MSE News: Budget 2013: Help to Buy mortgage scheme to launch

leitmotif

Another reason this country's fixation with houses as a primary source of wealth has landed us in the mire is because over the past decade and a half people have been encouraged by stupid Sarah Beany-type programmes to channel all their wealth (and much fictitious, bank-lent 'wealth') into property. And whilst houses prices were rising at phenomenal rates, there was plenty of reason to do so. But that tempts potential entrepreneurs away from investing in other things, such as innovative technology. Germany is weathering the recession reasonably. Why? They have proper emphasis on vocational and technical education, they have consistently aimed at quality, precision and high-tech innovation - things the Chinese (for example) can't yet replicate. We, on the other hand, can't compete with Chinese prices, have outsourced all our services to India, and don't have a way out of the recession other than devaluing our currency and hoping foreigners will buy our crappy goods ('outsourcing the recovery' was an expression I heard said of Osborne's budget). So Osborne looks to housing to get us out of the mire; at least if he can't create a recovery, he can have people labour under the illusion that the recovery is happening because look: our house price went up by 0.2% last month!

Perhaps if people hadn't been encouraged to funnel money into property over the past decade we'd have proper industry, creating proper employment and genuine prosperity (or, at least, the genuine green shoots of a recovery). As it stands, Osborne's plan will only serve to prop up house prices in the short term, meaning young potential entrepreneurs will have to put off any ideas about setting up some innovative business because first they'll have to pay off 40K's worth of student debt and then save up 5% of 7xnational average salary for an average house, and then spend 30 years shelling out 40% of their earnings on mortgage repayments.

Jesus, you don't need an economics degree to understand this country's in a mess.

shaniannie

Maybe I'm missing something here...

These schemes mean more people should, in theory, qualify for a mortgage in the first place - but banks only have a finite supply of cash to lend. Both these new schemes seemingly reduce the bank's risk when offering a mortgage, but they will still only have their finite amount of money to lend per month/quarter/year/whatever.

Maybe I'm over simplifying it in my head, but I fail to understand where less risk = more total money being lent.

leitmotif

shaniannie wrote: »

Maybe I'm missing something here...

These schemes mean more people should, in theory, qualify for a mortgage in the first place - but banks only have a finite supply of cash to lend. Both these new schemes seemingly reduce the bank's risk when offering a mortgage, but they will still only have their finite amount of money to lend per month/quarter/year/whatever.

Maybe I'm over simplifying it in my head, but I fail to understand where less risk = more total money being lent.

Because the government (i.e. the taxpayer) is taking over a proportion of the lending.

shaniannie

leitmotif wrote: »

Because the government (i.e. the taxpayer) is taking over a proportion of the lending.

Yes, for one of the schemes, the 20% deposit, on the limited amounts of new build houses.

I guess my thoughts were more aimed towards the mortgage guarantee, promoting higher LTV mortgages.

leitmotif

shaniannie wrote: »

Yes, for one of the schemes, the 20% deposit, on the limited amounts of new build houses.

I guess my thoughts were more aimed towards the mortgage guarantee, promoting higher LTV mortgages.

I see. Well, there the rationale is that banks do have money they could be lending but aren't, instead using it to shore up balance sheets. The banks must be bemused; they were told not to lend recklessly, but everything the government has done since then has been aimed at getting them to lend recklessly. Paying 6½-7xnational average annual wage for an average house is not sensible. I'm sure there'll be people here who argue that they can afford it, but specific cases aside, as a whole an economy can't function on that basis, certainly not a broke one.

shaniannie

leitmotif wrote: »

I see. Well, there the rationale is that banks do have money they could be lending but aren't, instead using it to shore up balance sheets. The banks must be bemused; they were told not to lend recklessly, but everything the government has done since then has been aimed at getting them to lend recklessly. Paying 6½-7xnational average annual wage for an average house is not sensible. I'm sure there'll be people here who argue that they can afford it, but specific cases aside, as a whole an economy can't function on that basis, certainly not a broke one.

I guess that's what's sticking in my mind the most.

The funding for lending scheme was meant to encourage the banks to lend more, but this seems to have had a very small impact.

I just don't see the banks suddenly loosening the purse string because of the guarantee. Won't they just tighten lending criteria even further and be even more picky over who they choose to lend to?

leitmotif

I don't see why they need to change their current lending practices. A person or couple with a permanent employment contract and a good credit history, etc. can currently borrow 3½ times their annual salary if they have a 15% deposit. That's sensible lending. If they can be encouraged to get that down to a 10% deposit, perhaps that would be a little better, but it's the prices that are the problem, not the lending. If 3½ times your salary (or 3 times one partner's salary and 0.5 times the other's) isn't enough, when coupled with your 10-15% deposit, to get you a suitable property, then the solution is not to burden yourself with more debt.

There's going to be a pension crisis in twenty-thirty years' time. People are going to be in mortgage serfdom, paying through the nose for bricks and mortar and their kids' education. I guarantee you that when people are forking out 40%+ of their income on mortgages the pension plans will be the first thing they put off thinking about until they're in their mid 40s.

terrydactil

saayinla wrote: »

If the government truely want to Help, I in my opinion would have thought the Help to buy be applied to both Old and New build rather than Selling over prices houses to First time Buyers under the guise of helping then on to the housing Ladder when infact they are most likely taking on negative equity.

Precisely

This is the government trying to win votes of home owners and pretending to help first time buyers.

Home owners have self-esteem based on the value of their property. That is why asking prices are still sky high despite the economy being in a mess for the past few years - people simply won't accept that they paid too much for the properties they bought in the noughties.

So what is the government doing? Trying to artificially prop up property prices with cheap credit, and selling it as helping buyers. They aren't at all, they are helping the profitability of construction companies and the self-esteem of home owners / voters.

The greed and selfishness of the people of this nation has caused a mess. People jumping on the price rise bandwagon of the noughties, selfish buy-to-letters who should be forced to invest in build to let or the stock-market instead (it's disgusting that these people treat family housing as a stock-market), and sellers now refusing to admit their property is overpriced.

How can it be that we have overvalued property and a government a trillion pounds in debt? Because of greedy selfish people, including bankers, all expecting the tax payer to pay for their greed and mistakes.

House prices need to be allowed to fall to affordable levels, and the supply constraints which have caused unaffordable prices need to be addressed.

So stop trying to manipulate the free market, Mr Osborne. That isn't your job!

Wallhart

shaniannie wrote: »

Maybe I'm missing something here...

These schemes mean more people should, in theory, qualify for a mortgage in the first place - but banks only have a finite supply of cash to lend. Both these new schemes seemingly reduce the bank's risk when offering a mortgage, but they will still only have their finite amount of money to lend per month/quarter/year/whatever.

Maybe I'm over simplifying it in my head, but I fail to understand where less risk = more total money being lent.

It's to do with capital regulations. A bank has to hold roughly 6 times as much in capital to lend a 95% mortgage than a 60%. There is a cost to hold that extra capital which is why 95% mortgages are so much more expensive in terms of interest rates

What's not clear on the guarantee Scheme is whether the banks will get capital relief in the 20% guarantee and therefore have lower costs to capital. And even then do you trust banks to pass that lower cost of capital onto us.

They will still issues more because the risk is reduced for them but the interest rate may not yet fall

I used 95% as an example but at the moment it is 90% because banks aren't offering 95% mortgages. Same principle applies


I'm not sure exactly how it works but first time buyers won't be risk negative equity because they will have 25% equity against the mortgage. For the equity loan new build scheme. Where the government makes money is if prices go up and you sell your house as they take 20% of sale not the money they lent you


In terms of funding it. Banks can package mortgages into covered bonds on sell them to raise money to issue more. Obviously it's not the only way of raising finance. The whole bank crisis before was based off of prime mortgages being packaged up and sold. When @ hit the fan these assets become worthless. But doing this isn't a bad thing if you used 60% ltv mortgages rather than 95%. Scandinavia have a huge mortgage backed security market underlined by very strong and save mortgage books.

shaniannie

Wallhart wrote: »

It's to do with capital regulations. A bank has to hold roughly 6 times as much in capital to lend a 95% mortgage than a 60%. There is a cost to hold that extra capital which is why 95% mortgages are so much more expensive in terms of interest rates

Ah, that explains quite a bit, thanks