Equity trap of Government help schemes

As house prices appear to be wobbling, first-time buyers face a tricky decision as they consider whether to buy a home under the Government’s £250m support scheme, devised to overcome the acute shortage of mortgage money.

HomeBuy Direct, widely operated by builders and housing associations and backed with millions of pounds of public money, will help 10,000 purchasers to buy new homes with a deposit of only five per cent.

They will qualify for a further equity loan of 20 per cent, funded equally by Government and housebuilders, which reduces monthly mortgage repayments.

Any scheme which boosts home ownership and the battered housebuilding industry deserves support and many young couples still see rental payments as money down the drain, and want a place of their own.

The danger, though, is that people with limited financial resources could buy an asset which then falls in value or gains so little that their next move becomes a problem.

Writing in Property Week, analyst Alastair Stewart, of UniCredit Research, said: “Shared equity could become an equity trap.

“A young couple takes a loan at 70 per cent or 75 per cent of value in a first home. To get into a larger family home, if kids subsequently appear, will require them to save up the gap between the initial equity and the 90 per cent more prevalent (to get a mortgage) in the trade-up market

“And that will be based on a bigger, more expensive property, possibly with extra inflation on top.”

Stewart raises the point that surveyors often down value new homes, to allow for incentives and perks which developers use to attract buyers. So a home purchased at, say, £100,000 might be valued at £95,000 if it soon went up for resale, which could pose another headache for the owners.

Under HomeBuy Direct, warns Stewart: “There is a risk that a couple’s small starter home might turn out to be a permanent residence.”

He believes that most stimulus packages intended to help buyers eventually feed directly into higher prices, freezing more people out of the market.


An “obvious alternative”, he says, is for the Government to do nothing at all, and to let house prices fall to levels that the market and banks deem to be sustainable.

Another critic of the Government plans is Henry Pryor at HousingExpert.net.

“As with all markets that are left alone, the housing market will come back into balance only when either more credit becomes available or prices fall.

“As the first was widely acknowledged to have been a major contributor to the global credit crisis, it might be better to look at the second,” he says.

Pryor says builders have almost a million plots with planning consent in their portfolios and in many cases paid too much for the land so are bound to welcome Government schemes to encourage more buyers.

“If one wanted to make it easier for the poor old first-time buyer then all George Osborne needs to do is encourage the state-owned banks to raise the loan-to-value ratio they offer and free up some of the conditions that they have put in place,” he says.

“The 20 per cent deposit which is the minimum required by most lenders is the largest barrier for most buyers. Possibly £30,000-plus out of taxed income is a significant amount to try to save alongside the repayment of student loans.

“Mortgages aren’t unaffordable as such, they are unavailable to many.”

Pryor thinks last year’s warning by Mervyn King, governor of the Bank of England, that “it’s time to take away the punch bowl” by allowing excess finance into the system should still apply.

Clearly any first-time buyers who do take advantage of HomeBuy would be well-advised to consider their medium-term plans – based on the assumption that significant price rises are unlikely to be seen for some years.

The Rightmove Consumer Confidence Survey says over-valuation of house prices “is emerging as a major factor as around half of the UK believes prices in their local area to be too high.”

Rightmove says the number of homeowners expecting prices to stay the same has risen for the seventh consecutive quarter and has now hit 40 per cent – suggesting “a period of price stagnation”.

Miles Shipside, director at Rightmove, says: “We now have a situation where half of the UK public feel house prices are too high, yet three-quarters of the same public expect prices to stay the same or increase over the next 12 months.

“This suggests the prospect of a market stand-off and rising unsold stock levels, if sellers don’t wise up to the house price views of their target market.”