The construction industry has benefited from several years of growth, but is it likely to come to an end when the new mortgage rules come into effect?
It has never been more difficult to buy a home than it is now. The days of one hundred percent mortgages are over. The banks doled out money in an irresponsible way and caused the financial crisis that stripped our proud nation of its triple ‘A’ credit rating.
The government acted to stimulate the housing market. They lowered interest rates and introduced a system to help people raise the twenty percent deposit that lenders insist upon with new mortgages. The deposit ensures that the house has equity in it from the beginning. If the banks repossess it at any time, they will get their money back.
The Help To Buy system lends people up to fifteen percent of the deposit they need. They must raise the remaining money to put down on the property themselves. After five years, they start to repay the part of the deposit that they borrowed at a low interest rate. The scheme is such a success that house prices are soaring as demand outstrips supply. Property developers are working hard to provide new homes and are enjoying the rewards that they bring. Is the bubble about to burst? We interviewed one property developer on the condition of anonymity. He told us that the industry worries about the calming measures the government has in their armory. The industry has much invested in future projects, but the government can turn off the financial tap at any time. How could they do it? Let’s take a look at three possible options.
- Restrict Help To Buy. If the government was to make the scheme available to fewer people or lower the percentage of the funding available, many people would not be able to afford mortgages. Without funding, property sales will fall. In the worst case, those in power could cancel Help To Buy, and that would have a big impact on new construction projects.
- Raise Interest Rates. If interest rates rise, fewer people will buy a home. It will hit the developers hard. Their houses will not sell, and because they run on finance from the banks, their repayments will increase. The cost of construction equipment alone is so high that many companies make use of used bucket trucks and other equipment. It is not only homeowners that suffer when interest rates rise. Businesses come under much stress when repayments go up.
- Mortgage qualification. They might decide to make it harder for people to get a mortgage by moving the qualification goalposts. It is unfair on those who are about to step onto the housing ladder and smacks of prejudice. It will also reduce the number of buyers on the market.
It is clear that whatever steps the government take, property development companies will bear the brunt of the changes. They have enjoyed the boom and made massive profits. Will those profits be enough to carry them through the slump that is sure to follow? We will have to wait and see.