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Unwrapping Help To Buy

5th March 2019

I read a thought-provoking article regarding affordable housing, and the government’s attempt to tackle this very important issue.  It dug quite deeply into the Help To Buy Scheme, which is due to come to an end in 2023.  The scheme, since its inception, has ‘helped’ 200,000 new buyers come on to the housing ladder.  81% of these are first time buyers.

The scheme is funded by the taxpayer who has contributed £10Bn into the scheme.  It allows the newbie buyer to borrow up to 40% of their deposit from the government to purchase a property for up to £600K within London.  The loan is tax free for five years, and then attracts a nominal rate of interest thereafter.

Sounds good on the surface.  However, when you look deeper into the details, the picture is not as rosy as it may first seem.  Often what’s cited to confirm the success of a scheme is the number of people it’s been used by.  According to this way of measuring it seems to be a success.

But a deeper analysis reveals some holes.

Firstly, the loan is not actually a loan, it’s an equity share in the property.  If you borrow £150K for a £400K property, and the property is then sold on for £600K, you will be paying back £225K; which reflects the 50% uplift in price.

The properties which this scheme can be used for are all exclusively new builds.  I have met developers who have designed mostly office conversions with this type of buyer in mind.  This is being done with absolute confidence that the scheme will be sold out, purely as there are buyers looking for a home. Buying is not done speculatively, but as a need for shelter.

Consequently, these properties attract a premium, typically about 16%.  Therefore, from day one you’re buying a property which is in negative equity.  Furthermore, these properties are designed with high ground rents.  This is typically not focused upon by the buyer.  For the developer this gives them an additional investment to then sell on, often to a collector of freeholds or a pension fund.

The above points show up on the bottom line of developers’ profit margins.  Persimmon is a developer whose profit margin is over 30%, and profits are £1Bn.  Guess what their business model is?  Over half their sales are Help To Buy.

Rising housing prices and affordability are very serious issues.  Currently, the average house price in London in comparison to wages is 14 times.  In Kensington this number rises to over 30 times.  A mortgage lender will lend up to 5 times one’s salary.  This means most of London has now become unaffordable to the average person.

Has the Help To Buy scheme actually helped first time buyers and those willing to upgrade?  Given the above, it seems debatable.  The numbers are self-evident.  It seems the immediate benefit is to the house builders, who were astute enough to latch onto this scheme.  The tax payer will be covering any losses resulting from any forced sales and negative equity.

So, is there a solution to this problem?  Should it be a government led one or will it come from the private sector?  A government solution often displaces wealth, with Help To Buy it has from the first time buyer to the developer; with the tax payer insulating all the risk involved in the process.  A private scheme would remove the tax payer bandage and perhaps offer a more balanced solution.

We will be going into this further in coming articles.

Suresh Vagjiani

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