For this reason, listed housebuilders in the UK have teamed up to lobby the government to bring back a little-known instrument – a Mortgage Indemnity Guarantee or MIG – which they believe will help large numbers of first time buyers currently priced out of the housing market. If their mission is successful, it could boost sales levels and share prices across the housebuilding sector. However, critics argue that plugging the deposit gap through MIGs or shared equity schemes conceals the unpalatable truth – house prices are artificially expensive.
All the housebuilders concur that deposits are the biggest problem for first time buyers. Mortgage lenders will generally not advance above 70-75 per cent loan to value on new build purchases. The chancellor's decision to increase the stamp duty threshold to £250,000 a fortnight ago will help – but not much. The British Property Federation calculates this will shave just 18 months off the 18 years it would take a 25-year-old to save for the average £33,000 deposit that mortgage lenders require. So it's hardly surprising that housebuilders have responded by lending first time buyers deposits themselves.
Sharing the pain
Known as a shared equity deal, recent financial results from builders show that as many as one in four sales of new build homes rely on these "top up" loans to proceed. Housebuilders innovated early on with their own schemes, but now chiefly rely on the government-backed HomeBuy Direct scheme. Available only on specially designated plots, first time buyers are loaned 30 per cent of the property's value, with half coming from the housebuilder, and half from the government's Homes and Communities Agency (HCA).
Technically valid for 25 years, the loan is not repaid until the property is sold or refinanced, and there's no interest charge for the first five years. However, borrowers must repay 30 per cent of the market value of the property at the time it is sold or refinanced, rather than a fixed sum. The scheme has been criticised for its reliance on another boom in house prices to finance the eventual repayments, but in the short-term it is succeeding in getting first timers on the property ladder.
However, housebuilders are starting to question the medium-term sustainability of the model. As floating equity stakes tie up valuable working capital for an indefinite period, housebuilders maintain that MIGs could plug the equity gap in a more capital-efficient way.
"For every Jumpstart shared equity deal Bovis Homes does, we're having to leave 25 per cent of the house price with the customer for up to 10 years," explains chief executive David Ritchie. "We can't keep plugging the gap forever. We would rather swap the 25 per cent capital investment for a real cash cost paid for by us, namely a MIG insurance premium on behalf of the customer."
Mr Ritchie bought his first home in 1992 when he was just 23 years old, working as an auditor in the Bristol office of KPMG. "Back then, I needed a 5 per cent deposit to get a mortgage, but 15 per cent of my loan amount was underwritten by a MIG," he says. He recalls having to pay a one-off premium of less than £1,000 to insure himself against the risk of default on this proportion of the loan. Once in place, this meant the bank could treat his advance as 80 per cent loan-to-value.
"If MIGs were reintroduced, this would mean banks could lend at 90-95 per cent loan-to-value again as the insured portion would not fully count towards their capital allocation," he argues.
Autumn cut off
Pressure to find an alternative to shared equity is intensifying as the current HomeBuy direct assistance will end in September 2010. Industry lobby group the Home Builders Federation (HBF) is currently engaged in discussions with the HCA about how the scheme might be extended.
"We would like to see the government make it a permanent form of assistance to the housing market," says John Stewart, head of economic affairs at the HBF. "We know there is a willingness to look at HomeBuy Direct as an ongoing proposition by the current government."
What a Tory administration might do is unknown. The HBF is currently "in discussions with various groups" to see if a workable MIG proposal could be devised and put to its members (and if necessary, to the Treasury). A government-backed insurance scheme could offer a more flexible alternative to HomeBuy, but considering the public spending constraints ahead, there are no guarantees that either would succeed.
"The difficulty is in devising a workable MIG," says Mr Stewart. Over a year ago, the HBF held discussions with lenders and insurers about their potential, but received a tepid reaction. Now that house prices appear to have stabilised, the HBF hopes attitudes will change. MIGs will not solve the biggest problem - the shortage of mortgage funding – but they would allow existing funds to be spread a little further, and importantly unburden the builders' balance sheets.
"Bringing back the MIG would really help first time buyers, and it can only be for the good of the whole industry if we all work together [to achieve it]," says Alastair Leitch, finance director of Bellway. A fortnight ago, the builder reported that to 13 per cent of all sales, from a historic average of 25 per cent.
Mr Leitch has also noticed that lenders are becoming increasingly wary of the HomeBuy Direct scheme, as it is essentially a 100 per cent mortgage in all but name.
"The lenders are now insisting on a 5 per cent deposit from the purchaser on top of the 30 per cent deposit we jointly provide," Mr Leach says. "On a £140,000 home, that’s £7,000 the buyer has to find. Most customers using HomeBuy Direct are more likely to have £7,000 of debt on their credit card than £7,000 in a savings account."
Robin Hardy, real estate analyst at KBC Peel Hunt, believes that reality will come home to roost by the end of this year. "A big slice of housebuilder business is coming from shared equity schemes," he says. "When the government schemes end this autumn, you might think housebuilders would be happy to revert to their own shared equity products, but it looks like they're finally realising what a challenge it will be to get their money back, as there isn't going to be rampant house price inflation."
Although the latest round of results from builders has shown a healthy improvement in sales, Mr Hardy fears that without powerful deposit incentives, housebuilders will have to compromise on price.
"2009 has been a purple period for new build homes," he says. "Housebuilders have had more interest than they would naturally get because they can throw in incentives that estate agents selling second-hand property cannot. Ultimately, they will have to admit that first time buyer properties are way over-priced, and should be half the level they are today."
In the future, the question may change from 'How can the equity gap be plugged' to 'should it be plugged at all?'
