The government's much-vaunted HomeBuy Direct scheme risks becoming a national liability. Fitch, the rating agency, had never criticised a government policy until HomeBuy Direct, and it's easy to see why it raised concerns about whether all the risks had been properly considered.
The scheme aims to encourage house buyers back into the market by providing an interest-free five-year loan on up to 30 per cent of the value of a property. Half of the deposit is funded by the government, and half by the housebuilder.
In common with other shared equity schemes being offered by housebuilders desperate to shift standing stock, HomeBuy Direct is creating a completely false idea of the affordability of property.
For example, take a £120,000 starter flat. The buyer gets a loan on 30 per cent, or £36,000, of the total and borrows the remaining £84,000 from a bank. The interest on the bank mortgage would be around £350 a month. This sounds affordable, and a better option than renting.
But to pay the other 30 per cent back within the five years would require £600 a month - taking the total cost close to £1000 a month - and if it is not repaid, index-linked fees kick in. People will find themselves on the hook for considerable sums of money - and these are people who can't even find a couple of grand for a deposit.
There is clearly a social liability to consider. House prices are still falling, and new purchasers are highly likely to be in negative equity within a year. As for the housebuilders, they are committing serious amounts of capital to taking these equity positions, which in any number of cases, they may never get back. But as long as they are able to execute sales, and make debt repayments with the remainder, they will keep pushing these schemes.
The government is obviously desperate to get the wheels of the housing industry turning again, as so many other segments of the economy have slumped due to the slowing vortex of housing transactions. So desperate, it is prepared to throw vulnerable first-time buyers into the fire to get the market going.
Robin Hardy is a real estate analyst with KBC Peel Hunt
