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Neverwhere

Help To Fire Sale?

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From Help to Buy in England - Terms and Conditions, as set out by Harlequin Homes (h/t long time lurking):

1.9 If, on the sale of the property, the price of the property has fallen and there is insufficient money from the sale to repay the equity loans after the mortgage has been paid the purchaser will lose any deposit paid. The HCA will not however seek to recover the balance of their equity, not otherwise paid out of the proceeds of sale, from the purchaser.

1.10 The purchaser may repay the equity loan to the HCA at any time following legal completion. Repayment whether in full or by instalments will be based on the market value of the property at the time of the repayment(s) and the purchaser will have to arrange and pay for the valuation of the property at that time. The minimum instalment value is 10% of the total of the equity loans.

I hadn't realised previously that HTB is apparently both an equity loan and non-recourse lending. This means that if the property reduces in value by x% the borrower has the choice of repaying the HTB loan minus x%, or selling the property and paying whatever they can towards the HTB loan minus x% from the proceeds of the sale less their outstanding mortgage (which may be nothing at all).

This seems to set up a sweet spot between being in negative equity with regards to HTB and being in negative equity with regards to their mortgage, wherein, in a falling market, the borrower is incentivised to sell because this will reduce the amount owing on their HTB loan, and has no interest in holding out for any price above their outstanding mortgage amount because they gain no direct benefit for doing so.

Help to Fire Sale?

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From Help to Buy in England - Terms and Conditions, as set out by Harlequin Homes (h/t long time lurking):

I hadn't realised previously that HTB is apparently both an equity loan and non-recourse lending. This means that if the property reduces in value by x% the borrower has the choice of repaying the HTB loan minus x%, or selling the property and paying whatever they can towards the HTB loan minus x% from the proceeds of the sale less their outstanding mortgage (which may be nothing at all).

This seems to set up a sweet spot between being in negative equity with regards to HTB and being in negative equity with regards to their mortgage, wherein, in a falling market, the borrower is incentivised to sell because this will reduce the amount owing on their HTB loan, and has no interest in holding out for any price above their outstanding mortgage amount because they gain no direct benefit for doing so.

Help to Fire Sale?

That could be the significant part if HTB London 40% loans are on the same terms ,considering the value of the HTB loan could be as much as £240K

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Hehe. Nice find. The law of unintended consequences strikes again.

20% down in a year in the last crash. I'm sure these props falling away will make this one even faster. Suits me, been waiting long enough.

Edited by Eddie_George

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Hehe. Nice find. The law of unintended consequences strikes again.

20% down in a year in the last crash. I'm sure these props falling away will make this one even faster. Suits me, been waiting long enough.

I think this could well be the case ...the BIG question is ,is this the sole reason for HTB London 40% (as there will be no mortgage prisoners just escapees if price start falling ) and will we see similar for the rest of the country if prices start falling ( its been clear for a while that London is circleing the plug hole)

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This is getting silly:

- current owners - this is huge help to sell as there will be buyers who can now accept a risk of 40% fall

- buyers - may not make any capitals gains but will save on rent, even if their house takes ~ 40% hit when they come to sell it. Only if they go interest only and rent > interest. Almost encourages not to repay in a falling market!

- renters - clearly nobody cares about them

- government - happy to indirectly transfer money to current owners, local or foreign.. WHY?!

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This is getting silly:

- current owners - this is huge help to sell as there will be buyers who can now accept a risk of 40% fall

- buyers - may not make any capitals gains but will save on rent, even if their house takes ~ 40% hit when they come to sell it. Only if they go interest only and rent > interest. Almost encourages not to repay in a falling market!

- renters - clearly nobody cares about them

- government - happy to indirectly transfer money to current owners, local or foreign.. WHY?!

AFAIK the equity loans are only available on new build properties so it sort of works out as the opposite: those first time buyers who recently bought a new build property down the street may be prepared to take a 40% hit on current purchases prices if they're selling into a falling market and have already lost their own equity, dragging down the value of other owners' properties in the process.

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AFAIK the equity loans are only available on new build properties so it sort of works out as the opposite: those first time buyers who recently bought a new build property down the street may be prepared to take a 40% hit on current purchases prices if they're selling into a falling market and have already lost their own equity, dragging down the value of other owners' properties in the process.

Thanks, HTB makes more sense now.

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And on the flip side how many people will say feck it what's to lose ill have that 1 bed studio flat for £600k i`m paying more in rent anyway the savings on the rent over x years will more than cover the loss of the deposit if it all goes tits up and if it don't i make money ...it could go either way in the short medium term ...long term though it`s got to be down as the incentives to by must be finite

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And on the flip side how many people will say feck it what's to lose ill have that 1 bed studio flat for £600k i`m paying more in rent anyway the savings on the rent over x years will more than cover the loss of the deposit if it all goes tits up and if it don't i make money ...it could go either way in the short medium term ...long term though it`s got to be down as the incentives to by must be finite

On a very small plus side, that would take them out of competition for other rentals and therefore make BTL less profitable. So I can see upsides in all this but they will take a long time to unwind unfortunately.

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And on the flip side how many people will say feck it what's to lose ill have that 1 bed studio flat for £600k i`m paying more in rent anyway the savings on the rent over x years will more than cover the loss of the deposit if it all goes tits up and if it don't i make money ...it could go either way in the short medium term ...long term though it`s got to be down as the incentives to by must be finite

If it is a non-recourse loan then this is the important point.

take a punt on a flat in London. Prices go up 40%? I get the benefit. Prices go down 40%? I walk away. No risk.

The fact that they are non-recourse will encourage price growth. Until it doesn't.

[i'd add that IMO part of the crazy growth in London is due to it being such an international city - there are plenty of people who can risk a 5%-10% deposit on a play that prices will go up. If prices crash the UK economy will be toast - so they just disappear out of the country, leaving the loan behind.]

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If it is a non-recourse loan then this is the important point.

take a punt on a flat in London. Prices go up 40%? I get the benefit. Prices go down 40%? I walk away. No risk.

The fact that they are non-recourse will encourage price growth. Until it doesn't.

[i'd add that IMO part of the crazy growth in London is due to it being such an international city - there are plenty of people who can risk a 5%-10% deposit on a play that prices will go up. If prices crash the UK economy will be toast - so they just disappear out of the country, leaving the loan behind.]

Is it open to UK nationals only?

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On a very small plus side, that would take them out of competition for other rentals and therefore make BTL less profitable. So I can see upsides in all this but they will take a long time to unwind unfortunately.

It's quite interesting in relation to the BTL tax changes, which will surely be encouraging the most aggressively leveraged BTLers to sell up once they start being phased in, as it draws demand out of the secondhand market at exactly the same time as supply to that market is being increased. Why take a punt on an ex-BTL property when you can buy new and the Government will take 20-40% of the risk for you?

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On a very small plus side, that would take them out of competition for other rentals and therefore make BTL less profitable. So I can see upsides in all this but they will take a long time to unwind unfortunately.

There is that to ,but if HTB london don`t stop prices falling considering the uptake of HTB so far it could go down the tubes rapidly

I`m beginning to think HTB London @ 40% is a shit or bust play

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If it is a non-recourse loan then this is the important point.

take a punt on a flat in London. Prices go up 40%? I get the benefit. Prices go down 40%? I walk away. No risk.

The fact that they are non-recourse will encourage price growth. Until it doesn't.

[i'd add that IMO part of the crazy growth in London is due to it being such an international city - there are plenty of people who can risk a 5%-10% deposit on a play that prices will go up. If prices crash the UK economy will be toast - so they just disappear out of the country, leaving the loan behind.]

20% HTB is definitely a non recourse loan as pointed out in the OP ,I have not seen any T&C`s containing 40% as the loan amount as of yet

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If it is a non-recourse loan then this is the important point.

take a punt on a flat in London. Prices go up 40%? I get the benefit. Prices go down 40%? I walk away. No risk.

The fact that they are non-recourse will encourage price growth. Until it doesn't.

[i'd add that IMO part of the crazy growth in London is due to it being such an international city - there are plenty of people who can risk a 5%-10% deposit on a play that prices will go up. If prices crash the UK economy will be toast - so they just disappear out of the country, leaving the loan behind.]

I don't see how that follows? Empirical data from the Bank for International Settlements strongly suggest that whilst real GDP per capita consistently drops off immediately post property price peak it also consistently takes off again and normally exceeds its previous level within a few short years and whilst property prices are still deflating:

ch3-gra4.jpg

Additionally, a recent impact assessment HM Treasury and the Bank of England indicates that a 10% fall in UK house prices is expected to reduce consumption by approximately 0.25%:

The Financial Policy Committee's tools over the buy-to-let mortgage market - Impact Assessment

Past empirical research is used to estimate the effects this fall in house prices might have on GDP. Studies using UK data have found little support for classic ‘wealth’ effects from house prices to consumption.59 However, empirical research has estimated modest causal effects on consumption from changes in house prices, consistent with collateral effects (by which a fall in the value of housing means households are less able to borrow against housing to smooth consumption) rather than classic wealth effects. For example, Benito (2007)60 estimates that a 10% fall in house prices reduces consumption by around 0.2%. Other studies have found larger estimates. For example, Mian et al (2013)61 find much larger impacts using cross-sectional data for the US.62 Recognising that risks are skewed to larger magnitude effects, and the possibility of non-linearities involved in such a stressed scenario, we have assumed that a 10% fall in house prices reduces consumption by 0.25%.

59 See, for example, Attanasio et al, which looks at the response of older versus younger households to try and identify wealth effects. Another paper (Campbell and Coco) find larger effects, but is it argued in Cristini and Sevilla Sanz (2011) that this is not robust. For papers see:

-Attanasio, O, Blow, L, Hamilton, R, and Leicester, A (2005), ‘Consumption, house prices and expectations’, ‘Booms and busts: consumption, house prices and expectations’, Economica, 71, p20-50.

-Campbell, J and Cocco, J (2007), ‘How do house prices affect consumption? Evidence from micro data’, Journal of Monetary Economics, 54, p591-621.

-Cristini, A and Sevilla Sanz, A (2011), ‘Do house prices affect? A comparison exercise’, University of Oxford Department of Oxford Discussion Paper Series.

60 See Benito, A (2007), ‘Housing equity as a buffer: evidence from UK households’, Bank of England Working Paper 324

61 See Mian, A, Rao, K, and Sufi, A, (2013), ‘Household Balance Sheets, Consumption, and the Economic Slump’, Quarterly Journal of Economics, 128, p1687-1726.

62 It is difficult to directly compare the elasticity, as it is based on the response of consumption to changes in housing equity rather than prices directly and so is state contingent. Based on UK levels of household wealth, their estimates are broadly consistent with a 10% fall in prices reducing consumption by around 1%.

No doubt this would be a short-term a negative for the UK economy but it hardly seems to line-up with idea that the economy would be toast, and once house prices correct that should encourage investment to follow more productive pathways and allow for more earned income to be spent directly into the productive economy.

Worth noting, also, is that according to another recent working paper from the BIS credit booms themselves present a drag on productivity and pose a much more significant risk to the economy if allowed to continue until the point of financial crisis than a financial crisis-free recession does:

Labour reallocation and productivity dynamics: financial causes, real consequences

To wrap-up these results, we simulate the estimated path for productivity based on specification (5). To do so, we consider two different assumptions. The first relates to the occurrence of a financial crisis and the second to the allocation component, which can be either "high" (relatively small misallocations having little effect on productivity during the expansion) or "low" (large misallocations causing more damage).22 We therefore end up with four different scenarios and simulate each productivity path.

2regtn5.jpg

In Graph 3, the red lines refer to paths with a crisis and the blue ones to those without a crisis. In turn, continuous lines refer to paths associated with a relatively high allocation component and dashed lines to paths associated with a low one. Three conclusions stand out.

First, in the absence of a crisis, the allocation component makes a modest difference for the subsequent evolution of productivity. The gap between the solid and the dashed blue lines remains below one percentage point during the first six years after the start of the recession and then rises to 2 percentage points 2 years later.

Second, by contrast, when a financial crisis hits, the allocation component matters much more. The difference between the red solid and the red dashed lines is around 5 percentage points 3 years after the peak and reaches more than 11 percentage points after 6 years.

Finally, the drag on productivity due to a financial crisis is much larger when these labour misallocations have been large during the expansion, ie the allocation component prior to the recession is low. The dashed red line is much lower than the rest. Put differently, it is the combination of a financial crisis with past misallocations that generates the largest and most long-lasting damage to productivity.

22 We consider the sample distribution for the allocation component and identify the case of a low allocation component (high allocation component) as equal to the value of the 25th percentile (75th percentile). Interestingly, the moments of the full sample and conditional distributions for the allocation component are very similar. Thus, conditioning or not on the occurrence of a financial crisis does not change significantly the value of the distribution quartiles.

Edited by Neverwhere

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One thing still not clear to me - let's assume some capital has been paid off in addition to the initial deposit. if price falls and the property is sold, are those repayments lost with the deposit?

I.e. in a falling market, would HTB discourage repayment of capital?

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One thing still not clear to me - let's assume some capital has been paid off in addition to the initial deposit. if price falls and the property is sold, are those repayments lost with the deposit?

I.e. in a falling market, would HTB discourage repayment of capital?

In a word yes over payment and lager deposits would be a very bad idea

If the price falls below the amount of equity held by the borrower and the government combined the bank takes the hit for the rest and the borrower will be perused by the bank for the shortfall as normal ,hence there will be a "sweet spot "for the borrower to sell if prices fall

Edited by long time lurking

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There`s no IO for owner occupiers MMR done away with that its only available for BTL

There is still an incentive to go for the longest term. Although for 40y-old first time studio buyers the term will be limited by age cap anyway.

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Is it open to UK nationals only?

EU citizens resident here are eligible too under EU treaties. Interesting to see however if Cameron's bid to deny EU citizens benefits for 4 years will also apply to help to buy and shared ownership schemes?

As a Londoner giving up hope of buying I am almost tempted looking at this if the right development came up in the right area. Would be good to see some worked examples of scenarios if prices fall.

Surely the Government can't have this blatant a disregard for taxpayer funds - just joking!

I see the Nationwide and Leeds BSs are even offering special mortgage rates for the scheme.

http://www.financialreporter.co.uk/mortgages/nationwide-launches-help-to-buy-london-range.html

Edited by MARTINX9

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EU citizens resident here are eligible too under EU treaties. Interesting to see however if Cameron's bid to deny EU citizens benefits for 4 years will also apply to help to buy and shared ownership schemes?

As a Londoner giving up hope of buying I am almost tempted looking at this if the right development came up in the right area. Would be good to see some worked examples of scenarios if prices fall.

Surely the Government can't have this blatant a disregard for taxpayer funds - just joking!

I see the Nationwide and Leeds BSs are even offering special mortgage rates for the scheme.

http://www.financialreporter.co.uk/mortgages/nationwide-launches-help-to-buy-london-range.html

I've done some simple mental arithmetic on this with the view of working out whether it might actually be an attractive proposition even if you believe that prices will tank relatively soon. Assuming that you go for the max £600k purchase price, your 5% deposit, which you would expect to lose, is £30k. Stamp duty is £20k. Let's say (generously) that other costs are £10k. You would therefore have to save £60k in interest relative to rent for an equivalent place before the crash.

I would estimate that for a £600k new build, the equivalent annual rent is about £20k, so you'd have to save 3 years' worth of rent. If mortgage interest is 50% of rent (generous assumption) then it would have to be 6 years until the crash for this to be worthwhile. I'd say that the current situation is very unlikely to hold out for that long. Then there is the issue of repaying some of the equity loan in those 6 years, which increases the cost side of the equation. There is also the risk of prices tanking more than 45% before you manage to sell. Finally, the interest saving is actually likely to be much less than 50% because banks have to pay a fee to HMT for the guarantee (they had to do this to get past the EU State Aid rules).

Really don't see how it could be worth it.

P.S. @Neverwhere - great find

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40% HTB transferring the risk of losses from 'home'-builders who have been building in London onto the taxpayer, while appearing to be helping hardworking families.

Edited by Sawitcoming

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