Advice and Opinion

UK's first time home buyers subsidy shows how crucial and effective this type of assistance can be

The South African First Time Home Buyers Subsidy which was increased from R68,000 to R128,000 and which is awarded to people in various categories of the lower income groups, has been praised by those concerned about the large number of South African citizens still unable own to their own homes – but it has not been widely publicized or promoted by the prime mover behind the subsidy, The Department of Human Settlements.

This was said recently by Bill Rawson, Chairman of the Rawson Property Group.

“It has to be appreciated,” said Rawson, “that many – possibly most – of those who would benefit from state help via this subsidy are not regular media readers and are often unaware that such assistance is available. The only real promoters of the scheme have been those banks, which as a result of a praiseworthy social commitment, have become involved in this type of funding – but even they, I suspect, are not really reaching the target market.”

The problem of younger people being unable to buy homes despite often earning good salaries, said Rawson, crops up worldwide whenever an economy run on free enterprise lines begins to take off and property values rise, as is now once again happening in the UK and the USA.

“In both of these,” said Rawson, “the media now regularly run articles on this subject and in both, the states have responded with packages designed to assist buyers.”

In the UK, he said, the state is now backing two assistance packages, the Help to Buy scheme, which was introduced in April 2013, and the First Time Home Buyer Subsidy scheme. The former applies to new build homes on brown field sites and the latter to new build homes on green field sites. Neither scheme will fund secondhand home buys as one of the primary aims of the subsidies is to stimulate the home building industry.

In the Help to Buy scheme the state enables the cash-strapped first time home buyer to put down a deposit of only 5% of his home’s price, the condition being that the price must be below £600,000. The state then steps up by way of a loan to increase the size of the deposit and this loan is initially interest free for five years. This results in the first time buyer being able to have a 25% deposit in all – which is certainly high enough to significantly reduce his monthly payments.

In the initial three to five year loan period the interest rate is likely to be fixed at anything from 3,6 to 5%, resulting in a final average overall interest rate paid of 4 to 5%.

Instead of lending cash to increase the size of the deposit, the government can guarantee the mortgage, it then limits its commitment to 15% of the home’s value. This provision, it is said, reassures the financiers, i.e. the banks, and encourages them to offer more competitive rates, but in practice it has been found that many 5% of loans are given similar rates.

Whichever way the scheme operates, said Rawson, it clearly costs the state large sums of money in lost interest. However, where the deposit has been loaned by the state, it becomes repayable when the first time home buyer sells his home. At that stage the state will demand 20% of the home’s current value whether the home’s sale price has grown or fallen. Should the home owner find that he is more prosperous than he had anticipated, he can opt to pay back the state at any stage that suits him, thereby avoiding the payment when he sells or passes the property on to his heirs.

According to the UK’s current Conservative Party government, Help to Buy and other assistance packages have contributed significantly to the launching of 137,000 new homes in 2014. Now however they have gone a step further, inviting keen first time home buyers to register for another assistance package, which, it is said, will give them their homes at a 20% discount on the sales price – a massive incentive to buy.

This, it is proposed, will be achieved by waiving all local authority fees, which amount in most cases to at least £45,000 per new unit – a very large sum.

“Although the new subsidy has had its detractors, it does look as though it will go ahead and thereby further increase the individual’s assets, making him less reliant on Welfare State assistance in other fields, e.g. pensions, health and education. The Conservative Party are saying that it will enable a further 100,000 first time buyers to have their own homes by 2020.”

Does this have any real relevance for South Africa today in view of the fact that the income levels being discussed are so vastly different?

“Quite obviously South Africa could never afford assistance on this scale but it does again emphasize that responsible governments do place first time home ownership high on their priority lists and stretch their resources to make it possible. Of course it is always possible to go the same route as one or two of the EU countries and simply accept that the majority of young people will probably never become home owners but as the UK has stressed, this will make them more reliant on the state in their old age and will in the end also result in the local residential property market not keeping pace with those of the more enterprising countries.”