Is New Buy the golden bullet? - by Mark Oliver

Mark Oliver

With the announcement in March of the New Buy initiative, the Government clearly signalled some active support for the housebuilding sector.   Personally, I think New Buy is an excellent initiative (and one I have been advocating for the last three years) as it targets resources precisely where they are needed – at the new housing market.  Let us not forget that the home building supply chain is a significant contributor to the UK economy – we estimate that each additional house start per annum generates 2.4 jobs.

New Buy essentially removes the need for large deposits.  Under the scheme the builder deposits 3.5% of the value of the house into an indemnity fund and the government adds another 5.5%.  Lenders can then offer mortgages of up to 95% of the value of the house, meaning that the buyer only has to find a deposit of 5%.

I have maintained for some time that the main problem for first time buyers is the large deposit that has been required – 20% of the value of a new home is a huge lump sum to find for someone who is probably already paying significant monthly rent.

The previous scheme – First Buy Direct – was only open to first time buyers, and effectively offered an equity loan to get round the problem of the deposit.   While offering some welcome options to the considerable number of people eager to get on the housing ladder, it was not restricted to newly built properties, so offered less opportunity to housebuilders.

New Buy advertIn recent months we have seen some of the bigger builders offering shared equity and other schemes to help kick-start the market, but only the larger developers with deep pockets were able to do this.  The good thing about New Buy is that the scheme is open to any housebuilder, and should help some of the smaller companies who have been particularly hard hit by the lack of affordable mortgage offers.

What it also does is help level the playing field between new build and second hand homes.  With building regulations demanding ever higher standards of energy efficiency, the price to build new homes has necessarily increased, and it has always seemed perverse that there was no incentive offered to encourage the housebuyers to opt for a more energy efficient home.

None of the parties responsible for the scheme (the government, the Home Builders Federation and the Council of mortgage lenders) can predict exactly how many new houses are likely to result from this initiative, particularly as the funding is not restricted to first time buyers, and there has been some scepticism in the press about the numbers involved. 

However, the HBF is talking in terms of 100,000 additional new houses over the three year term of the scheme.  If it achieves anything near to that number it will make a significant difference in the current sluggish market.  There should be no shortage of demand and Barratt Homes has already announced that it has received nearly 20,000 registrations of interest in the scheme on its website.

Over the past couple of years the major builders have all declared an intention to focus on building larger, detached family houses.  This was a response to a lack of first time buyers which can be attributed to the large deposits required.

HousesNew Buy could support this move, as the scheme is open to houses of a value up to £500,000.  However, with finance being available at the lower end of the market it will surely be a scheme that will be of huge interest to the elusive first time buyer, so I am confident that we will see a move back to larger volume developments.

For what it’s worth, the stock market clearly thinks the move is good news.  Within hours of the announcement, analysts at Credit Suisse were suggesting that NewBuy would grow house building volumes by an extra 4% is 2012.  I am hopeful that it will be even better than that.

Eyebrows were raised at the launch because only three lenders had signed up to the scheme at that stage.  However, I do not think this is particularly significant.   The timing of the announcement was something of a surprise.  It had been suggested in the Government’s Housing Strategy in November, but the launch was generally expected for sometime in May.  Moving the date forward has meant that some sectors were simply unprepared and I am sure that it will offer opportunities that the lenders will not want to miss out on.

As I outlined in my comment in the February issue, most industry experts were already suggesting a likely increase in new houses this year and New Buy can only help the process.  Perhaps it is time to dust off the phrase “green shoots” and start seriously considering the possibility that 2012 could see the beginning of a gradual recovery of the housebuilding sector. 

Follow Mark Oliver on Twitter @MarkOliver_

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