What has the Coalition Government Done for the Housing Market?

The first thing that the coalition did was abolish the reviled home information pack (HIP). Introduced by Labour the Home Information Pack was a good idea badly implemented...

Labour's loss at the last election was as much because Labour voters didn't vote as it was because of support being stronger for any other party; evident by the fact that the Conservatives had to go into partnership with weak-sister the Liberal Democrats in order to form a viable government. But what a time to become the UK's government, it was akin to getting the manager's job at a Supermarket about to burn to the ground.

The Lib-Dem/Tory coalition immediately set about handling the crisis in the exact opposite manner of the predecessor; while Labour was attempting to spend the country out of recession, the coalition has taken us down the austerity track with gusto. Cutting spending, increasing taxes, public sector job cuts and a truckload more unpopular policies.

Some unpopular policies in the housing sector as well, however, the biggest problem with their housing policies is that they have been almost completely ineffective – in a word, useless.

In fact, the best policy the coalition has enacted for the housing market was its first, even it wasn't brilliant and it has been downhill from then on.

Baby Steps - from the HIP

The first thing that the coalition did was abolish the reviled home information pack (HIP). Introduced by Labour the Home Information Pack was a good idea badly implemented. The idea was that it would tell potential buyers everything they needed to know about a home, without having to take the agents word for anything. Unfortunately the pack was made mandatory and anyone wishing to sell their home was lumbered with an additional cost of having to prepare the pack before they could put their home on the market.

Abolishing the HIP had the desired effect in that it brought more homes on to the market in a flurry. But even it wasn't without fault. HIPs had been a competitive market, and had given birth to many a small business serving private sellers, those selling through online estate agents, and often even those selling through agents as they offered a cheaper service. However, in the case of abolishing HIPs the positives far outweighed the negatives in that it allowed many people unable to afford the cost of a HIP, and possibly even trapped into possible foreclosure to sell up ASAP.

But it didn't tackle the housing market's main problem, which is lack of supply, lack of demand, stagnation and depression.

  • Lack of demand because prices never fell far enough to correct the lack of affordability.
  • Lack of demand because of the constrained mortgage market.
  • Lack of demand because many homeowners are in negative equity or at least have under the amount of equity they need to mortgage their next home, and first time buyers can't raise a sufficient deposit to get a mortgage in the first place.
  • Lack of demand because of the few potential buyers not removed by any of those hurdles, many of them won't pass credit checks with banks now requiring near-immaculate ratings.
  • Lack of supply because construction has been in the toilet for several years, not least because of lack of demand and lack of financing.
  • Stagnation and depression because of all the above.

A Detailed Strategy

The coalition has tried to tackle such huge problems with a myriad of piecemeal measures, barring a couple of big ones. The coalition's 2011 budget is a perfect example of this. In the budget it revealed a "detailed housing strategy", which contained a lot of small measures and very few big ones.

If one of the biggest problems is the fact that first time buyers can't buy, then one of the government's biggest measures was the FirstBuy scheme, which was a shared equity scheme whereby house-builders and the government would stump up (equally fund) a 20% interest-free loan to first-time buyers with a 5% deposit, allowing them to go for a 75% mortgage. The scheme was hit hard because it immediately put first time buyers at risk of negative equity. As the critics stated, new builds are usually overpriced and while you can normally negotiate a discount of up to 15%, builders aren't budging for FirstBuy buyers. On top of that a new build will usually lose value in the first 5 years even in a flat market, so in a down-market it is even more of a risk, especially if the first time buyers were unable to pay off the equity loan within the 5 year interest-free period.

This was replaced by the new HomeBuy scheme, which was very similar except for it brought the banks into the picture, and was also expanded to cover home-movers as well as first-time buyers. Under this scheme the banks actually lend a 95% mortgage on a new build home, with 3.5% guaranteed by the builder and a further 5% guaranteed by the government.

The schemes seem to have helped new home builders, as it was revealed this week that Barratt Homes have returned to profit, but have they really helped the market?

Big Problems Require Big Solutions

The FirstBuy Scheme was aimed at helping 10,000 first time buyers in 2 years, but broken down you can see that it just wasn't enough; an allocation for just 940 purchases in London says it all, but even the 2,400 in the Midlands is a joke. Because the NewBuy isn't actually funded by the government it potentially had some reach, there was talk of hundreds of thousands of purchases. But its strength is also a flaw, namely the support of the banks; it has reach because it isn't reliant on government funding, but instead it is reliant on banks being willing to lend 95%.

One of the biggest problems with the housing market is that the banks aren't willing to lend, indeed even people who have a deposit of 10% or more often find it difficult without an immaculate credit rating. While the 9% guarantee takes away some of the risk it isn't a lot. If the borrower had trouble paying, in theory the bank can first dip into the 3.5% backed by the developer, and then the 5% backed by the government, but if it comes to all out repossession then the banks know 9% will be a very small portion of what it is likely to lose on the property in such difficult times.

UK banks are actively pulling back from property lending as they try to reduce their exposure to the sector. Indeed data from Moneysupermarket.com also shows that the number of loans available for borrowers with only a 10% deposit or less has fallen sharply, and rates are being increased by the banks. The comparison website says that the number of 90% mortgages has dropped by a quarter in the last year, and the number of 95% loans available has fallen by 43% in the last 6 months. Overall there are 31% less products available to first-time buyers than there were last year.

Right from the outset there were doubts about just how committed the banks were to the NewBuy scheme. These were far from being laid to rest when the banks wasted little time before increasing interest rates on the loans offered under the scheme, despite the fact that only the government-owned banks had ever been at the advertised rates anyway. Raising rates is a symptom of the bigger problem, which is that the banks don't want to lend on property in the current climate without a huge cash deposit.

The Cold Hard Truth

And that is only one of the almost insurmountable problems faced by the property market. The bigger problem is that government intervention prevented house prices from falling far enough to make homes affordable, and with weak supply keeping any further falls to a stagnating trickle of real-terms decline, this has left us stuck in this mire until prices are low enough in real terms to break the cycle. But at the same time you have high unemployment, frozen wages and dire sentiment all adding further downward pressure to demand.

With all that and of course, the huge deficit we collectively own, there is no magic wand any government can wave to make it all better. You could say that another big price drop would help, but in all honesty it wouldn't; a big price drop would bring its own problems like negative equity, strategic defaulting and sledgehammered consumer-confidence. And then, the same dynamics of limited supply and limited land would only make for an even bigger growth during the next up-cycle anyway.

The truth is that if we stick to the status quo we are probably always going to be stuck in this boom-bust cycle, furthermore what would fix it and whether anyone could or would take such drastic measures is, as they say, above my pay grade. What has the coalition done for the housing market? Very little, but equally as much as any other government likely would have, if not in measures or money, then certainly in overall effect.

- Monday 17 September 2012

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