The Coalition has, in this year’s budget, finally made possible the re-balancing of the British housing market by introducing shared equity on the deposit required to purchase a new home.
For those who have forgotten, the current financial crisis began when american banks lent money on mortgages to people who were buying homes at a much higher cost than they were worth, despite those people not having the income to pay those mortgages back. It was called sub-prime lending and it has caused chaos. It is resulting from this that banks now require a 20% deposit before they will lend money on a mortgage.
This situation has crippled the building industry and has prevented the building not only of new houses for people to buy but also of new affordable social housing because most new affordable social housing in this country is built as a part of a planning agreements with building companies when new estates are created.
By the Government stepping in and providing shared equity against the deposit on a mortgage they have enabled people who can not afford to pay the 20% deposit on a mortgage that the lenders are now demanding to get onto the housing market, and at the same time the Government is guaranteed its money back when the property is sold (with interest if the sale is after more than 5 years).
The Government is not handing free money to the home-buyer, it is sharing a part of the mortgage. Shared equity in a house will enable those who are in decent jobs and can afford the mortgage repayments, but who do not have the funds to get on the housing ladder immediately and have been finding that every time they get to the point where they thought they would that the starting bar has been raised again, to actually get into the property market.
Housing associations and building societies have also been offering such schemes for years. Banks have not liked these schemes because having two owners involved in a property complicates the sale, which is where the Government underwriting comes in. If means that the Banks have no remaining excuses not to lend the money the Government has pumped into them to get lending underway.
This move will not solve the social housing problem, but it will enable many people who would otherwise be entering the social housing market when they would previously have been entering the home ownership market to get that first foot on the ladder that they so desperately need.
Many of those people are the same people as are currently flooding the ever increasing buy-to-let and private landlord’s pockets with housing benefits paid by the state. The private rented sector will therefore have once again to compete for clients, but bearing in mind that this scheme is for new-build they will have difficulty selling the properties they have (many of which are former social housing that were bought under the right to buy in the first place) and therefore they will have to reduce the rents to compete, and this again will reduce the housing benefits that need to be paid.
All in all this scheme introduced by the coalition will, if properly administered, enable young families to buy, free up private rented and make that market competitive again, reduce the burden of housing benefits on the state and above all ease some of the problems in the housing market.
It will not solve many aspects of the social housing market, that still requires building of new affordable social housing, but bearing in mind that many planning applications have a percentage of social housing built in and the only thing stopping those social houses being built is the capacity to sell the private ownership houses on the same new estates, this policy may also go a long way to helping get that new social housing built.