Affordable property for first timers

Coincidentally, Britain and Switzerland have both announced (on Sunday 11th March) measures to make housing more affordable for first-time buyers. The routes taken to reach the decisions, and even more the measures are very different, even diametrically opposed.

The British government has announced the NewBuy Guarantee scheme (available only in England!). The political motivation behind this scheme purports to make access to the housing ladder more affordable for first-time buyers; a very noble ambition. How likely is it to succeed?

Working backwards from available information, one finds that the average initial housing purchase is funded with a deposit of £38,000. Based on a deposit of 20%, this equates to an average capital cost for a first-time property of £190,000. It also appears that the average age of a first-time buyer is, a surprisingly high, 37. So, basically it has taken about 25 years to save £38,000; not taking into account compound interest, or the vagaries of the stock market (where one could easily have lost 30% in 2008).

Firstly, the scheme is not limited to first-time buyers, so, at its most basic the scheme is already pitting existing home-owners against property owning virgins. This will prove to be the first ratchet in an upward pressure on prices.

The scheme is being funded by the government (whenever you read that, it means YOU, the taxpayer) and property developers. A fund is being set up protect lenders (the banks) against potential losses on these deals. Under the scheme, the property developer pays the lender 3.5% of the purchase price, and the government provides an additional guarantee of 5.5%. This clearly adds an additional cost to the expenses of property developers and will be the second upward pressure on prices. Put simply, if the sale price of a property is cost plus 20%, the average sale price of £190,000 has just become £198,330, as a simple fact of the additional cost to property developers.

So, taking our examples above, and assuming a 5% mortgage rate, the current first-time buyer has to find £7,600 to fund the interest element of his mortgage; under the new scheme, this will have risen to £9,420 per annum; an increase of £1,820 per year. If these newcomers to the home-owning experience had the extra £1,820, they could have saved it, been younger than 37, and buying property at a lower price.

Additionally, the NewBuy Guarantee scheme does not provide a safety net to the purchaser; if he finds himself in a negative equity situation (and has to sell), he will still be in the usual creek without a paddle (or even a canoe). This is all so similar to the starting point to the US sub-prime debacle, which was based on overly generous lending on overpriced properties; lesson not learned.

It will also be interesting to find out how HM Treasury will account for their part in the guarantee scheme. Will it be a straight cost, or a contingent liability, which will only become apparent when things go belly up.

The thinking behind this scheme is, no doubt, well-intentioned but also doomed to failure.

On Sunday 11th March, the Swiss people voted in a referendum (there were four others that day, as well as state elections) to limit the number of secondary (i.e. not main) residences to a maximum of 20% in any given 'commune' (town or village). The vote was passed by a slim majority, and against the recommendations of the Federal Council (government) and parliament.

The initiative was mainly aimed at mountain villages, which are sprawling as a result of seemingly excessive development. The idea is that the countryside is for everyone, and that continued development will blight this asset. Tourism being a major industry in Switzerland, this is a powerful motivator. Part of the argument was also that wealthy Swiss, as well as foreign investors, were driving up property prices, to the detriment of the younger generation.

It is now for the law makers to make this initiative applicable; they have their work cut out. There are quite a few resort villages where considerably more than 20% of the properties are owned as second residences, and frequently a high proportion of those are foreigners. Forcing people to sell is simply not a option.

So, what are the likely outcomes of this change in attitude. Firstly, it is likely that construction permits in these areas will be much harder to obtain. This, in itself, can only result in higher prices, unless there is a sustained movement to divest oneself of these properties. But, who would want to sell a property that can only increase in value.

Secondly, it seems likely that there could be another upward pressure on prices by foreigners viewing this as a 'last chance saloon' to invest in tourist areas.

In the medium term, if planning permissions are only given for main residences, this will have the desired effect of reducing prices, provided that local authorities make available the building land necessary for such projects.

This initiative seems to have some hope of helping first-time buyers but, not in the short-term, and it is not without risks.