There has been much discussion about whether these schemes will help the market and indeed some pundits are predicting they could end up pushing up prices, rather than helping to increase the supply of new homes.
To work out whether the schemes will help or hinder the market, you need to break down the impact on new build homes versus ‘second hand homes’.
Since the market hit its lows of 2009 and started to recover a little in 2010, new build property prices have typically been pretty static (bar London, where house prices in many areas have recovered to their 2007 levels).
The number of new builds built has been relatively static, running at just over 100,000 properties per year. Previous to the credit crunch, build levels were running at double this rate.
The introduction of the Help to Buy Scheme for people buying properties up to £600,000 means that demand for new build properties should increase and potentially increase quite dramatically. As developers are only building according to current demand, so if demand increases and supply of new build doesn’t, buyers may end up competing for properties they couldn’t otherwise afford without the equity loan. As a result, without an increase in supply by developers, this new initiative could well increase the price of new builds.
So for the Help to Buy scheme on new builds, the supply of properties onto the market has to rise to keep up with the increased demand.
This new scheme offers quite a substantial amount of money to potential buyers. According to a Financial Times article the government’s aim is to generate 570,000 purchases through their scheme from 2014 to 2017. That’s approximately 190,000 new purchases a year.
Putting this in context, this would, if all of the purchases were new as a result of the scheme drive an additional 25% purchases / sales into the market. This would be a massive shot in the arm not just to developers, but also to existing home owners and the wider property market.
For example, a 25% increase in turnover for agents, surveyors, conveyancers, DIY stores and tradesmen would be a much needed boost to both the business and the consumer market.
Just as with the new build market though, if no more properties come onto the market for sale however, then this could end up driving prices up as opposed to generating more sales.
However, I think this is much less likely to happen in the existing property market than the new build market. By 2014 we will be heading into year seven of the recession. Many people will be desperate to move who bought back in 2005 and their little kids are now heading towards or are already much larger teenagers who need their own space.
The guaranteed mortgages are likely to be going to many people who want to trade up, meaning demand will increase, but as this is likely to be from existing homeowners, then supply will increase too, which will could really help to kick start the market.
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