Prospective buyers have had a raw deal in the capital in the last few years. After the crunch, lenders required deposits of at least 15%. With house prices in the capital heading ever upwards, it wasn’t worth bothering considering purchasing if you had less than £50,000 saved, when you took the additional costs like solicitors fees, stamp duty and broker fees into account. Enter the Help to Buy Scheme!
The Help to Buy Scheme was put forward by the government to help prospective buyers onto the property ladder by reducing their required deposit to as low as 5% of the purchase price of the property, up to a value of £600,000. Happy days, the 5% deposit was back! When it was announced, many Londoners thought that this was their chance to get a foothold on the property ladder – prized as it is in the capital.
Landlords in the capital were particularly worried. With the 5% deposit back, who on earth would consider renting, especially in the UK where renting is largely considered “money down the drain?” Would this mean that would be first time buyers would be the winners and landlords the losers with almost every tenant with a bit of savings able to get onto the property ladder? Not quite.
With the average house price in London at £437,000, the problem with Help to Buy becomes apparent when you do the maths. Ok, the deposit required is low as 5%, with the government providing the difference of up to 15% of the purchase price. However, this means that for a lender to offer a mortgage for the average house price, they would need to lend up to £415,000. In order to qualify for such a mortgage using the 4 times salary calculator, a buyer would need a salary of more than £100,000.
Even when you take flats into consideration, the income levels required are pretty high. And lenders are exceptionally fussy at this end of the market, with the self-employed having to prove profits equal to the salaries of the employed. Those with a poor credit score or adverse credit need not apply.
The evidence also shows that landlords need not worry. This is because there is a massive shortage in the supply of housing, and Help to Buy will have little impact on this. According to London Councils, the capital needs a whopping 80,000 new homes a year between now and 2021 just to meet demand. Good old Boris has promised to deliver 40,000 new homes a year but London is not even building half that number. Because of factors like shortage of land, planning restrictions and the general lack of credit available to house builders, house building in the capital is more or less at a standstill.
Figures in other parts of the country are more encouraging – statistics show that Help to Buy is popular and a relative success up North, with 66 Equity Loan approvals in Bradford and 88 Equity Loan approvals in Leeds. By comparison, there were two in Lewisham and zero in Southwark!
In London, house prices have roughly doubled every decade since the seventies. It would be foolish to bet on rents, which rose 8% last year coming down in the foreseeable future. Even using the most ambitious estimates, prices are set to rise for the next 20 years until supply catches up with demand, if that ever happens.
Sterling & Law Group plc