The recent announcement by David Cameron that the second phase of the Help to Buy scheme will now launch on Monday the 7th of October was met with a mixed reaction. While many feel that overall the scheme is good news for the UK property and mortgage markets, sentiment in London is a little different with ministers and media worried about the potential of a property bubble forming.
The second phase of the scheme will allow purchasers to borrow up to 95% of the property value up to £600,000, with the Government underwriting the remaining 15% of the risk for lenders. Crucially however, while borrowers will be able to apply for mortgages from Monday the 7th of October, the guarantee underpinning the mortgages will only apply from January 2014.
John Phillips, Financial Services Director at KFH, comments: “While the second phase of the Help to Buy scheme is fantastic news for the wider property market, bringing it forward to begin next week just doesn’t seem practically possible in such a short space of time. Many lenders are simply not ready at the moment and so are waiting for the Government to publish guidance and full details with a particular focus on what criteria they will need to use and who will be paying for the products. A key concern is whether lenders will underwrite a 95% Loan to Value or 85% Loan to Value, as this has a significant impact on things like products available and interest rates.”
The issue of a bubble forming is one that is being widely discussed. We analysed data from the Land Registry, comparing pre-crash sales volumes and price rises with today’s figures to get a better understanding of the market. Looking at the month of May in 2007 specifically, the volume of sales was 55% higher than the volumes seen in May of this year, while prices today are 13% higher than their August 2007 peak.
Paul Masters, Group Marketing and Operations Director at KFH, comments: “Reported sales volumes in London are still significantly lower than those seen in the 2007 peak, indicating that a bubble is very unlikely. However, prices have increased by 7.1% this year, and are currently 13% higher than before the credit crunch which indicates the strength of and confidence in the London property market. The increase in property values are largely as a result of low stock levels, increased demand fuelled by an improving mortgage market and an improved economic climate. Prices should stabilise if we start to see increased levels of stock coming on to the market in the next few months to meet the demand from Help to Buy buyers, however if demand continues to outstrip supply, then prices will continue to rise. The Bank of England however does have powers to intervene and pull the initiative should things start to look risky.”