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FirstBuy scheme to offer cheap mortgage money to first-time buyers

Will the First Buy scheme help or hurt first-time buyers?

There was never much doubt that George Osborne would want to do something for first-time buyers struggling to get onto the housing ladder in the Spring 2011 budget.

His response – a new FirstBuy scheme that will provide a £250 million fund to help first-time buyers get on the housing ladder, via a shared equity arrangement in new-build property. It will be jointly funded by the housebuilders.

Osborne claims FirstBuy will help 10,000 first-time buyers, which is non-trivial in a market where only 43,000 or so mortgages were approved in February 2011 – way down from the 80,000 or so that was previously seen as required for stability in the housing market.

Yet in reality the £250 million FirstBuy fund is likely to prove a drop in the ocean compared to the total size of the mortgage market, which in January and February of 2011 was running at around £9.5 billion in mortgage loans advanced a month.

Who wins from FirstBuy?

Certainly, the government. In fact, it’s a double win from a politician’s perspective.

  • Firstly, Osborne is being seen to support struggling first-time buyers, which goes down well with voters.
  • Finally, anyone looking to sell a house or move up the ladder needs a healthy market with decent turnover (including a bottom level influx of first-time buyers or buy-to-let landlords). Existing homeowners may benefit if FirstBuy keeps the overall market moving, though the programme itself only applies to new build homes.

Sure enough, the chancellor has since gone further with his Help To Buy scheme in the 2013 Budget.

But whether first-time buyers and others benefit from being used as cannon fodder in the fight against a house price crash remains to be seen.

It’s true that first-time buyers have struggled to get a mortgage at all, due to the banks’ suddenly stingy requirements for a high deposit in the wake of the credit crisis. This inability to get a mortgage has meant that first-time buyers have ironically been denied access to the only thing making homes affordable despite the elevated level of prices versus average earnings and rents – that is, historically very low mortgage rates.

So superficially the FirstBuy scheme may seem attractive, and it doubtless will be to anyone desperate for a house who feels locked out of the market.

But I can’t help thinking first-time buyers would be better served by house prices falling the 20% or so that would seem a minimum to bring them back to their long term averages. It’s no coincidence that the FirstBuy programme is being jointly funded by housebuilders, who’ve been running their own increasingly inventive schemes for the past 18 months or so.

True, nobody who sees what the true house price crash in the US has done to that economy could be sanguine about the impact of lower prices more in line with long-term ratios here.

Yet the frightening thing is our bubble was far bigger than the American house price bubble. And there will be a price to be paid by some segment of society the longer we continue to puff it up. Rather unfairly, given they didn’t benefit from the boom, it’s surely the first-time buyers who are paying it.

Also, if you were a housebuilder, would you be thinking of increasing or reducing asking prices on your new developments in the wake of this announcement of lots of government cash coming your way?


{ 14 comments… add one }
  • 1 JH March 23, 2011, 3:29 pm

    You said: “Finally, anyone looking to sell a house or move up the ladder needs a healthy influx of first-time buyers “

    How will this help? If first time buyers are buying new homes from the builders it won’t help the housing market as a whole. If they could use the money to buy any home on the open market then things could also get moving again further up the housing ladder.

  • 2 The Investor March 23, 2011, 4:34 pm

    @JH – Yes, very good point. I wrote the post as Osborne was speaking, as I thought it was pretty important and I wanted to do something newsworthy, and didn’t twig that it was new build exclusive (not sure he actually said this in his dispatch, though maybe I missed it).

    I’ve now checked the full budget document, and you’re right. (Anyone who wants to read it can download it from The Treasury).

    I’ve modified the text above in light of this important point. Sorry for any confusion caused.

  • 3 Ian W March 23, 2011, 5:31 pm

    In my opinion it’s the duty of all first-time buyers to turn down schemes like this and force the housing market to properly correct itself.

    My generation was the first to rack up large debts getting a university education that was free to our parents and older siblings, and one that graduated to find a world in which a degree was worth much less and a home of our own was far out of our reach. I might be lucky enough to buy a home before 35, but only because of elderly relatives that have saved their whole lives and can help.

    If our parents, grandparents and the government weren’t propping up the unsustainable level of house prices, the picture for all first-time buyers would be much fairer.

    Everyone who borrowed beyond their means to cause the housing boom should have known what they were getting into, I would have no sympathy at all with a large correction in prices.

    It seems like this measure is much more likely to benefit builders and banks than anyone else.

  • 4 Boris March 23, 2011, 7:46 pm

    @ Ian W: as per you last sentence, why do you think anything could change ?
    It has always been the same story:
    1-Price crash coming
    2-(Bank+gvt+whoever else) pour money into the circuit again to make it work as if nothing happened…until another instance of 1-
    I agree correction is needed but it’s needed in so many areas now 😉

  • 5 The Accumulator March 23, 2011, 8:23 pm

    Why so sanguine about a big crash? Equals large slice of the population with huge debts and another slice who’s confidence is shot by the evaporation of their wealth. In other words, another massive contraction, recession, lay-offs etc when things are on the edge as they are.

  • 6 The Investor March 23, 2011, 9:34 pm

    @Accumulator – Somebody has to pay for the high house prices that housing incumbents enjoy, and it’s currently the first-time buyers (many of whom will increasingly also be carrying student debts etc).

    I don’t see any moral reason why those with houses should have their net worth protected, while those without – who in most cases just had the misfortune to be born a few years to late to take part in the party – must pay a massive slice of their income for the rest of their lives to do so.

    Particularly when the net result will be a reduction of social mobility, as inheriting money (whether before or after parental death) to buy a house will increasingly distort the market as the only practical means to get on the ladder under the current status quo.

    I wouldn’t say I’m sanguine about a crash – indeed, I specifically referenced the ill-effects on the US economy of the proper house price correction that’s happened there (and I’ve been monitoring companies like Wolseley in the FTSE 100 in respect to it, too). But at least the US market has largely righted itself, rather than creating a property-cracy like we’re in danger of installing in the South East of the UK and London, at least.

    That said, as @Boris says much of the country has seen prices come off the crazy levels, so if they stay flat for five years or so they could mean revert without too much pain. London / the South East still needs a slump though, especially considering it’s where most of the country’s bright young things aspire to live to create wealth. (Fact, not an opinion – I stood on dirty Oxford Street today, I’m not saying it’s all roses).

  • 7 Rob March 23, 2011, 11:06 pm

    I agree with JH
    I am a first time buyer who can afford a mortgage but can not raise a deposit.
    The firstbuy scheme is no good for me as i could move into a £150,000 house on the open market tomorrow, but on this scheme i have to buy a new house and the equivalent new house in my area is £209,000. How does this benefit me??????
    If i could buy any house this would open up the chain and maybe they might want to live in the same size new house with a bigger mortgage….

  • 8 The Investor March 24, 2011, 12:15 pm

    @Rob – Agreed. As I say above, this is as much about propping up housebuilding I think (which to be fair does employ a lot of people, including the young). I own shares in a housebuilder that have done very well in the past month, mainly on good results but this won’t hurt, either.

  • 9 Salis Grano March 24, 2011, 7:12 pm

    Yup, my housebuilder has perked up. On the other hand my North Sea oil producer has plummeted. You win some, you lose some.

    I think a big housing crash would not be helpful. A long slow decline in real terms would be the best outcome.

  • 10 The Accumulator March 24, 2011, 9:14 pm

    @ Investor – Isn’t just about everyone paying to prop up the market? From the savers who are subsidising low interest rates to the taxpayers who bailed out the banks and are now paying the price in higher taxes, wage freezes and inflation. There can’t be many sections of society getting away with it beyond the financial class that triggered the crisis in the first place.

    I see no moral case either. Only an economic one. Kick away the props and let the thing crash and many fewer first-time buyers will be saving for a deposit because they’ll be out of work.

    Agree with Salis, I’d rather see a cushioned fall over time. Get the construction industry moving with relaxed planning laws and housing targets and let increased supply do much of the work.

  • 11 The Investor March 24, 2011, 11:56 pm

    @Accumulator @Salis – Yes, I think we’re all agreed that’s the project, and in the grand scheme of things probably for the greatest good. But (pace Accumulators comments about the financial class) moral hazard was ever thus.

    I suppose even the asset-rich 60-something is paying right now via the depreciation of his wealth with RPI over 5%, though I personally don’t expect that rate to be quite so elevated for too long.

    There is one group who aren’t though – who are clear winners – and that’s the group who paid 6x salary for a house and put the deposit on their credit card. While I’d agree the financial zeitgiest egged them on, ultimately it was their choice to say “screw it let’s do it” versus those who chose to save and not over-stretch themselves, those few that @IanW alludes to above, and they have been bailed out.

    It was better to behave recklessly and run up huge debts than to do the ‘right’ thing. Not an ideal lesson, nor one that’s likely to delay the next financial disaster. Quite the opposite!

    But agreed it’s a pragmatic world we live in, not a poetic (just) one.

  • 12 OldPro March 25, 2011, 8:44 pm

    The Investor: The question is in your ‘manor’ of Central London what salary are you multiplying by six times to get your unreasonable valuations? A bankers salary… an oligarchs… a Libyan henchman on the run with a suitcase loaded with gold…? Don’t believe myself London property has much to do with British economy anymore?

  • 13 d morrish August 12, 2011, 3:31 pm

    I have been interrested in this first buy scheme that George Osborne has put together, as before this came out i was devising a plan that would not only get new builds moving but the whole of the property market.This idea has much less risk involved.I just do not know the right person to put it to with out someone stealing it from under my nose.Can you help?

  • 14 Emma January 5, 2012, 12:36 pm

    I agree with Rob. I am too a first time buyer who can afford a mortgage but am finding it difficult to save the deposit.

    I bit my tongue!! and thought this may be my only option to actually get myself on the property ladder!! The thing im finding difficult is actually finding a property! When contacting these developments with the FIRSTBUY printed all over there advertising they are saying no sorry we dont have it??

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