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Housing's Perfect Storm

Posted by on in Financial Services Blog
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There has been positive news for homeowners recently with mortgage lending and house purchase enquiries increasing substantially, coupled with news that house prices in most of the country have increased slightly over the past year and surveyors predicting they will continue to rise for the next year.

Most commentators put this increase in values down to the Government's help to buy scheme and I agree. This scheme involves the Government providing an equity loan of up to 20% of the purchase price towards the cost of a new build property, therefore reducing the size of mortgage a buyer needs. The Government then shares in any increase, or decrease, in the value of the home.

This scheme is only available on new build property. Just like new cars, new build properties lose some of their value as soon as they are 'driven off the forecourt'. So whilst there may lifestyle reasons to buy new, from a value for money point of view you are usually better off buying second hand. Of course, over the long term property is usually an appreciating asset whereas a new car is almost always a depreciating asset. This initial dip in the value of new build homes will be particularly problematic to those who use the scheme to get onto the property ladder and hoping to take a step up in a couple of years' time. They will need house prices to rise just to maintain the value of the equity they put in.

Some argue that the Government has no role interfering in the housing market in this way. If the scheme works and prices remain stable or increase then millions of people who cannot afford to buy will remain unable to do so. The argument continues that without Government support prices will fall and become more affordable to millions more people and eventually the market will reach an equilibrium.

The final concern is what happens when the scheme ends? As well as losing buyers using the scheme, there could be a flood of property onto the market as people seek to repay the Government's loan, which could lead to a perfect storm making the 2007 crash look like a calm breeze.

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