no doubt prices will continue to rise for the foreseeable future. The Bank of England announced a cap on mortgage lending last week in an attempt to normalise the housing market. The Financial Policy Committee (FPC) have announced that no more than 15% of any financial institutions (bank/building society) new house purchase lending can be at a Loan to Income (LTI) of 4.5 or more.
Loan to Income example
John earns 55k and Tina earns 45k. Together they want to buy a house. A loan to income of 4.5 essentially means they borrowed 4.5*(45k + 55k) = 4.5*(100k) = 450,000
Institutions have been lending at higher LTI ratios primarily due to a combination of slow living wage growth in the UK and an increase in property prices due to demand outweighing supply and overseas cash buyers.
In my opinion, I don’t believe this will solve the problem. If anything, it will price out more domestic first time buyers out of the market with more power given to foreign investors to continue to drive up prices and make becoming a homeowner an ‘elite’ privilege in the nearer future.
We are in the middle of what potentially is another housing bubble in the UK. What this basically means is that house prices continue to rise making it increasingly difficult for first time buyers to climb the property ladder without assistance from family/friends. This has led to an influx of overseas cash heavy investors primarily from China and Dubai being able to capitalize and purchase a number of buy-to-let properties at a time and rent out to an individual who would potentially love to own their own place but financially is not a viable option for them, achieving significant yields due to low mortgage costs and the ever increasing rise in rent prices. New builds homes are a great example. Investors would snap up properties pre-construction (off-plan) below market value which is seen as a win win situation for both sides. The investor has bought at a discount and the developer is assured of a return on his development.
To help combat this the government has now launched the help to buy scheme for people that either want to buy their first property OR move from their existing one to a new place.
To be eligible for help from Help to Buy, you must:
1 – Have a deposit of at least 5%;
2 – Be looking to buy a home worth £600,000 or less;
3 – Be purchasing a property you intend to live in most of the time;
This means you can’t buy a property you intend to let out or use as a second home.
Help to buy scheme is basically where the government gives you up to the value of 20% as an equity loan interest free for the first 5 years allowing you to only have to a deposit to put down down of only 5%. You then have to take out a mortgage on 75% of the property value.
House price – 100,000
Deposit – 5000
Government Equity loan – 20000
Remaining mortgage – 75000
The advantages of an equity loan is that the higher you deposit tends to correlate positively with a reduction in the rate at which the bank will lend to you. Also in the unfortunate situation the property declines in value below the amount paid, the amount repaid to the government is proportional i.e 20% of the new value if we take the above example.
The help to buy scheme is something that should be looked into if owning a property is something that you would like to do but research into the different options available – the second phase of the scheme had just been launched with banks such as Natwest and Barclays offering mortgage products for the programme.