UK house price rises “mod­er­ate” fol­low­ing ex­pan­sion of help-to-buy

Financial Mirror (Cyprus) - - FRONT PAGE -

The ex­pan­sion of the help-to-buy ini­tia­tive in the UK will in­crease mort­gage lend­ing, lead­ing to mod­er­ate rises in house prices, said Moody’s In­vestors Ser­vice. The net ef­fect of the UK govern­ment’s ini­tia­tives is that house prices will in­crease at a rate of

0-5%, which is within Moody’s cur­rent fore­casts. Ris­ing house prices re­duce losses and in­crease re­cov­er­ies if a bor­rower de­faults on their mort­gage loan, which sup­ports the per­for­mance of UK res­i­den­tial mort­gage-backed se­cu­ri­ties (RMBS).

“Lon­don in par­tic­u­lar will ben­e­fit from a sep­a­rate help-to­buy ini­tia­tive, with a higher equity loan pay­out from the govern­ment. How­ever, the Lon­don scheme is only lim­ited to new builds, which lim­its its ben­e­fit some­what. Amend­ments to the scheme will also open up the mort­gage mar­ket to bor­row­ers with low-to-mid in­comes,” noted Greg Davies, au­thor of the Moody’s re­port.

The UK govern­ment in­creased the ini­tial equity loan pay­out from 20%, as orig­i­nally en­acted, to 40% to com­pen­sate for the larger gap be­tween earn­ings and house prices in Lon­don ver­sus the rest of the coun­try.

“The govern­ment’s pre­ven­ta­tive steps, such as lim­it­ing the ben­e­fit of the pro­gramme to the owner-oc­cu­pied sec­tor, and sur­charges in the buy-to-let space, may re­duce de­mand and will curb an over­heat­ing in house prices on the back of the help-to-buy ini­tia­tive’s ex­pan­sion,” ob­served Kam­ran Sabir, a se­nior an­a­lyst at Moody’s.

As early as mid-Jan­uary 2016, there has been a 6.6% in­crease in the sup­ply of one- and two-bed flats com­ing onto the UK mar­ket, which is a main­stay of the BTL sec­tor. This anec­do­tally sug­gests that some in­vestors may be ex­it­ing the BTL sec­tor in light of the cuts to tax re­lief on in­ter­est pay­ments an­nounced in the Sum­mer 2015 bud­get. Given the stamp duty sur­charge, marginal BTL prop­erty own­ers will be fur­ther dis­cour­aged from en­ter­ing the mar­ket, there­fore mod­er­at­ing over­all the house price ap­pre­ci­a­tion level for the year.

The ex­ist­ing ini­tia­tive - com­pris­ing both the equity and the guar­an­tee ini­tia­tive - has been used by al­most 130,000 peo­ple (62,569 par­tic­i­pat­ing in equity loans and 65,920 in guar­an­tees) and has led to GBP 23.3 bln in house pur­chases (GBP 13.6 bln in equity loans and GBP 9.7 bln in guar­an­tees).

Moody’s typ­i­cally as­so­ciates a high loan-to-value (LTV) ra­tio with a higher de­fault risk.

There­fore, help-to-buy loans with high over­all LTV ra­tios carry a higher bor­rower de­fault risk (tak­ing into ac­count both the un­der­ly­ing mort­gage and the equity loan) rather than just the un­der­ly­ing mort­gage with­out the equity loan.

A high pro­por­tion of help-to-buy loans with high over­all LTV ra­tios may re­sult in a higher de­fault rate in the mort­gage mar­ket in the event of an eco­nomic down­turn. In ad­di­tion, a pos­si­ble con­se­quence of ex­pand­ing the help-to-buy ini­tia­tive could be the ac­cel­er­a­tion of house prices, which in­creases the risk of prices over­heat­ing.

How­ever, the govern­ment has im­posed re­stric­tions on the help-to-buy ini­tia­tive and on the growth of the BTL sec­tor. Th­ese re­stric­tions will sub­stan­tially al­le­vi­ate some of th­ese risks.

Fur­ther­more, the help-to-buy ini­tia­tive is re­stricted to bor­row­ers who have a clean credit his­tory and no other prop­er­ties, who pass the af­ford­abil­ity lev­els es­tab­lished through the Fi­nan­cial Con­duct Au­thor­i­ties Mort­gage Mar­ket Re­view and who are not par­tic­i­pat­ing in other state­spon­sored ini­tia­tives.

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