Hiten Ganatra is Managing Director of Visionary Finance.
The Government’s commitment towards the levelling up agenda was reinforced by the Chancellor in his recent budget announcement, delivering on its Manifesto pledge to help generation rent become generation buy with the introduction of the government-backed mortgage guarantee scheme.
Whilst this was a welcome policy to complement the Help to Buy scheme, aimed at opening up the supply of the second-hand housing market and reducing reliance on the new build sector, there is more to do on the supply side. Forecast estimates 345,000 new homes per year to meet the backlog and future demand against net new dwellings running at just over 200,000.
Addressing the supply side issues
A recent report by Dr Gerard Lyons for the Policy Exchange identifies four key interventions to help boost the supply of housing. While these recommendations are likely to have a positive impact on supply side, thought must be given to what needs to be done to achieve the required growth in housing numbers of 100,000 per year. First, the availability of skilled tradesman will be a key factor and while there are many construction-related apprenticeship and training programmes available the uptake of these courses is dwindling, with the Federation of Master Builders reporting apprentice numbers in the construction sector falling.
The Construction Industry Training Board reckons that the sector needs to recruit and train 31,600 workers every year to keep up with the demand. A shortage of skilled workers has been exacerbated by foreign born workers returning home not only because of the end of the transition period but also as a result of the pandemic.
A thriving construction workforce will be key to delivering the housing numbers to keep pace with the level of demand and therefore the Government must do everything within its powers to develop the next generation of homegrown tradesmen but also to attract migrant talent for the sector.
Second, the planned root and branch reforms of the current planning system must be implemented. In every planning application narrow interests will be prevalent. They may come in the form of developers overdeveloping sites to maximise profits, while giving little consideration to local infrastructure or affordable housing mix.
Equally, local councillors or MPs might withhold their support for developments for fear that they may not be re-elected or local residents objecting to schemes due to NIMBYism. Absolute control of the planning process needs to taken away from local authorities and be replaced by something like a regional housing delivery taskforce which would look to consider each major planning application based on pragmatic views with emotions and vested interests withdrawn. As a former Conservative councillor I saw first-hand many obstacles with the current local authority planning system.
Third, we need to be introducing a framework to encourage smaller developers and to make funding more accessible and cost effective. Borrowing rates for small developers to fund projects are significantly more expensive than for larger house builders. Currently development funding is available to smaller developers at rates between six and 12 per cent per annum with prohibitive arrangement and exit fees which can be as high as two per cent each way.
Another consideration for smaller developers is the capital they are required to inject which could be as much as 40 per cent of the land cost and 40 per cent of development cost. Hence, for example, on a scheme which has a gross development value of £3 million where the developer has purchased the land for £1.2 million and anticipates a build cost of £1 million a cash amount of approx. £880,000 would be required which would price many small developers out of the market.
Mortgage Guarantee Scheme – a game changer
Since the pandemic, the availability of high loan-to-value (LTV) mortgages has contracted significantly with lenders becoming nervous around the long term economic impact. In September 2020 I had conversations with many lenders about where they expected the housing market to be in six to 12 months time and almost everyone predicted that house prices would fall between seven to 14 per cent. Lenders therefore withdrew completely from 90 per cent LTV mortgages last year and have only recently re-introduced high LTV products.
The announcement of the government-backed mortgage guarantee scheme will help to unlock a wider pool of housing stock for first time buyers in areas that have been left behind. The £5 billion commitment to the Levelling Up Fund will not only help to re-invigorate local towns and communities but, with this scheme, make possible the aspiration of home ownership more achievable.
If we take Wolverhampton as an example, a town which will benefit from the investment, the average price of a house is £179,206. Under the current mortgage options available this would require a minimum deposit of £17,920 (excluding costs).
To illustrate the financial impact for a would-be first-time buyer the following table shows how, with a larger deposit, mortgage rates begin to fall drastically. This has a notable effect on the monthly payment but also the size of the deposit required.
The difference in monthly payment between a 90 per cent LTV product and 80 per cent LTV product is just over £165 per month and the deposit required is an additional £17,920 which makes the aspiration of homeownership out of reach for many.
The recently announced mortgage guarantee scheme by the Government has seen an increase in the availability of 95 per cent LTV products both from lenders who have signed up to the scheme and from those who have opted to offer the higher LTV products independently. Rates on the mortgage guarantee scheme are starting from 3.73 per cent p.a which means using the above illustration monthly payments would increase to £872.61. Whilst the deposit level would drop to as low as £8,960 the circa 90bps which lenders are having to pay the Government to be part of the scheme could mean the success of the initiative may end up underwhelming particularly if cost of homeownership is higher than local market rents – which in Wolverhampton currently stands at £824 pcm for a three-bed home.
Stamp Duty Land Tax (SDLT) – what should happen to this inefficient tax
Although a short-term extension was announced on SDLT, this tax is a blunt money raising tool for the Government and is ripe for reform, as it doesn’t help those who most need support. For example, first time buyers who save up for the deposit would need to save up additional funds beyond the deposit to cover SDLT as it can’t be added to the mortgage.
If the volume of property transactions decline this invariably means less SDLT receipts for the exchequer. The revenue only feeds off the tax receipts of SDLT if the market is buoyant. Given that we are facing a period of economic uncertainty, it is important the Government looks at the bigger picture of economic growth which invariably will generate greater tax receipts over a sustainable longer term.
Therefore, I propose we scrap SDLT entirely and look to replace this with some form of residential property sales tax, , where the seller pays a percentage from the equity they have built. Critics of this would say that the tax would be passed onto buyers however with many buyers reliant upon a mortgage to support the purchase the valuation of the property would need to remain affordable.
Through joined up thinking the Government can absolutely achieve the objectives it has set out to expand home ownership and increase the supply of homes. This will require further bold, creative and decisive measures, to deliver on its commitment of levelling up the UK.