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Rising new build premium driven by builder incentives – IMLA

  • 16/11/2017
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Rising new build premium driven by builder incentives – IMLA
The Intermediary Mortgage Lenders Association (IMLA) has raised a series of concerns which need to be addressed to stabilise the new build sector, including over-reliance on Help to Buy and rising new build premiums.

It warned that housebuilders remained too reliant on Help to Buy and that the new build premium has risen significantly, driven in part by “less sustainable factors” such as builder incentives.

IMLA also highlighted the high-profile issue of leasehold transaction in the new build market which “makes it questionable whether some new properties have any substantial long-term value”.

However, the trade body also noted that there was increasing confidence among lenders to finance new build purchases given better disclosure of incentives, more dialogue with housebuilders and the shift from flats to houses.

This has resulted in higher loan-to-value limits on new build and less restrictive site exposure limits.


Help to Buy

Help to Buy equity loans made up 27% of all new housing completions and 5% of all housing transactions between April 2013 and March 2017, with the ten largest housebuilders attributing around 35%-40% of their sales to Help to Buy.

The scheme is backed by £21bn of government funding until 2021.

IMLA warned that given this level of dependency, the planned end of Help to Buy in 2021 could produce a significant shock to the house building system.

It urged mortgage lenders to work with government and housebuilders to inform decisions on a future replacement scheme.

Housebuilders have already stated that the end of the scheme was having an impact on their planning processes.


New build valuations

The IMLA report also highlights the key issue of new build valuations and calls on valuers to remain vigilant towards unjustified new build premiums.

“While the advantages of purchasing a new home – such as an NHBC guarantee and lower running costs – justify a higher price, the premium has risen significantly in recent years and has been impacted by less sustainable factors including builder incentives and even government support schemes such as Help to Buy,” it said.

IMLA addressed serious concerns about the use of leasehold by housebuilders with the inclusion of onerous ground rent clauses.

This “makes it questionable whether some new properties have any substantial long-term value; where ground rents double every 10 years, a £250 ground rent will become £8,000 in 50 years and £32,000 in 70 years,” it warned.

The issue has already produced a promise for government action with a consultation into banning these restrictive clauses on new build properties.

And lenders are treating these clauses with caution or outright bans.


Significant progress

IMLA executive director Peter Williams noted that the UK housing supply model had for a variety of reasons consistently failed to deliver adequate number of homes to meet demand.

“Lenders will always see new build as different and, indeed, potentially riskier, but significant progress has been made in the last ten years to put lending activity on a surer footing,” he said.

“Government stimulus has played an important role in stimulating this market, and whether this means on-going support to help buyers with modest deposits to buy new properties is needed beyond 2021 remains to be seen.

“Industry should stand ready to support initiatives that ensure a healthy supply of new homes for first-time buyers with modest deposits, while ensuring that the solution works effectively for lenders as well as housebuilders,” he added.

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