Speculation is growing that changes will be made to the Help-to-Buy scheme in the Autumn Budget, giving rise to questions on the effect this could have on new buyers and the housebuilders themselves.
The help-to-buy (HTB) scheme was introduced to help first-time buyers onto the first rung of the housing ladder – although you don’t actually need to be a first-time buyer. The reasoning behind the idea was that 95 per cent mortgages were hard to secure in the wake of the financial crash. However, this is no longer the case, although mortgages become more expensive as the loan-to-value ratio increases. But there is one big advantage in the scheme in that 20 per cent of the purchase price attracts no interest for the first five years and only has to be paid back after 25 years or when the house is sold.
Use of the facility has grown from a trickle to a torrent, with around 170,000 buyers taking advantage of the scheme since it was introduced in April 2013. Most of these – around 81 per cent – were first-time buyers, with equity loans racking up to nearly £9bn. As the scheme is confined to new-build purchases, housebuilders have seen a growing number of purchases being made using HTB loans.
This is an area of considerable controversy, including claims that the loans have effective subsidised dividends paid to shareholders, and that house prices have been inflated by the increase in demand. Recent controversy over some executive pay schemes certainly hasn’t helped to lend support for the continuation of the current scheme beyond its current 2021 expiry. However, evidence suggests that it has not added to house price inflation because apart from the inevitable new-build premium, prices have tended to follow the changes in the existing housing market. The idea that the scheme has helped to line the pockets of company directors is hard to prove because, by and large, bonus schemes rely on certain financial hurdles that must be achieved. And at the end of the day, it is shareholders who approve these schemes.
More to the point is what happens if the scheme were ended? The only real casualty would be the buyers looking to buy a home. The big unknown is how much effect this would have on the number of people looking to buy a home. For the housebuilders themselves, the effects would vary considerably. Persimmon (PSN), for example, sold 16,043 homes in 2017 of which nearly half were bought using HTB. By contrast, for east London-focused Telford Homes (TEF), the scheme doesn’t come into play, partly because of its increased focus on build to rent, but also because HTB houses cannot be sub-let and also because there is a six-month take-up limit, which means that buying off-plan and waiting a year to take possession is not an option using HTB.
However, it seems likely that the housebuilders would be uniformly tarred with the same brush should HTB be scrapped altogether. In fact, it’s hard to see who would be pleased by such a move other than the critics of the scheme who have nothing to gain from its abolition. And from a political point of view, it would be a deeply unpopular move that would do nothing to improve the government’s stance on helping first-time buyers. In cases like this, the doom scenario is usually peddled out when in all likelihood no major changes will come about.
Whatever the outcome, housebuilders will remain profitable, albeit less so. There are headwinds that will serve to trim profits, not least the fact that new buyer enquiries have started to contract. The builders can always counter this by building fewer houses, but a fall in demand could leave housebuilders struggling to sell with homes already in the pipeline. But we have to remember that sentiment is the key factor here. If enough potential buyers are brainwashed by the daily prophets of doom surrounding Brexit, and the idea that interest rates are about to rise significantly, then demand will fall off. More concrete factors could support the idea of lower activity, not least the fact that loan-to-value ratios remain stubbornly high as growth in average earnings remains benign. However, LTV ratios could start to become more attractive because house price inflation continues to contract, and consumer price inflation is just about lagging wage growth. There is a long way to go yet, with annual house price inflation down from 4.4 per cent in the year to July 2017 but still recording a 3.3 per cent gain. This is a generalisation, however, and doesn’t take into account regional variations. House price inflation in Scotland is still galloping along at around 5 per cent, while prices in London are 0.7 per cent down year on year.
How the scheme works
The scheme only works with newly built homes. The buyer has to find 5 per cent of the asking price and secure a 75 per cent mortgage. The remaining 20 per cent is provided by the government, and for the first five years attracts no interest payments. The maximum amount you can borrow from the government is £120,000 outside London and £240,000 (40 per cent of the asking price) inside London. After five years, you will be required to pay an interest fee of 1.75 per cent on the amount you borrowed from the government, rising each year after that by the amount of inflation measured by the RPI plus 1 per cent. The loan is repayable after 25 years or on sale of the property. In the latter case, you will have to pay back 20 per cent of the sale price if it is higher than the original purchase price. If the value of the property falls below the original purchase price, you only have to repay 20 per cent of the market value.
