A constant theme and indeed thread of the credit crunch era has been housing markets and more specifically the behaviour of house prices. The latter are treated by the establishment along the lines of “the spice must flow” of the novel Dune. They do not always put it like this as we peruse the Bank (of England) Underground blog. This is how it reviews the 4% cut in UK Bank Rate between October 2008 and March 2009.
Those holding large debt contracts with repayments closely linked to policy rates immediately received substantial boosts to their disposable income.
What they omit are two other factors. One is that savers who had savings linked to policy rates will have seen their income cut. Those who have been with me on the full journey will recall Bank of England Deputy Governor Charlie Bean saying that savers should in effect suck it up as it would be temporary. Of course it has been anything but. The other is that this was the first move to support house prices and let me throw in the early phases of UK bond buying or QE which was to reinforce this.
However this did not do the trick so what is a policymaker to do? It took a little time to sink in but the Bank of England came sprinting out of the traps in the summer of 2012 with its Funding for Lending Scheme. This reduced mortgage rates pretty quickly by around 1% and according to the Bank of England the effect built up to a maximum of 2%. You may not be surprised to learn that after a 6 month response time lag UK house prices began to turn as monthly net mortgage lending became less negative and then positive.
Help To Buy
The UK government had a slower reaction function as it was not until April 2013 that Homes England started this.
Through the scheme, home buyers receive an equity loan of up to 20% (40% in London since February 2016) of the market value of an eligible new-build property, interest free for five years.
In terms of scale there is this.
The Department expects the scheme to support around
352,000 property purchases by March 2021, via loans totalling around £22 billion in cash terms.
National Audit Office
This has looked into Help To Buy and it has not held back. Let us start with what it did.
The Department’s independent evaluations of the Help to Buy: Equity Loan scheme show it has increased home ownership and housing supply.
Okay although it does make you think when you note that around 60% of recipients did not need it.
37% of buyers stated that they could not have bought without the support of the scheme. We estimate this to be around 78,000 additional sales of new-build properties
since the scheme started.
So was it to buy a home or the home you would like? But it did boost sales of new houses and thereby supply of them.
This did lead to a problem we have looked at on various occassions.
Five of the six developers in England that build most properties account for over half of all loans through the scheme. They sell a greater proportion of properties with the support of the scheme than other developers.
Between 36% and 48% of properties sold by these five were sold with the support of the scheme in 2018. The profits of all five developers have increased since the start of
the scheme.
That last sentence does some heavy-lifting does it not? The NAO shuffles uneasily away from being more specific so let me help out a bit from my article on the 22nd of October last year.
The boss of house building firm Persimmon has walked off in the middle of a BBC interview after being asked about his £75m bonus.
“I’d rather not talk about that,” Jeff Fairburn said, when asked if he had regrets about last year’s payout.
The £75m, which was reduced from £100m after a public outcry, is believed to be the largest by a listed UK firm.
I guess most people in the shoes of Mr. Fairburn would have been uncomfortable with the questions posed. This is because as I noted back then there are large arrows pointing at the cause.
We have looked before at how it helped them to make high profits on the sale of each house and it also boosted volumes in a double whammy effect. So it turned into help for housebuilders profits and bonuses.
So what on its own was welcome which was the rise in housing supply boosted a small number of builders or an oligopoly. How would economic theory expect an oligopoly to respond? By making excess profits, so for once economics 101 has worked which we fo not see that often. What it did not expect was the way in the modern era that this would feed into managerial and executive bonuses. In economic theory the excess profits go to shareholders and whilst as you can see below it did these days we see a fair bit siphoned off by the managerial class.
In particular we find ourselves looking at a bonus scheme set at £4 compared to a payout based on one of £24 in case you wonder how we got to such an eye watering amount.
If we look at the long-term chart for some perspective we see that there was a previous peak of around £13 in 2006 when the pre credit crunch housing boom was pumping it up. Whereas this time around it peaked over £27.
Taxpayer Risk
This was something shuffled down the list. After all what can go wrong investing in UK property? That was the impression given which of course ignores the early 1990s. But the UK taxpayer was taking on an equity risk and getting the grand sum of 0% per annum in return.
Factoring in the estimated rate of redemptions, the net amount loaned is forecast to peak at around £25 billion in 2023 in cash terms.
As to the cost of this that has varied a fair bit but back when the scheme started we were paying around 1% per annum more on the ten-year Gilt than the present 0.83%. So there has been a running cost of providing the money. Also there is this.
The Department expects to recover its investment in the medium term and make a positive return overall, although it recognises the investment is exposed to significant market risk.
Indeed the choice of 2048 seems to be an example of kicking something into the long grass.
Homes England expects total redemptions to equal the amount loaned by 2031-32, and to have made a positive
return on investment by the time all loans are repaid by 2048.
So it is punting the housing market. What could possibly go wrong?
Recent housing market data indicate that house
price growth is slowing down, and that there has been a recent fall in prices in some regions, notably London.
Comment
The NAO has covered many of the issues here but there is another one that it skirts. Let me illustrate by giving you the official number for the average house price when Help To Buy began in April 2013 which was £170.335, and the one this March which was £226,798. So quite a rise which has not been driven by real wages as they have ebbed and flowed. So the irony of the Help To Buy era is that it has seen house prices become even more unaffordable meaning that it was this version of Help.
Help me if you can, I’m feeling down
And I do appreciate you being round
Help me get my feet back on the ground
Won’t you please, please help me ( The Beatles )
It was not the only driver of the rise because as I pointed out earlier the Bank of England opened the credit taps with the Funding for Lending Scheme cutting mortgage rates. The combination of what was called “credit easing” by the then Chancellor George Osborne ended the couple of years of house price stagnation and replaced it with over 5 years of rises. Or even more “Help” is now required at the higher prices.
Of course it benefited existing homeowners who got higher values for their homes but at the expense of future buyers. Also the credit crunch era began with proclamations that we will not allow high loan to property value ratios which then became it is okay for the taxpayer to take the risk. That risk also helps “The Precious” which gets some protection in any downturn from the UK taxpayer.
If a home is repossessed, the mortgage lender gets their money back first because they are the first charge on the property; the equity loan is the second charge.
Me on The Investing Channel