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A government scheme to stimulate the housing market by underwriting 95 per cent mortgages on new-build properties is unlikely to succeed because lending rates are too high, the chief executive of housebuilder Persimmon said on Thursday.
The NewBuy guarantee scheme was hailed by David Cameron, prime minister, as “a vital boost to the housing market, giving people good affordable new homes and backing thousands of jobs in construction” when he launched the programme on 12 March.
However, only four lenders have signed up and rates are hovering at around 6 per cent, higher than other mortgage deals.
Mike Farley, chief executive of Persimmon, said he didn’t “want to give up on the scheme at this stage”, but in a break from the industry’s usual upbeat tone he admitted that high interest rates were threatening its success.
“There’s nothing wrong with the concept but to make it work we need a lower rate or people will be priced out,” he said. “The rates are so high people won’t be able to afford the repayments and that will put the brakes on.”
Although housebuilders will continue to lobby lenders for a cut in rates, Woolwich, part of Barclays and one of four banks that first signed up to the scheme, has already raised the rate on its product, from 4.99 per cent on a two-year fixed product to 6.09 per cent on a three-year fixed.
The government had hoped NewBuy would boost the housing market and create 50,000 jobs by allowing lenders to offer 95 per cent mortgages on new-build homes without taking on all the risk. The programme works by providing a guarantee to lenders – shared by housebuilders and the government – that protect banks from losses should a customer default.
But Alastair Stewart, analyst at Canaccord Genuity, who published a note before the scheme’s launch titled “The [NewBuy] MiG won’t fly”, said: “It appears that the scheme simply hasn’t got off the ground. There has been very limited appetite from day one on the part of the lenders.”
The comments came as Persimmon reported orders had hit £1.24bn so far this year, up 9 per cent on the same 15-week period in 2011. Since the credit crunch began in 2007, Persimmon has slashed debt and spent around £1bn on cheaper land, which is feeding through to higher margins and profits. The company has vowed to return £1.9bn to shareholders over the next nine years.
● FT Comment: Severe winds have been threatening to blow Britain’s housing market down for some time but Persimmon has remained resolutely upbeat, reporting a 10 per cent increase in visitors, historically low 17 per cent cancellation rates and a 9 per cent year-on-year increase in its order book. Mike Farley, chief executive, had been suggesting that NewBuy could stimulate the market further, but with that in doubt, the shares – trading at 14.2 times 2012 earnings compared with Barratt at 13.4 and Bovis at 8.5 – are just worth holding.