Osborne's homes package carries risks

LONDON Fri Mar 22, 2013 8:43am GMT

A construction worker climbs the roof of a new home on a housing development in Ashby-de-la-Zouch, central England, March 20, 2013. REUTERS/Darren Staples

A construction worker climbs the roof of a new home on a housing development in Ashby-de-la-Zouch, central England, March 20, 2013.

Credit: Reuters/Darren Staples

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LONDON (Reuters) - A government plan to promote economic recovery by helping home-buyers carries some risk of fuelling a new housing bubble and incurring taxpayer losses, industry executives and analysts said on Thursday.

Under the plan announced on Wednesday, the government will shoulder the risk of billions of pounds in mortgages by allowing Britons to buy homes with only small down payments.

"It's a gamble," said Mark Farmer, head of private residential at building consultancy EC Harris. "If people start defaulting on their mortgages ... then the taxpayer will end up bailing them out."

Britain's housing market has been weak since the financial crisis struck five years ago, hurt by austerity measures, near-zero growth in the economy and a reluctance by banks to lend. Construction of new homes has also been slow.

The new scheme, called 'Help to Buy', involves the government guaranteeing up to 130 billion poundsof higher-risk mortgages from 2014 for three years, which property consultancy Savills (SVS.L) said could increase mortgage-reliant sales by 34 percent.

That will allow banks to provide more loans to people without the 20-30 percent deposits that have become a common demand of borrowers since the crisis.

The government also committed 3.5 billion pounds over three years to shared equity loans for newly-built homes worth less than 600,000 pounds, allowing buyers to purchase them with a 5 percent deposit.

"We're not talking about returning to the situation of four or five years ago where people had 125 percent ... mortgages and self-certified mortgages where no one checked what peoples' incomes were," Chancellor George Osborne told BBC television on Thursday.

Osborne said the new plans were prudent and would not put Britain back at risk of a property boom and bust, in large part because the UK housing market was currently flat.

Shares in Barratt Developments (BDEV.L), Britain's biggest housebuilder by volume, have risen 7.8 percent to a five-year high since Wednesday, while rivals Persimmon (PSN.L) and Taylor Wimpey (TW.L) have seen their shares gain 5.7 and 6.9 percent respectively.

Guaranteeing mortgages can come with huge costs. The U.S. government was forced to bail out mortgage finance firms Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) in 2008 after losses from years of lending to high-risk borrowers threatened the two companies' solvency.

Since then, they have drawn about $188 billion (124 billion pounds) in taxpayer funds to stay afloat, while paying about $58 billion to the U.S. Treasury in dividends.

BUBBLE RISK

However, housebuilder Persimmon's chief executive Mike Farley said government schemes launched so far had a robust vetting process for prospective buyers, safeguarding against bubble risk.

Smaller housebuilders, which missed out on previous schemes such as New Buy because they could not afford the required equity investment, were also likely to be able to access Help to Buy, he said, providing a further boost to growth.

The Royal Institute of Chartered Surveyors said the measures were "much-needed" but that the government "needs to be careful this doesn't create another housing bubble".

James Pargeter, head of residential at consultancy Deloitte , said there was a risk the plans would push up housing prices by allowing a lot more borrowing while doing little to get building under way.

Annual private homes completions currently stand at 90,000, far behind the 230,000 that Britain needs each year, data from Savills showed. The government hopes the shared equity component of the scheme will help about 75,000 buyers to purchase homes over the three years, encouraging construction.

Housebuilders have to date taken a cautious approach to building and have focused on improving profit margins rather than volumes after seeing demand crash during the crisis.

Cenkos Securities analyst Kevin Cammack said the scheme's shared equity component would enable housebuilders to shift property reasonably comfortably. "So if they can see the certainty of demand they're likely to build more property so hopefully the supply side does improve."

"But there's no guarantee of that and they may just think to maximise the price at which they're selling it," he said.

(Additional reporting by William Schomberg; editing by Stephen Nisbet)

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