There are so many ways to bring down the cost of new build in the UK, chief among them reduced regulation, planning and taxation. So I was most disappointed, putting it mildly, to see Prime Minister Andy Burnham’s new initiative, Your First Home, which will give government-backed equity loans of 20% to first time buyers, who will now be able to buy new build property with just a 2.5% deposit. Initially, that 20% will be interest-free.
This is just another means to saddle young people with debt. As if student loans weren’t bad enough.
Unlike period property, new build struggles to keep its value. It’s often because people overpay for new build - the so-called new-build premium. You’re buying a brand new product and somebody, you, has to cover the developer's margin, marketing costs and all the other costs wrapped up in that shiny new flat.
Meanwhile, there is no longer the buy-to-let investor to prop up the buy side. The government has already seen to that. The risk of in the inexperienced first-time-buyer overpaying is high and the likelihood of them falling into negative equity is immense.
Look at the problems those who went down the Help To Buy route are now having with London flats, where prices are down 20-30%, with owners in negative equity, unable to sell without taking huge losses, and unable to move up the property ladder. Trapped.
Help to Buy artificially inflated the prices of new-build flats. Developers knew buyers had government backing, so they charged a “new-build premium,” which effectively captured most of the subsidy. It handed money to people who already had it. Of course building companies will welcome Burnham’s scheme this time around.
Now that the Help-To-Buy subsidy has ended, new buyers must purchase using normal mortgages, which has caused prices to “normalise”, ie fall 30%.
Meanwhile, there are the problems of skyrocketing service charges and the fallout from the cladding scandal, both of which have also made flats hard to sell.
The main people Help To Buy helped were the large building companies, and Andy Burnham’s new scheme will do just the same. It is yet another demand-side intervention in a market where the fundamental problem is that housing is too expensive to build.
It is a terrible and misguided thing to do. Builders can (and will) overprice their deals, and trap buyers, who, as first-timers will be naive, in punitive leasehold deals. It is no more than a subsidy for building companies. It does not address the many causes of Britain’s unaffordable housing. It exacerbates them. You are creating more of what caused Britain’s affordability problem in the first place.
This is new builds only. So happy days for the likes of Barratt Redrow, Vistry and Taylor Wimpey, never mind the cowboys, who will take the money and run, and leave you holding the bag of poor construction, leasehold and unsellability. Builders’ shareprices will rise on the back of this.
Loads of people will be suckered into buying because of the easy affordability now, and thier desperation to own a property. “Oh, it’s better than renting” “Oh, we only have to pay this much.” But if you or anyone you know is tempted by this, I urge you or them to please avoid it at all costs.
As a rule flats, particularly new build, are to be avoided because, there is so much beyond your control that you end up being financially responsible for, from basic repairs and maintenance, to problems in the actual build, such as cladding, only found years later, which have now become your unsellable asset.
A 2.5% deposit is just too much leverage. It’s fine if you know what you are doing, but most don’t.
You could overpay for your property by 5%, which is easily done when you have the carrot of easy affordability now being dangled in front of you. Prices could fall 10%. Or you lose your job. Heaven forbid prices should fall 20-30% as they have with Help to Buy. There are so many routes to negative equity. It is going to ruin people.
Do our policy makers never learn? Never mind Help to Buy, what about the US subprime crisis? And then there is 1989-94 and the loose lending that preceded that crash. All the evidence of where this goes is right there in living memory, staring them in the face.
There is also the issue that interest rates today are much higher than they were when Help To Buy was introduced.
Yet again the government is addressing the problem of unaffordable housing by making it easier to borrow more money to buy unaffordable housing. In other words, it’s finding more ways to bring money into the system when the problem is too much money.
This will absolutely screw people. And it’s all dressed in this great guy, true Northerner, trustworthy kids TV presenter, helping you out language with no mention of the risks. It is proper gaslighting. It’s like the friendly chap outside the school playground with the gateway drug.
There are times when I think this country’s leadership and administration is just superlatively incompetent. There are times when I actually think Satan might be at work and this is one of them.
And you wonder why I can’t stand governments!
If you’re interested in the subject of unaffordable housing, you might enjoy this classic from the archives
Finally, but perhaps most importantly, here is this week’s commentary. I urge you to read it, if you haven’t already.
They’re Coming for Your Money. Don’t Let Them Take It.
Good morning to you and a big welcome to the many new subscribers, both paid and unpaid, who have joined the Flying Frisby this week.
Thanks for subscribing to the Flying Frisby.
Until next time,
Dominic
If you live in a third world country such as the UK, I urge you to own gold or silver. The pound will be further devalued, as will the euro and dollar. The bullion dealer I use and recommend is The Pure Gold Company. They deliver to the UK, the US, Canada and Europe. More here.
For my readers on the other side of the pond, let me also plug next month’s New Orleans Investment Conference, which runs from October 28-31. I’ll be there and there is an array of great speakers.
