Bill Jamieson: Strong foundations for confidence

THE Scottish Government’s new initiative to stimulate sales of newbuild houses is to be welcomed, writes Bill Jamieson

It seems the perfect solution. The housing market is moribund. Buyers can’t afford the 25-30 per cent average deposit now required. Housebuilding has fallen back. Now the government has stepped forward with a mortgage indemnity plan. It ticks all the boxes and provides an immediate solution. The house-buying couple get the mortgage. The housebuilder gets his sale. The bank or building society is covered for the extra risk taken. And our newly-appointed housing minister, Nicola Sturgeon, gets to take a bow.

Why, it’s the perfect solution. In fact, why didn’t we think of it before? Mortgage indemnity could have spared us the housing collapse, the lending famine and the building slump.

There’s no doubt that there’s a lot going for the scheme announced yesterday that will enable up to 6,000 households to gain easier access to new homes. It will help credit-worthy borrowers to access 90-95 per cent loan-to-value mortgages to buy new-build homes in Scotland, with a maximum sale price of £250,000.

The position today compared with a decade ago is dire. The average deposit for Scottish home buyers (first-time buyers as well as home movers) was 25 per cent last year – up from 10 per cent ten years ago. Based on an average home price of £156,419 for 2011-12, a 
25 per cent deposit equates to £39,100. Homes for Scotland reckons that the scheme has potential to generate sales of up to £1 billion over three years, and could also create or safeguard 22,800 new construction jobs and more than 650 apprenticeships.

There’s no doubt the building industry has been hammered. According to the Council of Mortgage Lenders, there were 105,000 loans advanced for house purchase in 2006. Today, that figure has dropped to 44,000 – a plunge of 60 per cent. Ms Sturgeon, who has swapped health ‘n’ hospitals for her new brief as housing supremo, was delighted to unwrap the new scheme yesterday. “It helps people get on to and move up the housing ladder, where it is sensible and sustainable for them,” she said. “High deposit requirements have presented a major stumbling block for those who want to buy a newbuild home.”

Of the many forms of intervention that government fiscal stimulus can take, this looks the most efficient and fast-acting. Ambitious infrastructure schemes involving new roads or rail track or bridges may offer more lasting long-term benefits, but they can take years to grind through the planning system. A mortgage indemnity scheme like this is able to deliver stimulus where it is clearly needed, to households who could not otherwise afford it and to an industry that has suffered badly with a pronounced fall in orders. The Scottish Government and Homes for Scotland can thus take a bow for an initiative tailor-made to help revive our housing market.

However, what of the weaknesses and threats? While the scheme is open to all buyers, it is restricted to buyers of new homes. Now there’s logic in this: it helps housebuilders and all employed by them from being buried under piles of unsold property. And new homes are far more energy efficient: proper insulation, smarter building materials and improved design.

But because the scheme is restricted to newbuild, it cannot therefore lift the housing market overall. A big problem in the market today is the entrapment of former first-time buyers who want to move up the ladder. The stock of existing unsold property currently on the market is not diminished, so there is not the ripple effect that in time would benefit the market overall.

Indeed, this problem is getting worse. According to Hometrack, movements in houses coming on to the market UK-wide exceeded new buyers registering for a fifth successive month in August. It calculates that housing supply has risen by 19 per cent over the first eight months of this year, while demand has risen by 10 per cent. On top of this, the Royal Institution of Chartered Surveyors reports that buyer inquiries sagged for the fourth month running in August – and at an increased rate.

Figures from the Council of Mortgage Lenders yesterday showed mortgage advances for house purchases totalled 49,500 in July. While this was a welcome 4.7 per cent improvement on the previous month and a gain of 5.3 per cent on the level a year ago, this is still well down on long-term lending levels and a glacial recovery from the rate of lending recorded pre-crash.

It is tempting to view the subdued state of the market as solely a function of sharply reduced mortgage lending, but other factors are at work. Not least of these is the widespread lack of confidence that is inhibiting buyers. There is a growing view that the housing market is suffering, not from a “normal” cyclical downturn, in which prices sag for a year or so before recovering, but from a historic change. It was this expectation of ever-rising property values that accounted for the near-manic levels of activity in 2003-2007. Lenders colluded in this mania by offering 100 per cent mortgages and breaking free from historic ratios of house price-to-income.

Today, after an epochal banking crisis brought on by over-lending, doubt has set in as to whether the market will again experience such a level of activity and, indeed, a large measure of agreement that a return to such levels would not be welcome. That should not, of course, deter a purchase where the price is comfortably within the buyer’s income range and that a period of static or falling house prices would not present a problem.

The high initial deposit is testimony to a view among lenders that the game has indeed changed and that they wish the buyer to carry more of the risk. This assessment is constantly changing. The hope is that today’s house price-to-earnings ratio of 4.29 per cent will continue to decline – it peaked at 4.71 per cent in April of 2010. But it is still well above the 1983-2012 average of 4.05 per cent. Thus, for all the talk of the housing market having suffered a severe “correction”, this has some way to go yet before returning to historic norms.

Some might object by pointing out that the monthly mortgage interest payment as a percentage of average income has fallen sharply. Of course it has – interest rates are the lowest for 300 years. But that only underscores the market’s concern: that the economy is still so weak it would be unable to sustain an interest rate significantly higher than today’s level. The latest forecasts from the Bank of England and the OECD point to zero growth in 2012, with a recovery bounce not expected soon. And unemployment in Scotland is still rising. Is this really the climate for a 95 per cent mortgage?

Those tempted to criticise the Scottish Government for being too modest and failing to offer much more as to put a housebuilding recovery beyond doubt might usefully consider the risks of this game of Pass the Parcel, given the state that the economy is in – and who ultimately would end up paying the price of this indemnity parcel.