This week the Government announced its 5% deposit deal for first-time buyers struggling to get on the housing ladder.
Good stuff. Well done! Help, at last, for poor first-time buyers who have seen their savings struggle to keep up with house prices rising through lockdown.
Or is it? Is the Government, together with mortgage lenders, approaching this crisis from the wrong end? Will this, and a new announcement from Nationwide about lending a higher earnings multiple, actually harm buyers and even harm the housing market?
- The new 5% deposit scheme
- Nationwide offering yet more money to borrowers
- Supply v demand in housing
- How you can cash-in on the need for more housing
- Permitted Development Rights (PDR) and how that might help
This scheme that was announced in the Budget earlier this year is aimed at helping first-time buyers get on the housing ladder without having to save for more years to gain a full 10% deposit.
It involves the Government backing part of the 95% mortgages offered by a select few banks including Lloyds, HSBC, Barclays, Santander and NatWest to give lenders more security when handing over such a large amount of cash to new buyers. Anything over the first 80% of the deal will be backed by the Government.
It will be available to anyone buying a home costing up to £600,000, unless it’s a flat or leasehold in which case the upper limit will be £400,000. The scheme doesn’t cover buy-to-let purchases or second homes. In some cases it may not cover new-build properties either (rather telling, I think – what do they know about new-build properties that we don’t?).
On the face of it, this is a handy help to first-time buyers who have been consistently kept out of an increasingly unaffordable market. For some people in some parts of the country, this will be great news.
For others, though, it’s going to be yet another disappointment now and in the future:
- Although it’s handy to be able to put down just a 5% deposit, that still means that you have to borrow a lot of money to buy the full property. The amount you will be able to borrow will depend on how much you’re earning. Even if you have a 5% deposit, if you don’t earn much, that may still mean that you won’t be able to afford a place in your area
- If you do borrow the full 95%, that will be a huge outgoing each month. Even though money is cheap to borrow at the moment (mortgage rates are deliciously low on the whole) it’s still a lot of cash to set aside each month. That can be a millstone round the neck of a young person after a while.
- The big problem with schemes like this (and there have been a few in recent decades) is that although it helps some first-time buyers right now, it increases the demand for housing, while failing to add to the supply. So very quickly prices go up even further making it even harder for the people behind this tranche of home-buying hopefuls to get on the ladder! So the merry-go-round continues, until we all fall over.
We’ve just heard that Nationwide Building Society are now going to allow first-time buyers to borrow 5.5 times their income with a deposit as low as 10%. The loans will have the same rates and features as Nationwide’s current standard mortgage range.
It means that a couple with a joint income of £50,000 would be able to borrow up to £275,000, rather than £225,000 as they would have done before, assuming a 10% deposit. Not surprisingly the new rule doesn’t apply to the self-employed.
For a moment you might think that this is good news for couples desperate to get a nice place to move into, particularly if they live in an area that is expensive and going up in price.
On the other hand, though…£275,000 debt on a combined income of £50,000? Will that couple ever have a life or will they spend their entire time trying to scrape enough cash together each month just to service the mortgage?
What if the boiler blows up (they like to do that)? What if one of them totals the car (probably something that would only bring in a couple of hundred quid from the insurers) and they need to replace it for work? They will have to get horrible, over-priced car finance and that will add to the monthly burden. What if one of them suddenly loses their job? The ‘what ifs’ are endless and spell and increasing burden on a young couple trying to make it in the world.
The fact that it’s increasingly difficult for first-time buyers to get onto the housing ladder is a simple matter of supply and demand. The demand for properties consistently outstrips demand and has done since the 1980s.
- Social housing has gradually been eroded and house-builders have not been hired by Councils to build new ones on the whole.
- The population has steadily increased over the last few decades to around 70 million, while the number of units that have been added to the housing stock has lagged behind to an alarming degree
- More and more of us are choosing to live in a single household which puts extra pressure on the housing stock
- Up until the last year or so, buy-to-let has been a very popular form of investment for individuals and companies, pushing prices up for those who want to buy a house to live in.
Ultimately, offering incentives and larger mortgages to first-time buyers is only going to kick the can down the road. We need to create more residential units around the country to make them affordable and create a more equal society.
Obviously I’m not the only person who has worked this out. In fact it has been a constant refrain of MPs from various parties, particularly Labour and the Lib Dems.
This problem is not going to go away. If anything it will intensify over the next few years. So there are opportunities for investors to make money from attempts by companies and individuals to increase the housing stock.
Building companies are not traditionally safe bets for investors. As the housing market goes up and down, so do their fortunes. Also, (and this is born out by the note above that the new 5% deposit scheme doesn’t cover all new-builds) there have been criticisms of the quality of work on new homes. Building projects have been rushed and corners cut, It’s likely that there will be more court cases and builders will need to compensate aggrieved homeowners into the next decade.
So, bear this in mind when you consider investing in house-building companies. On the plus side, though, as Governments recognise more and more that the housing stock needs to be drastically increased, they will look for ways to encourage building across the country and well-run construction companies could do well.
The main house-building companies you could consider if you like the idea of investing in that sector are:
- Barratt Developments (BDEV)
- Kier Group (KIE)
- Taylor Wimpey (TW)
- Persimmon Group (PSN)
- Galliford Try (GFRD)
- Bellway (BWY)
- Redrow (RDW)
As usual, it’s essential to research thoroughly any company (and sector) you would like to invest in. Read the company reports, look at the sector generally and make your own mind up after reading up as much as you can about the subject.
A REIT (Real Estate Investment Trust) can be a good way of investing in property without actually buying a property.
As you can see in our article here, REITs can be a useful part of your portfolio as they give you access to the housing market when its doing well. When it’s going down the fund can smooth out some of the losses. Essentially you should lose less than you would if you actually owned a buy-to-let property, and, of course, the investment is more liquid than an actual property so you can get your money out easily.
peer-to-peer property lending
There are a few peer-to-peer platforms that enable you and me to profit from other people’s development projects.
One of the best is Blend Network (we have a whole article about them here) which gives an average of around 10% a year on money lenders put into individual development projects.
It’s risky as you put your money into single projects each time – it’s not spread across a range of developments – and you have to put in a minimum of £1,000 each time.
However, they have been around for nearly four years and have never had a default on any of their loans. It’s a company I invest in and have found to be good at creating regular returns.
If it’s something that would interest you, find out more here.
A recent ruling by the Government, called Permitted Development Rights (PDR) has opened up more possibilities for individual developers to create residential units from former retail and commercial buildings, without having to get expensive and time-consuming planning permission.
It could be an office or shop that you then convert into residential units, and as lockdown has brought (and will bring) a huge amount of commercial properties onto the market as shops, restaurants and office-based businesses close, many of these properties are likely to be cheaper than they were before.
“At the moment there’s an abundance of stock, motivated sellers and reduced prices,” says Ritchie Clapson of propertyCWO. “The real sweet spot is to take a building like a light industrial-use building or other commercial building ideally within a residential area. At the moment the value of those buildings is relative to their use. So you can buy these buildings while their value as a shop or industrial unit is low and then when you turn them into residential spaces, their value will be greatly enhanced.”
It’s even possible to buy cheap commercial property and turn it into more valuable commercial property. For example, Ritchie suggests turning office blocks into sets of ‘office pods’ that people can own individually, and turning around retail units into smaller spaces for individual creators to rent. “The artisan economy – people making their own designs – calls out for small, flexible retail units” he says. “Smaller units that people get into and can expand flexibly if needed are what they want. Also, in some cases you could create a mix of shop units and residential units within these retail spaces that brings a mix into the high street. A bit of residential and artisan also brings back the need for coffee shops and other local services for the new residents living in the area.”
If you would like to get into property developing yourself, look into PDR as a way to pick up well-priced units in valuable areas.