Why Help to Buy is fraught with risk

COMMENT: I was recently asked by one of our graduates for advice about getting on to the housing ladder. Should he buy now or wait? Should he buy in London or in the regions? Should he buy something that needs work or that is newly built? It caused me to reflect on what I did at his age (23) – and whether I would have done it differently if I had my time again? I remember as a graduate myself, working in my father’s auctioneering practice, I asked the same question of one of the younger qualified partners. You should buy a deal he said. Go for something that has as many opportunities for adding value as possible. Choose your area carefully. Don’t worry if it’s a bit grubby. The first move is only a stepping stone to the next. Look for the worst house in the best road. At that time, the government was offering generous improvement grants which were only repayable if the property was sold within five years. Ideally, he said, buy a part-vacant house, preferably with a regulated tenant. Not only will you receive some income from the tenant which will help with mortgage payments but, when you get possession of the whole building, you’ll have an opportunity to create a single house which you could occupy, sell or let. Or you could convert the building into two self-contained flats and consider all of those options. When Help to Buy is withdrawn in 2023, prices are at risk of being significantly undermined. This sector could be the next casualty of negative equity So, what did I do? I ignored his recommendations and bought a modernised flat. In hindsight, I regret not having followed his advice. It was an easy option, and I wish I’d rolled my sleeves up and got stuck in to a deal. I told this story to our graduate. He was considering bidding for a brand-new apartment off-plan with a bit of help from the Bank of Mum and Dad, a mortgage and then a top-up loan using the government’s Help to Buy scheme. That was his easy option. But, in my view, one that’s fraught with risk. Artificially inflated prices Help to Buy is drawing first timers into property ownership with up to 95% loan-to-value. I say “value” but “purchase price” is more accurate. New-build flats are often like brand-new cars. They will be worth less when they are second-hand. In the meantime, the newer development down the road will attract the next wave of Help to Buyers drawing demand inflated by artificial spending power. When Help to Buy is withdrawn in 2023, prices are at risk of being significantly undermined. This sector could be the next casualty of negative equity. And there’s another twist. For some years, housebuilders have been seriously burdening new lessees with onerous ground rent obligations. The traditional 125-year leases at, say, £10 pa rising modestly every 25 or 33 years have given way, in the harshest of cases, to 99-year leases at initial ground rents of up to £1,000 pa, doubling every 10 years. The Council of Mortgage Lenders (CML) has warned of the impact on affordability of such provisions in leases. Many lenders now have tough lending policies as a result. I’m aware of sales falling through because buyers are simply unable to obtain offers of finance to buy flats with oppressive ground rent arrangements. Auctions offer better value So rather than going down the sexy new-build route with Help to Buy funding, I gave our graduate the advice that I had ignored at his age. Buy a deal. Auction catalogues provide a rich seam of choice and opportunity for the first-time buyer. Of course, there are risks involved here too. But they should be manageable if full due diligence is completed before bidding. Full and thorough preparation is key – as is self-discipline on the day. It’s important to set a price limit and stick to it. Be prepared for the disappointment of being outbid. There will be plenty more opportunities at future sales. With the prevailing economic uncertainty created by Brexit and the forthcoming general election, many private potential sellers of unmodernised properties are choosing to wait until stability is restored to the market. But there are many sellers of such stock who are not obliged to postpone selling decisions for this reason. They include housing associations, local authorities, charities, public bodies, mortgagees and receivers. And remember that, at auction, you’re only ever paying one increment more than the next-best bidder. The price is determined by market forces in a very open and transparent forum. It will feel very different buying from a housebuilder that has set asking prices at new-build premiums inflated by 95% funding. Help to Buy? It should have been called Help to Sell. Gary Murphy is a partner and auctioneer at Allsop