Will Help to Buy make your dreams of home ownership a reality?

house

The Conservative’s Help to Buy scheme was their flagship policy for addressing rapidly rising prices caused by the acute housing bubble in the UK. Since it’s implementation in 2015, the government reported in 2017 that more than 100,000 homes across England had been bought under the scheme, with as much as 81% of this figure accounting for purchases by first-time buyers. To many young people, a Help to Buy ISA offers a seemingly lucrative long-term investment given low interest rates on savings accounts and the poor prospects for getting onto the housing ladder for most under-30s.

Under Help to Buy the government offers a number of options, including shared ownership, equity loans and the popular ISA, which improve the affordability of purchasing a home via government loans and savings bonuses. With many of these offering to simultaneously cut the cost of buying, reduce the size of deposits and provide interest free loans, it is not hard to see the appeal. The equity loan enables first-time buyers to borrow as much as 20% off the value of a new build with only 5% cash deposit and a five-year interest-free loan – only increasing to 1.75% per annum thereafter. For a cash-strapped young professional these loans could make the difference between being able to afford to buy or not, with loans theoretically as large as £570,000 on offer.

That being said, the scheme is not without its critics. Data compiled by reallymoving.com showed that the average price paid by first-time buyers using the ISA was £278,000 over the past year, compared with £257,000 for those who did not. Given that the ISA limits users to the purchase of new builds, which carry a 16% premium their older counterparts, it appears prudent to be sceptical about the magnitude of the saving made under the scheme – if indeed a saving is made at all.

The Telegraph has criticised the scheme on the basis of the demographic that it is servicing.  Strict caps exist on the income multiples underpinning loan values (in other words how much you can borrow relative to your annual earnings), meaning that it is the affluent who are benefiting from this scheme. This is corroborated by data, which suggests that the average recipient of a Help to Buy has a wage in excess of £40,000, well above the national average. Thus, whilst in 2013 the government may have heralded Help to Buy as ‘the biggest government intervention in the housing market since the Right to Buy scheme’, in a blatant attempt to draw parallels between the scheme and Thatcher’s iconic housing policy, the result may not have been as triumphant as George Osborne had hoped.

This does not appear to be the view of his successor, Mr Hammond, however, who announced last month in his budget speech a new Help to Buy equity loan scheme for first-time buyers to be launched in April of next year. This is to replace the existing scheme, which was set to end in March. The new scheme will also feature regional price caps in order to limit the negative inflationary effects of the policy on the housing price market. The caps, which will be at 1.5 times the current forecast average for first-time buyer prices in each region, are aimed at addressing the unaffordability of house prices that has arisen from the asset price bubble in the UK. What they do not do, however, is acknowledge the causal role that the policy itself has played in precipitating this. The government’s decision to extend Help to Buy necessitates a discussion beyond merely the limitations of the scheme itself, to consideration of whether the policy disguises the long-term structural issues underlying the market.

Chris Giles, Economics Editor for the Financial Times, acknowledges the role that Help to Buy played as a ‘demand subsidy for those selling houses’ but argues that the government should be ‘fully aware that house building took off after Help to Buy and the cost of this subsidy does not appear to be worth it’. Mr Giles acknowledges how the scheme is merely a short-term fix, and one with potentially damaging inflationary consequences. Politically, it is not hard to see the appeal of the scheme, but the prioritisation of short-term gains over the long-term interests of the economy means that everyone is likely to be worse off eventually. The IMF estimated the houses in the UK are on average overvalued by 12 percent, leading Societe General’s global strategist Albert Edward to claim that there was now a ‘bubble on top of the previous bubble’ in the UK housing market. With the risk posed by Brexit uncertainty and stagnating investment it seems unwise to be fueling activity in the housing market with a short-term fix: if the government is serious about helping people onto the housing ladder they should be addressing the shortage in supply with policies to encourage long-run expansion.

That is not to say that the autumn budget was without any positive changes to housing policy. Extra funding was announced for the Housing Infrastructure Fund of the magnitude of £500m, which will help local councils who are looking to build homes. Mr Hammond hopes that this will build 650,000 more homes, with a further 13,000 to come from the nine housing associations that the government has partnered with. An extension to the stamp duty exemptions, previously available for first-time buyers of properties worth up to £300,000, will also be available for all shared home ownership on properties valued as much as £500,000. That being said, the risk posed by an inflated housing market is still very much real, with G15 estimates suggesting that approximately £42bn would be needed over the next decade in order for the government to meet its targets in relation to housing. This represents a huge further spending commitment from the current allocation of £9bn over the five years to 2021. So, whilst Help to Buy may appear to be honouring the Conservative’s pledge to solve Britain’s housing crisis, it only scratches the surface of what needs to be done to achieve this.

To many, in a time of economic doom and gloom, the poor state of UK housing is merely one more unsurprising blow to the state of the British economy. To students and recent graduates, however, fears about the cost of living and the viability of home ownership are likely to feature heavily alongside the burden of student debt in their financial concerns. The government might try and sell the Help to Buy scheme as the pinnacle of housing policy since Thatcher’s Right to Buy, but under closer inspection it appears to fall short of addressing the structural issues underpinning a critically overvalued market facing acute economic uncertainty. I, for one, am not convinced.