Edited by Adam Jacobs, Wednesday, 16 Mar 2011, 16:48
A story in the news today has intrigued me. This is the story that 5 local councils in the north of England are launching a scheme to help first-time house buyers by loaning them money for the deposit on their house.
On one level, this sounds great. Although mortgage rates are currently low by historic standards, many first-time buyers struggle to save enough money for the deposit on a house, given that few mortgage lenders these days are prepared to loan more than about 80% of the value of a property, and some much less. It's not affording the mortgage that's the problem, it's finding a big enough pot of cash for a deposit up front. The size of the pot of cash required is outside the reach of most normal people.
We are told in the news story that the councils get a generous rate of interest on the loan. That seems entirely fair and reasonable. So in theory, this isn't costing council tax payers any money, as presumably it's being done at commercial rates of interest. I don't know what rate of interest, and when I phoned the first contact on the press release announcing the scheme, she also didn't know. Apparently it's up to Lloyds TSB, who are participating in the scheme, and I would guess that the rate of interest would vary according to the circumstances.
However, this scheme raises some interesting questions. If the loan is being given at a commercial rate of interest which is expected to cover the risk of people defaulting on their loans, then you have to ask why the banks themselves aren't providing a similar service? After all, one of the main functions of banks is to lend money, isn't it? Banks could easily make the councils' scheme unnecessary, either by offering 95% mortgages, or by offering specific loans for deposits, separately from a mortgage.
I can only think of 2 possible explanations why banks are not making these kinds of loans themselves. One is that the loans are a perfectly viable commercial proposition, and the banks are acting irrationally in not offering the service. It wouldn't be the first time that banks have acted irrationally. The second explanation is that the local councils simply haven't understood the risks of people defaulting on the loan, and are putting council tax payers' money at risk. Both explanations seem perfectly plausible. I have no idea which is correct.
It's worth noting in passing that this scheme may be an example of the "Big Society" in action, as it has been organised by Sector Treasury Services, a private company who appear to be running public finances for some local councils. I assume they are being paid for this scheme, and whether that had any bearing on encouraging councils to go down that route is something we can only speculate about. No, what am I talking about: that's totally far fetched, isn't it? Surely commercial interests would never have anything to do with important decisions about public finances made by responsible public servants, would they?
Anyway, all that aside, there is something else that worries me about this scheme. A big part of the reason why so many people struggle to buy their own home is that house prices are way too high. Housing minister Grant Shapps has recently argued, very sensibly in my view, that a period in which house prices fall in real terms would be a thoroughly good thing.
Helping a few first-time buyers by loaning a deposit will of course be a great help to those buyers who are able to take advantage of the scheme. But in the long run, I fear it will only make things worse for first-time buyers, as it will help to fuel increases in house prices. In some ways, first-time buyers being unable to afford houses could be a good thing if you take a longer-term view, as that situation is unsustainable, and will have to result in house prices stabilising or falling. That's just the sort of outcome that Grant Shapps has said he wants, and which I think most other sensible people would also want.
Surprisingly, then, we are also told in the story I linked to at the top if this article that Mr Shapps welcomes this scheme enthusiastically. That puzzles me. If he would like to see house prices stabilise, why is he supporting a scheme that is likely to contribute to their continued inexorable rise?
Why are councils helping first-time house buyers?
A story in the news today has intrigued me. This is the story that 5 local councils in the north of England are launching a scheme to help first-time house buyers by loaning them money for the deposit on their house.
On one level, this sounds great. Although mortgage rates are currently low by historic standards, many first-time buyers struggle to save enough money for the deposit on a house, given that few mortgage lenders these days are prepared to loan more than about 80% of the value of a property, and some much less. It's not affording the mortgage that's the problem, it's finding a big enough pot of cash for a deposit up front. The size of the pot of cash required is outside the reach of most normal people.
We are told in the news story that the councils get a generous rate of interest on the loan. That seems entirely fair and reasonable. So in theory, this isn't costing council tax payers any money, as presumably it's being done at commercial rates of interest. I don't know what rate of interest, and when I phoned the first contact on the press release announcing the scheme, she also didn't know. Apparently it's up to Lloyds TSB, who are participating in the scheme, and I would guess that the rate of interest would vary according to the circumstances.
However, this scheme raises some interesting questions. If the loan is being given at a commercial rate of interest which is expected to cover the risk of people defaulting on their loans, then you have to ask why the banks themselves aren't providing a similar service? After all, one of the main functions of banks is to lend money, isn't it? Banks could easily make the councils' scheme unnecessary, either by offering 95% mortgages, or by offering specific loans for deposits, separately from a mortgage.
I can only think of 2 possible explanations why banks are not making these kinds of loans themselves. One is that the loans are a perfectly viable commercial proposition, and the banks are acting irrationally in not offering the service. It wouldn't be the first time that banks have acted irrationally. The second explanation is that the local councils simply haven't understood the risks of people defaulting on the loan, and are putting council tax payers' money at risk. Both explanations seem perfectly plausible. I have no idea which is correct.
It's worth noting in passing that this scheme may be an example of the "Big Society" in action, as it has been organised by Sector Treasury Services, a private company who appear to be running public finances for some local councils. I assume they are being paid for this scheme, and whether that had any bearing on encouraging councils to go down that route is something we can only speculate about. No, what am I talking about: that's totally far fetched, isn't it? Surely commercial interests would never have anything to do with important decisions about public finances made by responsible public servants, would they?
Anyway, all that aside, there is something else that worries me about this scheme. A big part of the reason why so many people struggle to buy their own home is that house prices are way too high. Housing minister Grant Shapps has recently argued, very sensibly in my view, that a period in which house prices fall in real terms would be a thoroughly good thing.
Helping a few first-time buyers by loaning a deposit will of course be a great help to those buyers who are able to take advantage of the scheme. But in the long run, I fear it will only make things worse for first-time buyers, as it will help to fuel increases in house prices. In some ways, first-time buyers being unable to afford houses could be a good thing if you take a longer-term view, as that situation is unsustainable, and will have to result in house prices stabilising or falling. That's just the sort of outcome that Grant Shapps has said he wants, and which I think most other sensible people would also want.
Surprisingly, then, we are also told in the story I linked to at the top if this article that Mr Shapps welcomes this scheme enthusiastically. That puzzles me. If he would like to see house prices stabilise, why is he supporting a scheme that is likely to contribute to their continued inexorable rise?