Persimmon's Help to Buy gains raise eyebrows

The Help to Buy scheme was essentially designed to get banks to lend money against homes back in 2013. It means that they can grant 75 per cent loan-to-value (LTV) mortgages (55 per cent in London) instead of 95 per cent ones. In short, it gives them a lot of protection from losing money on loans if there is a big fall in house prices.

This has been manna from heaven for housebuilders. I can’t prove this, but this is what I think is going on: The fact that the mortgage lender is only on the hook for 75 per cent of the home’s value gives the seller of a new-build home some leeway on pricing above the prevailing second hand price as the lender is unlikely to value it down for mortgage purposes.

If the LTV was 95 per cent, then the risk of valuing down would be much greater and pricing power would be much diminished. Yet, this is what the buyers of Help to Buy properties are exposing themselves to as the next buyer of their home will not have a government-subsidised mortgage. If they are buying with a 95 per cent mortgage, there is a good chance that the mortgage provider could say that the selling price today is too high and the seller would have to cut their price in order to sell.

This doesn’t bother the housebuilder who has already pocketed the cash. During the past few years, the builders of Help to Buy properties have sold homes on land that was bought cheaply during the last downturn, the boost to their operating margins has been significant

Persimmon (PSN) has been one the biggest beneficiaries of Help to Buy, which accounted for 48.5 per cent (7,970) of the 16,449 homes it sold last year. Its profit margins (above) have doubled since the scheme was introduced in 2013 and are now a whopping 29.2 per cent (up from 26.9 per cent in 2017). Its return on capital employed (ROCE) is a very impressive 25.2 per cent.

Persimmon has never been as profitable. This is a good and a bad thing. At the moment, it’s good for shareholders as the surplus capital that has been built up is being paid out to them as a growing annual dividend. It’s bad because the political risk to Persimmon – and the industry as a whole – is increasing.

Recent press reports cited increasing concern about the build quality of some of Persimmon’s homes and speculated that it could lose its licence to sell under the Help to Buy scheme. Nothing has come of this yet, but the government will come under increasing pressure as to why it supports a company making over £1bn of profits and sky high profit margins, especially if its work is shoddy.

I make no secret of my view that I think Help to Buy is crony capitalism of the worst kind. I find it staggering that the current government can have a price cap on energy suppliers making wafer thin profit margins, yet subsidise building companies to make massive profits.

I think there is a danger that the scheme will end badly and that many first-time buyers will have taken on lots of debt to buy overpriced new-build properties.

There can be no doubt that Help to Buy has got shovels into the ground and has increased the supply of new houses. Many of these homes would have been built anyway but it has not solved the big problem that this country faces, in that the cost of housing is way too expensive – it has made it worse.

If you are a Persimmon shareholder you might not be bothered as long as the money keeps flowing in, but the risks that this gravy train will end – by 2023 officially – will change the economics of the business. At lower selling prices, builders will still make fat margins on new land purchases but their absolute level of profits will be a lot lower.

I think Persimmon shares are quite expensive trading on 2.6 times forecast net asset value (NAV). This implies that its high returns and levels of profits are sustainable. They might be for the next few years but history – and perhaps politics - suggests that assuming this might be less than prudent.

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