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

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The UK government increased the initial equity loan payout from 20%, as originally enacted, to 40% to compensate for the larger gap between earnings and house prices in London versus the rest of the country.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