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What’s not to like about the Help to Buy equity loan scheme?

Help to Buy is a government initiative which applies to certain new homes up to £600,000 in value.

With a 5% deposit, home buyers can get a government loan of up to 20% of the purchase price – 40% in the case of buyers in the London area – borrowing the balance from a regular mortgage lender.

The loans are cost-free for the first 5 years and the government gains in the event of any increase in the property’s value in proportion to its loan.

On the face of it, Help to Buy is a great success. In London alone over 12,000 buyers have reportedly been helped to buy their own home.

It has been championed as a practical way for hard pressed first time buyers to push back against growing unaffordability and climb the property ladder.

The scheme was originally due to end in 2016 but was extended to 2021. In his recent budget Chancellor Hammond announced the launch of a new scheme to run for 2 years from March 2021.    

Developers of course love the scheme and it has undoubtedly maintained demand for their units and helped to sustain their healthy profits.

Buyers using the scheme to become homeowners are unlikely to say a word against it.   

Go online and there is no shortage of cheerleaders extolling the virtues of Help to Buy – including lenders, mortgage brokers, estate agents and property journalists. Yes, very much the usual suspects. 

The scheme does have an important part to play in converting hard-pressed tenants into home owners. 

However is the scheme all it is cracked up to be?. Far from being an apparently unqualified success, could it in fact be an expensive and dangerous timebomb?

It would be churlish to deny the real, practical achievements of Help to Buy.

Figures released by the Ministry of Housing, Communities and Local Government, covering the period from the start of the scheme in April 2013 to December 2017 showed that 158,883 properties were bought with the aid of Help to Buy, costing the tax payer £8.27 billion.

About 80% of purchases were made by first time buyers. The average price of a property purchased under the scheme was £247,230 with the average Help to Buy loan being £52,026.

However anecdotal evidence suggests that new build properties available through Help to Buy may be more costly than equivalent property not available through Help to Buy.

If that is so, Help to Buy purchasers are likely to be hit by bigger falls and greater losses when the next property crash inevitably arrives. It is not hard to imagine tens of thousands of buyers feeling that they have been misled or conned.

The obvious flaw with Help to Buy is that by applying to new homes with their chunky inbuilt developer’s profit, they are fuelling the purchase of the very properties which traditionally fall fastest and further when the housing market goes into reverse. 

Certainly Help to Buy has fuelled or propped up house sales. Over 158,000 buyers have bought with a Help to Buy loan since April 2013 and it is safe to conclude that the vast majority of them would not have been able to buy without assistance.

Buyers have certainly benefited – but perhaps the biggest gainers have been developers.

Generally they have enjoyed healthy profits since the start of the scheme and it is only recently that some of them have started to feel the chill winds of a flat-lining new homes sector (as evidenced by the profit warning issued by developer Crest Nicholson last month).

The biggest criticism is that Help to Buy has not sufficiently helped the “right sort of buyers” – the buyers least able to get on the housing ladder and for whom the scheme was presumably intended.

According to the government’s figures mentioned earlier, the average purchase price under the scheme is £247,230 with an average equity loan of £52,026.

As at August 2018 the average price of a UK house was £232,797 (Land Registry)

By way of illustration, a person buying an average priced property at £232,797 with a deposit of 5% (£11,639.85) and a 20% outside London loan (£46,559.40) would need a chunky mortgage of £174,597.75.

With the average salary being £27,200 (financial year ending 2017: Office for National Statistics) and lenders not usually lending more than 4 times salary, a buyer on an average salary with a 5% deposit is not going to get the size of mortgage they would need to buy.

In fact a person on £27,200 obtaining a mortgage of £108,800 (£27,200 x 4) is not going to afford anything much above £145,000 (even without taking purchase costs into account) if they are only entitled to a 20% equity loan and can manage only a 5% deposit.

Therefore an average earner cannot afford properties priced anywhere near the national average of £232,797 (August 2018).

Of course the position would be better if such a person can find a co-buyer to purchase with.

The scheme is clearly more accessible to higher earners – who are well placed to get on the housing ladder without the helping hand of Help to Buy.

By way of illustration, a buyer with a salary of £60,000 is able to borrow £240,000 without Help to Buy (four times salary). That is enough for them to buy a property in excess of the national average price of £232,797 (August 2018).

If they claim the 20% equity loan and put down a 5% deposit, they will be able to buy at £320,000 – making a larger capital gain on any house price growth. 

Higher earners, having potentially high levels of disposable income, are well placed to save for a deposit and critics argue that providing them with cheap loans of up to 40% of the purchase price is fundamentally misguided – simply enabling many of them to buy bigger houses with greater profit potential.

Only the richest buyers (and co-buyers earning above average earnings) are likely to be able to take advantage of the scheme in the most expensive parts of the country – where housing unaffordability is most severe – where there is a problem most in need of fixing.

There is a lot to be worried about Help to Buy.

As the scheme is now set to continue beyond 2021, it is going to cost yet more public money. If there is a crash in property prices the tax payer will take a massive hit

Ultimately the scheme is a device to buck the market and such attempts rarely end well.

Without Help to Buy (and other initiatives) propping up the market, arguably prices would have fallen – especially in London and the South East – and that would have improved affordability, enabling more buyers to climb the housing ladder unaided by the government and tax payers’ money.

The £8.27 billion spent on the scheme could have been leveraged by councils and housing associations to build tens of thousands of affordable homes at prices within reach of people of average and below average earnings.

Is it the role of government to subsidise homeowners to buy what is an asset, and one which historically doubles in value every 10 years?

The government seems to have recognised limitations of the scheme by introducing regional price caps in the scheme to begin in 2021; that should reduce buyers buying more expensive homes at the expense of the tax payer. However the other objections to the scheme will remain. 

When the final report as to the impact of Help to Buy is written, don’t be surprised to learn that its greatest achievement was to shift millions of pounds of tax payers money into the coffers of big developers and to hand out cheap loans to higher earners who really didn’t need them to get onto the housing ladder.   

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Dalton Barrett
Rebel Property Coach

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