The Good the Bad and the Ugly of Help to Buy

publication date: Jan 6, 2014
author/source: Kate Faulkner, Property Expert and Author of Which? Property Books

The Good the Bad and the Ugly of Help to Buy

2014 could end up with an extra 12% of sales thanks to Help to Buy. On the one hand, developers have, understandably welcomed the scheme with open arms, while on the other, economists and some MPs have fired warning shots of it causing a ‘housing bubble’. 

So what has Help to Buy actually done for the property market in 2013? Has it contributed to house prices increasing, and if so, is this actually a bad thing? 

Here’s my presentation on the impact of the scheme and a summary below:-

The Good News About the Scheme 
This really comes down to how you view the property market. If you view it that it contributes heavily to our economy, then the Help to Buy Scheme has been a phenomenal success. If you don’t like, want or think house prices should increase and you don’t think it has the capacity to impact on the economy, then you probably won’t like it! The reality is though, the scheme has turned the property market from a poor performing one into ideally the best market. 

Firstly, it has given a huge boost to developers. Economically, typically £1 spent on construction delivers £2.36 to the economy. So building 30% more new homes is good news all round. And we need jobs for young people. Mark Clare warned on the Housing Market 2014 report on Radio 5Live, the biggest challenge he had to face was training and recruiting skilled labour to deliver more properties in the future. So to me, economically, this has helped to get our developers back on their feet – good result I think! 

Secondly, Help to Buy has persuaded first time buyers back into the market. It has helped them look at new builds, when in the past, according to RIBA, 75% of people didn’t want to buy new build, so increasing their popularity through this scheme is a real plus. 

Thirdly, Help to Buy has boosted transactions for all buyers and sellers, not just those taking part in the Help to Buy Scheme. Imagine trying to sell your property for four or even five years with no success – and for no reason apart from a lack of demand. Several people near to me have been desperate to move and now can as the market has picked up and they can sell and move on with their lives. 

And on average, for every property bought, past research has suggested buyers spend on average £8,000 per property in the first few years. This is a huge boost potentially for DIY stores and our tradespeople, some of whom remain busy, but some have struggled to keep their businesses alive since the credit crunch hit. 

Finally, when people buy homes, they normally buy a new car and indeed in my experience go on holiday for a rest afterwards, so overall more people buying homes is great news for our economy and in particular helps drive jobs for our younger generation. Lets not forget getting hold of expert tradespeople is a tough job in the UK, and the more we can train, the better for all. 

The Bad
The two main difficulties with the scheme are they have done a great job to boost first time buyer activity, but not a great job at boosting supply. Really what we need, is for the scheme to either only run on new build properties so it drives supply, or make sure people participate who are trading up, so they release lower value stock onto the market. 
The lack of stock is, according to all the main property commentators such as the RICS, the biggest cause of property prices starting to rise in 2013. 

The second issue with the scheme is, is it really right for the government to fund purchases of properties up to £600,000? In my view it isn’t. This scheme doesn’t need to be more then £300,000. And this is backed by the average purchase price for Help to Buy being around £160,000. 

This is supported by recent reports that the biggest take up of the scheme according to the HCA has been in the Midlands, the South and the East of England – London has one of the LOWEST take ups of the Help to Buy scheme. This reality contradicts many of those who are saying it’s driving a ‘housing bubble’ as the only place we are really seeing an increase in prices of any significance, is London itself.  

To make this scheme available to more people – or help save government cash, the cap should be reduced. Wales caps new build support at properties worth £300,000 and Scotland £400,000, England should, in my view, follow suit. 

The Ugly, Will the New Equity Loan Scheme Actually Work? 
The big fear is that Help to Buy will drive a ‘bubble’. The rationale behind this, is the government are putting money in for only three years, once it’s gone therefore, it’s likely to reduce demand, so prices will drop. 

Now as someone with a degree in economics, I get the argument, but as someone that specialises in property and economics, this doesn’t work. These are not stocks and shares we are looking at! These are homes over people’s heads, people don’t ‘trade’ in and out of property. 

The reality is, prices are pretty low in comparison to what they were prior to the credit crunch (only London has really recovered). And the increases we are seeing are mostly London driven. Many areas are still 20% lower than they were. What we seem to be mistaking is house prices going up = a bubble. It doesn’t, house prices are STILL underperforming versus previous years, and are nowhere near the ‘bubble’ levels we saw from 2000. 

What the economists are missing is that 95% mortgages should be more freely available when the scheme stops in the first place. This is further proved by the fact that some lenders, such as the Yorkshire Building Society, are offering 95% mortgages without the help of the scheme at all, so the idea that demand will ‘drop off’ is really rubbish. All the government is doing is plugging a hole which currently exists and will disappear in the next few years – providing lenders get their balance sheets sorted. 

Finally, as Savills and many other forecasters rightly point out, it’s not the Help to Buy Scheme which will prevent demand in the future – it’s affordability. If wages don’t go up and house prices do, then property prices will go up for a short time, then fall back again. 

For more information about the impact of Help to Buy, read my presentation

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