13 September 2018
Now try “Help to Sell”
The dangerous consequences of Help to Buy
by Frank O’Nomics
Sometimes simple calculations can reveal a great deal. The government’s supposedly generous Help to Buy scheme has led to £8bn being lent to first time buyers since the scheme was introduced in 2013. This cash has led to the building of 170,000 new properties, of which 140,000 went to new buyers. That amounts to £47,000 per property overall. Now this should be very helpful for those who had previously found it difficult to get onto the property ladder. However, when you look at the impact that the scheme has had on the profits of the house builders involved, that “help” becomes highly questionable. Over the period of the scheme, the profit per house of a typical builder has increased by £25-30,000. That profit may be the result of a number of factors but, if a lot of it is the result of the over-pricing of eligible Help to Buy properties, the benefits of the scheme are largely negated, being just a transfer of money from the government to the house builder. Further, these benefits could become negative if the property bubble that Help to Buy has been instrumental in creating, bursts. Signs of a turn in the housing market are emerging and there is a danger that the Help to Buy generation will be left with negative equity which will require a new “Help to Sell” scheme to facilitate their escape.
First of all we should properly acquaint ourselves with the nature of a scheme brought in to address the fact that home ownership rates for those aged 25-34 had halved in the course of a decade. Those looking to buy a property for less than £600,000 who have at least a 5% deposit, can get an interest free 5 year loan through the scheme of up to 40% in London and 20% elsewhere. The balance is raised from a conventional mortgage. Once the loan goes beyond 5yrs an interest rate of 1.75%, rising at 1% over inflation is charged. This simple scheme was introduced in 2013 and is estimated to have been responsible for up to 40% of new-build sales and at least partly responsible for a near doubling of profit per house for house builders. Originally intended to run until 2016 it was extended until 2020 and, not surprisingly, a number of house builders have argued for it to be extended indefinitely.
What have been the consequences? 200,000 more people on the housing ladder (assuming some joint mortgages) can be regarded as a positive, and the economy has benefited from a highly profitable building industry, but at what cost? Recent research shows that a typical house or flat built to access the scheme costs (in most areas other than Scotland) around 10-15% more than an equivalent older property. Some of the explanation for this may be down to newer fixtures and fittings, but that would hardly amount to 15%. That the premium is excessive is borne out by some of the incentives that builders offer to potential buyers in the form of cash back or the payment of fees, such as stamp duty of legal costs. When house prices are rising such premiums may be quickly forgotten, but when they start to fall this becomes a big problem. Take a £400,000 London house that is bought with a 5% deposit, a 40% Help to Buy loan and a 55% mortgage. Even with prices static the 15% premium leaves a buyer underwater at the outset, any fall in prices serving to increase the negative equity in the property – and prices in London are falling at their fastest rate since the height of the financial crisis.
Put simply, without a rise in prices to offset the premium charged the buyer will be stuck with the property until they can find the cash to cover the shortfall, and while the scheme remains in place, first time buyers will not help them as second-hand property does not attract the subsidy.
What then can be done? Ending the scheme may precipitate the problem by exacerbating the market correction, and will clearly have a big impact on the profits of house builders. A company such as Persimmon has seen a threefold increase in earning per share since the scheme started. Expanding the scheme to include older properties might help to undermine the excessive profits that these companies have been making, but would negate the initial driver, which was to fill the shortfall in new builds. The “Help to Sell” suggestion at the outset was not mere flippancy; in return for participation in the scheme, asking the builders to underwrite the properties, giving purchasers the opportunity to sell them back within a set period, subject to some charges, might reassure buyers and limit negative equity. The problem with this is that the companies’ balance sheets might not withstand the risks, and the replacement of one false market with another is not really a solution. The other alternative is to either place constraints on the house builders pricing models (with a focus on not allowing discounts and the payment of fees) or to tax their excessive profits. Using such taxes to create more social housing would be a step towards addressing the nub of the issue. Help to Buy has helped a lot of people to get onto the housing ladder, but most (according to the Resolution Foundation) have incomes in excess of £60,000. The danger is that the scheme has failed to help those who most needed it and provided a millstone for those that didn’t.