As governments around the world continue to scratch their heads with regards to ideas to inject confidence into their local economies, it seems that the property market is very much under the spotlight. Many governments are now looking to introduce an array of financial programs to assist those looking to jump aboard the property bandwagon and for those looking to either upsize or downsize in the short term. These are interesting policies which are attracting criticism and praise in equal measure.
The UK government is one such authority that has introduced a Help to Buy scheme which is a multibillion pound financing package offering a 20% interest free loan towards properties under £600,000 in value. In effect this allows homeowners to put down a 5% deposit, 20% interest free loan from the government and a 75% mortgage from their lender. So what is wrong with this?
Does this create a false market?
When looking at the potential to create a false market we need to consider whether this is an initial boost which will continue in the medium term or a simple injection of cash to introduce a feelgood factor ahead of the next election. It may depend upon which side of the political fence you are situated as to whether you see this scheme as political or practical.
The fact is that those who would not ordinarily be able to afford a property may now be able to put down a relatively small deposit, take advantage of government finance and reduce what may have been an overbearing mortgage arrangement. There is no doubt that this has injected much-needed demand into the UK property market but there are also concerns that once this financial support is taken away, could we see the UK property market lurch downwards?
Quote from PropertyForum.com : “Over the years there has been much mention of UK property prices and their phenomenal rise in the longer term which has in many parts of the country pushed house prices beyond the limits of first-time buyers.”
Bridging the economic divide
In simple terms there is no right and no wrong answer with regards to whether the UK government is being practical or cynical in relation to the Help to Buy scheme. At this moment in time the UK economy is struggling to move into “traditional” growth bands and while there has been some improvement of late, it would only take one further jolt from the European economy and the UK would follow suit. Therefore, if the UK government is able to push the property market and increase activity then this has the potential to bridge the economic chasm we are staring over.
Despite the fact that many housebuilders in the UK have criticised the government’s “short-term” funding arrangements, it has not stopped them taking advantage of a significant increase in short-term demand. The fact is that a fluid and a buoyant property market in the UK not only creates a better feelgood factor but also injects much-needed capital into the economy, creates jobs, encourages economic growth and perhaps more importantly, will eventually increase tax income for the UK government. If this plan works then it is potentially a win win situation for all involved although there is a chance that once the financial support has been taken away we may well see a return to “fair values”.
What is fair value for the UK property market?
Depending upon how you judge the average property in the UK, and different companies have different guidelines, the average home probably cost around £160,000. Is this fair value?
The fact is that the UK property market, and indeed any other investment market, is dictated to a great extent by supply and demand. The supply and demand of shares in the investment arena is easier to predict although the supply and demand of property is somewhat more complicated. Governments around the world have such a strong grip of their local property market via not only an array of financial incentives which they can introduce and take away, but also the fact they are in control of property development and property applications.
The simple fact is that if a government sees pressure upon its local property market it can reduce the supply thereby leaving fewer properties available for what are on the whole growing populations. If however there is under supply or excessive demand then there are various levers which the authorities control including increasing supply (although this cannot happen overnight) or making funding more expensive.
If the ongoing Help to Buy scheme in the UK assists the property sector in overcoming any short-term fluctuations in supply, demand and economic growth, it will have worked perfectly. The best scenario would be a gradual reduction of financial support in the short to medium term which would be taken up by growing demand, economic growth and more natural finance available. This seems unlikely in the short term because of the worldwide economic situation and we can only hope that current funding being pumped into the UK market, and other markets around the world, does not result in a short to medium term “false market”.
In many ways the UK government, and other governments around the world, has been pushed into this situation. A reduction in property values would place many people in even greater financial distress, increase the number of distressed sellers and push more people into negative equity which can be a very difficult place from which to climb away.