Help (for whom?) to buy (what?)

I know I said I wouldn’t go on a rant about help to buy, but all the music out of Conservative Party conference is pointing at pouring more money (£10 billion, but we’ll get into that below) into the scheme will be a centrepiece pledge.

Put simply, help to buy isn’t a terrible scheme, but it only helps a small number of people, who are able to save and could probably buy a property either immediately or after a period of further saving and does very little to add to the solve the need for truly affordable homes to buy or rent.

If it was one of a number of housing creation policies the government were progressing then I think we could live with it, but it’s not and trying to make it (again) the centrepiece of government housing policy is very worrying.

But first of all, let’s quickly run through what help to buy is. Originally, help to buy had two main components, a loan from the government of up to 20% of the value of the property and a guarantee that the government would underwrite part of the mortgage in the case of default. The government has got rid of the underwriting part and set up a help to buy ISA, where they will add 25% to your savings until you have saved £12,000 and they have put in an extra £3,000.

The loan means that those people who can gather a 5% deposit (so £10,000 for a £200,000 house) would be able to take a 75% mortgage on a newbuild home, with the government loan covering up the remaining 20%. This is interest free for 5 years, at which point a supposedly low rate of interest would be applied. As it happens, we have had years of low interest rates, but even now, the rate isn’t exorbitant.

Let’s take a couple of who scrimped and saved and got £10k in savings. Under a regular mortgage and using a 10% deposit scheme they could have purchased a house for £100k, and paid a commercial rate of interest whilst paying off the £90k. Under the help to buy they can turn their £10k savings into a £200k house, have a commercial loan of £150k and owe the government £40k. They get a nicer house, almost certainly in a nicer area and they get it quicker than if they had to save twice the amount. They’ll have to pay more for longer, but they are probably happy to take that- assuming they can keep up repayments. The house grows in value more or less in line with the market, which we are led to believe will keep on growing above inflation forever.

Indeed, the government’s own analysis shows 61% of people bought a bigger property and 60% of people bought in a better area than they would have done without the support. 61% said that the scheme helped them buy a property more quickly than they would have been able to do otherwise.

There is a but, however. Those in smaller homes and flats (ie. those on the lowest incomes) now feel trapped as they are unable to move to the next step of the ladder as they won’t have the support again. Their income and savings were enough to buy a home with government support, but not to allow them to fully access the housing ladder with all of its implied (and unearned) riches.

What does it mean to the government? Well, in this example they have passed £40k to the housebuilders, who will no doubt be happy. It seems incredibly likely that the new homeowners will pay the government back, so the money the government has invested will be returned and can either be recycled into the scheme or used for something else. So when you hear about the government “spending” money (in this case £10 billion) on help to buy loans, what it really means is investing money where it knows it isn’t getting the best rates of return.

And what does this mean for the housebuilding sector? Newbuild homes can be built with some degree of certainty that some people will be able to afford them. Housebuilders can look forward to higher prices than might otherwise have been the case, helping their profit levels and making sure they can please their shareholders or owners. They might build more homes, but they will be careful to only do so at a rate that allows them to maximise their profits.

Lenders see higher returns because more and bigger mortgages are being taken out. They’re happy.

As for existing homeowners, property prices can keep on going up and up as there isn’t a pressure to reduce prices from people unable to afford new homes.

Finally, what does it mean for people who can’t scrape together a mortgage, particularly as prices increase? It means nothing to them, it doesn’t help them one jot. The government are also looking at extra support for private rented tenants, but this looks to be effectively ensuring they have basic rights and perhaps doubling the usual length of an assured shorthold to 12 months. The social housing green paper will come out at some point, perhaps, and at that point we’ll get to see what government wants to do for social housing tenants and those who can only truly afford social rents.

Similar to the loans, the guarantee scheme meant that lenders could provide mortgages with confidence that they would get some of their money back. The government wasn’t giving lenders money, simply underwriting the scheme (up to £600,000 which, round here, would buy you something like this) and the more creditworthy you could show you were meant you could borrow more.

The help to buy ISA gives money to those who can save money. So, to be blunt, it’s nice free money for people who can save money.

Which leads me back to the point: whom is this policy -this flagship policy- for? It’s for people who need a nudge to get over the line, or who need a hand to buy now rather than in a few years time. It doesn’t disrupt the housebuilding market or the demands from existing homeowners that their house price grows in relative value over time.

In essence, it makes buying a first home conditional on government support for middle income households. It takes the market as it is, makes it slightly worse and then offers a solution for the lucky few.

Much like my comments on the proposed changes to assessed need, it means housebuilders are still in the driving seat when it comes to housing supply. They control it, they will (understandably!) use it to their advantage in order to maximise their profits.

The government needs to recognise that it is in a position of power when it comes to the regulation and control of markets. It is an actor, where choosing not to act is still an action.

It is no good trying to tinker around the edges with failing markets, hoping to add to the apples on the applecart without upsetting it. Any solution to the housing crisis will, by definition, be disruptive. Not only to local communities (who may not wish to see housebuilding on a scale that is required) and existing homeowners (who may see a slowing of the housing bubble) but also to the housebuilders themselves, who have had a position of power in the market for too long.

It will take will and judgement to see that through.

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