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Beware of Government Help to Buy housing initiative

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Monday November 18, 2013 at 1:03pm
The Government’s help to buy scheme, designed to help first time buyers onto the housing ladder, is getting a lot of publicity at the moment with many young people welcoming the move. The popularity of the scheme is already said to be resulting in house price rises. For parents with children looking to buy into the current housing market as first time buyers I urge a great deal of caution.

The best time to buy a house is at the top of the interest rate cycle, that is because as interest rates fall the monthly mortgage payments reduce and also the value of the house increases. So property prices rise as interest rates fall and property prices fall as interest rates rise.

A best time to buy a house was the end of the 1980s. Then interest rates were near a 300 year high. As interest rates reverted to the mean rate by falling, the value of those properties rose and at the same time things got even better as the mortgage payments reduced as a consequence of falling interest rates.

Now we see interest rates at a 320 year low. So anyone stretching themselves now to buy at the bottom of the interest rate cycle could find themselves in trouble as property prices are much more likely to fall and interest rates rise.

Over time people spend around 20% of their disposable income on housing costs. And so in those terms houses are not currently overpriced but only as long as interest rates stay at their current super low levels. Even though common sense tells us this state of affairs won’t last we tend to “anchor” to what is already known. In other words we ignore the fact that interest rates will rise and ignore the consequences when making the house buying decision.

Help to Buy is simply ‘election fodder’

With interest rates so low we find house prices have risen to levels beyond the reach of first time buyers. Instead of letting rates rise to their market level the government brings in the Help to Buy Scheme. Their argument in public is that property prices are not expensive, just that first time buyers can’t afford the deposit.

The deposit is unaffordable for many first time buyers because the banks are asking for such a high deposit; maybe as much as 25% of the purchase price. There is a reason for this, in commercial terms the banks think prices are going to fall and so they need a big enough deposit buffer to protect their position.

So the real reason the Help to Buy scheme has been launched is that it is a popular step on many fronts. It actually increases house prices making all home owners feel better. It also gives those who can’t afford the bank’s deposit a hand, backed by the tax payer. All good election fodder but really bad for those who can’t afford to buy without government assistance.

If you are thinking of giving money to your children, possibly even to purchase a property do the sums really carefully with them and make sure they are not going to find themselves over stretched and in negative equity when the inevitable happens and interest rates rise as property values call. Any such gifts should in any event be protected from life’s unintended consequences (for example of your child’s divorce, remarriage or death). Whilst sensible estate planning can’t deal with the vagaries of the economy and Government policy it can protect family wealth from tax and help ‘keep it in the family’.

Andy Parker
Chartered Financial Planner, Birmingham

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