Will Gordon's plan really help us?

GORDON Brown is today expected to unveil details of his plans to turn Britain into a nation of home-owners.

Under the ambitious scheme, thousands of struggling first-time buyers could be given financial help to step on to the first rung of the housing ladder.

Depending on their circumstances, they would need to take out a mortgage only for between half to three quarters of the cost of their new home, under a deal struck between the Government and mortgage lenders. The rest of the equity would be split between the Government, the lender or possibly the house-building company.

In addition to their mortgage, buyers would pay an annual 'rent' of no more than three per cent of the value of the part of the home they do not own, with the option to buy the whole stake if their finances allow.

The Government believes the scheme could potentially cut average repayments on a £200,000 home by up to £372 a month. It will not be restricted to key public sector workers such as the police, teachers and nurses, and there will be no means test.

Great news, surely, for anyone struggling to buy their first home in these times of hugely inflated property prices?

Yes and no.

Although exact details of how the scheme will work remained sketchy in advance of Mr Brown's full statement today, local housing experts have welcomed the move.

The proposals would amount to an extension of the affordable home ownership schemes already operating in York, such as discount sale and shared ownership. Demand for such schemes is great, and waiting lists can be up to six months, according to some local experts.

Anything which would enable more first-time buyers to take advantage of such schemes must be good news, said Ruth Hone, office manager of Pink, the first-time buyers' arm of estate agents Hudson Moody.

"If such schemes were going to be available to everybody, it would be fantastic news," she said. "We do need something like this, especially in places such as York, where house prices are out of reach for most first-time buyers now."

Kevin Hollinrake, of estate agents Hunters, echoed that view. The plight of first time buyers, who have seen house prices spiral out of reach, was one of the main problems affecting the housing market today, Mr Hollinrake said.

In the past, first-time buyers made up around 50 per cent of all house sales. Now, the percentage was closer to 30 per cent. So many younger people have been unable to get on to the housing ladder - not only in York, but in rural North Yorkshire too.

With new buyers unable to enter the market, selling chains could eventually collapse, potentially undermining the property market.

"So this is definitely good news," said Mr Hollinrake.

Others, while broadly welcoming the move, still urge caution.

Steve Broadley of the Mortgage Advice Service in Skeldergate, York, said that to have an appreciable effect in York, where house prices have risen at an unprecedented level in the past few years, the Government would have to allow buyers to take out mortgages for just half of the price of the property they wanted to buy.

A mortgage for 75 per cent (three quarters) of the price of a new home would still be beyond many first-time buyers in the city, he said.

Steve Wilcox, professor of housing policy at York University, had further concerns.

For the policy to work, he said, it must be targeted properly.

If the scheme were made too widely available, it could be self-defeating. For those who took out a 75 per cent mortgage, the effect of the scheme would effectively be that they could afford to buy a house that cost something like 25 per cent more than they would have been able to afford if they had had to take out a full mortgage.

"But if everybody can afford to pay 25 per cent more, then the whole market will go up by 25 per cent," he said. In other words, it could cause house prices to rise again.

To ensure that does not happen, it was vital any 'shared equity' scheme of the kind being proposed coincided with an increased programme of house-building, Prof Wilcox said.

That is part of the Chancellor's plan. Mr Brown, along with Deputy Prime Minister John Prescott and housing minister Yvette Cooper, will today also be unveiling plans to release more land for house building, and to cut the costs of construction and ease planning rules.

All very well, Prof Wilcox said, but the various elements of the plan would all have to be carefully timed. If thousands of first-time buyers were given help to buy before new the homes became available, that could still start a new round of increases in house prices.

There is also a danger that homebuyers themselves could lose out, Prof Wilcox warned.

For those who could not afford to get on to the bottom rung of the housing ladder any other way, the scheme could offer real benefits.

For those who could already afford a cheap starter home, but wanted to use the scheme to buy a bigger or better home than they could otherwise afford, there would be a problem, however.

A couple who can afford a deposit of £10,000 could, for a weekly mortgage payment of £147.80, afford to buy outright a home worth £116,000. By the time they had paid off their mortgage they would own outright a home which, at today's prices, was worth £116,000.

If they put down a deposit of £10,000 and then opted for a 50 per cent mortgage/ 50 per cent rent scheme they could, for the same weekly payment of £147.80, afford a home worth £160,000.

This sounds a good deal: and the couple would certainly have a nicer home for their money. The problem is that the £147.80 they were paying out each week would consist of £104.50 in mortgage repayments, and £43.30 in rent.

The upshot of this would be that by the time they had paid off their mortgage, they would effectively own little more than a half share in their £160,000 home. Their share of the property would be worth £85,000 (their £10,000 deposit, plus half of the remaining £150,000 value).

They would, at today's prices, be £31,000 worse off than the couple who had bought the cheaper £116,000 home outright (see graphic above).

The more the cost of homes increased with time, the greater that gap between those who had bought a cheaper home outright and those who had bought a 50 per cent share of a larger home would be, Prof Wilcox said, and the harder it would become for the latter ever to take the next step up the housing ladder.

The scheme would be great, therefore, for those who couldn't afford to buy any other way: at least they would be paying off part of a mortgage, rather than pouring money away in rent.

But if you can afford to buy a cheap home without going down the shared ownership route, you may well be better off doing that than buying a bigger home on a shared ownership basis.

The cost to the taxpayer

THE Treasury says that although there will be upfront costs, the scheme would essentially be a form of Government investment.

Theoretically, if the value of a property were to decline after it was bought, it would be the Government's stake which bore the brunt of the loss.

In the more likely event that the property's value were to increase, however, the Government would be entitled to a percentage of the profit.

Case study

LAURA Sweet sees little in Gordon Brown's proposals to help her.

The York-based IT trainer and her journalist fianc Dan have, between them, a combined income of a little less than £45,000. If they really stretched themselves, they could just about get on to the bottom rung of the housing ladder.

The reason they haven't done so is because they don't want to over-extend themselves at a time when mortgage interest rates could go up, or house prices could go down.

Laura admits she and Dan came close to buying a home five years ago. In the event Laura, 29, used the money saved for a deposit to pay her way through university instead.

At the time they hadn't expected a house that would then have cost £50,000 would now cost more like £130,000, she admitted.

Does she regret not having bought when they had the chance? "If we'd done that, I wouldn't have my degree," she said. "So it is swings and roundabouts."

She and Dan still hope to buy a home one day - "It would be nice. You would feel a bit more settled" - but it probably won't be until after she has re-trained as a teacher, Laura said.

She doesn't think a shared ownership scheme of the kind being proposed by Gordon Brown would be much help to a couple in their position, for much the reasons given by Prof Wilcox (see main feature and graphic).

Of much more use would be some kind of scheme to address the explosion of buy-to-let buyers, who have pushed up the price of houses in the crucial first-time-buyer market.

There should be a quota of homes in the first-time-buyer bracket in York that could not be 'bought to let', she said. That could make a real difference.

Updated: 09:26 Wednesday, May 25, 2005