The prime minister’s announcement of 95% LTV mortgages for first-time buyers at the virtual Conservative conference last Tuesday will undoubtedly support first-time buyers in accessing the property market, while simultaneously inflating property prices.
The Tory plan to prop up property values will mostly benefit existing homeowners, the housing industry and housebuilders. It is not a long-term solution to the housing market conundrum.
Existing homeowners will enjoy growth in the perceived wealth contained within their properties. Although rarely realised, it offers security, which is important political capital.
For unsuspecting first-time buyers, however, it will have long-term ramifications. During economic turbulence, hasty buying decisions can return to haunt people.
We have already seen this market tendency in 2008, when some areas then took 10 to 15 years to exceed the 2008 pricing.
Where deposits are wafer-thin, negative equity is a significant risk. Beneficiaries of today’s scheme who attempt to sell in the future, into a market where this support no longer exists, will face market tension where first-time buyers can’t afford today’s inflated pricing.
Acquiring residential property that is located in particular areas or is a less desirable type of property will leave first-time buyers facing negative equity.
This risk is enhanced by their relative inexperience and the implications will be acute because first-time buyers typically desire a second move within a few years.
The risk is greater in regions where the housing market faces greater turmoil due to the pandemic. Areas with lower socioeconomic status will see a greater rise in unemployment from the pandemic, which is likely to result in years of stagnant or negative growth.
Apartments, leaseholds or less desirable property types where future values are less reliable will again leave unsuspecting future homeowners facing negative equity. What looks like an opportunity to own a home could soon become negative equity purgatory where homeowners are unable to move from a small property to provide the space needed for a growing family.
The prime minister’s goal is clear and shows ambition. People should have this opportunity and many will prosper from it. However, the government must ensure the correct guidance is given and protection around the future impact of this initiative should be considered for all regions of the UK.
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