Shapp, Crackle and Pop goes the Housing Market

1940: Boom Town - Jack Conway

Any Independent Financial Adviser worth their salt, that creates a decent financial plan for clients will advise people to clear debt. The main reason that the world is in the state it is at present is due to the excessive borrowing which has largely been used to buy property. This is a vicious circle as the available funds effectively mean that there is ample demand and as a result the price rises. So the credit crunch has hopefully taught us some lessons.

Of course it hasn't. The media is still obsessed with house prices which fell by 0.2% in January according to Nationwide Building Society and the average home is currently priced at £162,228. In short, there are fewer mortgages available and people are electing to stay put, or upgrade by way of home improvements. Banks, who have been berated for getting us into this mess (who were in fact merely lending us all money that we demanded) and yes, they didn't do a good job of vetting applications and ensuring that the mortgage was affordable. This was particularly rife in America. Anyway, the Housing Minister, Grant Shapps has launched the New Buy Guarantee Scheme. This is effectively a Government backed insurance scheme, and by Government I mean taxpayer. The purpose of the scheme is to encourage banks to lend 95% mortgages again. Meaning buyers need just a 5% deposit. I appreciate that to many this will seem like a great idea and mean that they don't have to wait as long to build up a sufficient deposit. However, surely the debt-fuelled crisis was all about our impatience, buy now pay... well, some time in the future...maybe, rather than save first.

So what will this really mean? if the borrower defaults on their loan (and by European standards, this could mean missing 3 payments rather than the current 6) or the property suffers "negative equity" the Banks will have recourse to an indemnity fund - which is funded by house builders and taxpayers. So put simply, the Bank cannot lose, hence the thought that this will encourage them to lend.

Is it just me or is this complete madness? surely fiscal prudence is precisely what the Banks should have been doing and should be doing now. Certainly lend to those that can afford the loan, but getting back to a 95% mortgage is really admission that actually this is quite an expensive exercise and if you cannot put 10% of your own money towards a property, then one must consider if it is genuinely affordable. Of course I have sympathy with any first time buyer at the moment, but that's because property prices are too high in relation to incomes, not because "they deserve it".

Buying a home is a massive financial commitment. Many enter into a mortgage without giving proper consideration to the implications. Houses are not always easy to sell and certainly not at the price you would like to sell for. Income and employment is rarely certain. Domestic bliss and stability are increasingly uncommon. Becoming a homeowner typically takes more than 25 years - you only own the property once the mortgage is finally repaid and the Deeds are released to you.

The scheme will become available in March. It will be available to any UK resident buying a newly built property up to £500,000. So in theory, someone could have a £25,000 deposit and borrow £475,000, which under normal mortgage lending would require an income of around £135,000. Now if you earn £135,000 and don't have £25,000 of savings for buying a home, can I suggest that you talk to a a good financial planner? The Government hope that this initiative will help first time buyers (and others) and stimulate the property market. I commend the sentiment, but this seems to be attempting to buck the market, which you may remember that Margaret Thatcher said was not possible.

Caveat Emptor.