To those on the outside, it may seem perverse that the government is apparently ploughing taxpayer money into the housing market.
The cataclysmic collapse of the housing bubble in 2008 was one of the major reasons for the recession and the resulting austerity measures.
However, it should be appreciated that no money is changing hands at this stage.
The government is, to some extent, “betting” that the commitment to underwrite the scheme will be enough to generate confidence, without actually having to spend a penny – this would only occur in the event of a default.
In the short term, it makes sense to give the first-time buyer market a shot in the arm, as it is clear it needs help.
A lack of mortgage finance for first-time buyers means the bottom of the property ladder is in near-paralysis, which is putting the brakes on the rest of the market. Our research reveals that just 1% of all loans for house purchase in October were to borrowers with a deposit of 10% or under. Back in October 2007, before the downturn, that figure stood at 13%.
The government is therefore right to step in and aid buyers with low deposits and first-time buyers, who traditionally represent a greater proportion of new build buyers, attracted as they are to the low or zero maintenance costs at a time when personal finances are under pressure from the home purchase.
With the economy struggling and speculation that the eurozone crisis may make things worse, lenders don’t feel they can risk this sort of high LTV lending over long periods, because they need higher deposits to protect themselves.
The initiative should therefore be welcomed – but also recognised as something of a drop in the ocean that is required to address the shortfall in higher LTV finance longer term.
The government has said the scheme will be reviewed in three years time, which seems like a sensible time period.
Any longer, and the potential risk to the taxpayer will become untenable. It already stands at around £1bn.
Although it would take a steep rise in repossessions and a sharp fall in house prices for the taxpayer to feel the pinch, with the eurozone still so unstable, this may be more of a real risk than some are suggesting.
Richard Sexton is business development director of e.surv chartered surveyors
