FIRST TIME BUYER CONUNDRUM

With all the furore in relation to changes to the tax relief for buy-to-let mortgages and also the increase in Stamp Duty for second homes, one of the questions I was recently asked was “did I not think that these proposals would help first time buyers?” 

On the face of it these proposals would appear to help first time buyers because you would expect that they would curtail property investors.  As a practitioner at the coal face however, I do not think that this will actually happen mainly because property investors tend not to be purchasing the same properties as first time buyer but instead tend to purchase the lower end properties where there is an opportunity to add value through renovation and refurb. The majority of first time buyers cannot afford to buy these types of properties nor do they want to.

With this in mind, my feeling is that the proposals that are currently outlined by the Chancellor and John Swinney will actually have a negative impact on first time buyers as they will result in an increase in rent as landlords will need to cover their costs and less properties being available for rent.  This will make it increasingly difficult for tenants who would like to get on the housing ladder to save up a deposit.  I also think that these proposals will have a negative impact on second steppers  (second steppers are those people who have perhaps bought and are living in lower priced properties that are currently of no interest to existing first time buyers).  By curtailing property investors, I think second steppers will find it harder to sell their properties and this will have a knock-on effect further up the chain as there will be a limited number of purchasers for those properties.

In general terms, and especially with new rental legislation, property investors tend to be the very ones who will spend money refurbishing properties prior to them going on to the rental market.  Not only does this make, in most cases, good business sense in relation to being able to add capital appreciation value to the property, it also makes the property easier to let.  Again, by curtailing property investors I think that both UK and Scottish governments will restrict the improvement of the country’s housing stock to the detriment of all concerned.

So what is the answer?  I have long argued for a first time buyer fund.  I would refer you back to blogs from 2008.  The first time buyer fund could be a means by which the government, working with lenders, guarantees 5% of the mortgage for a specified duration, say 5 years.  This would enable lenders to lend 95% mortgages at 90% rates, knowing that the government was guaranteeing 5% of the loan.  I think that the amount of the guarantee should be area specific and should be set to the average price of any particular area.  This scheme should be used to encourage first time buyers to buy properties in the normal first time buyer areas and not simply give them an opportunity to purchase more expensive properties.  The lenders would still apply their normal rules of affordability and the scheme would be required to be funded on an annual basis but with the government in fact only taking the risk on guarantees that go bad.  The hope would be that after 5 years, the fund for future years would be in place and would thereafter simply repeat.   This would be a good opportunity for government to support first time buyers, the housing market and the economy in general, especially in times of economic downturn.

How would this be funded?  Again I refer to previous blogs where I have mentioned changing the Capital Gains Tax rules on properties so that any property that was sold within a 5 year period, be it a main residence or otherwise, would incur a higher Capital Gains Tax claim, although it must be remembered that this is on profit so should not have any impact on affordability for future purchases.

I would urge both Scottish and UK governments to reconsider their proposals and support the housing market.

Lindsay Darroch
Partner – Head of Property
www.blackadders.co.uk

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