But it helped high-income people buy homes.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
The UK’s government’s flagship “Help to Buy” equity loan scheme, launched ostensibly to give cash-strapped first-time buyers a leg up onto the property ladder, has dished out billions of pounds of publicly subsidized loans to relatively well heeled homeowners who were perfectly capable of buying their first property without need for outside help, asserts a new report by the National Audit Office (NAO).
The report, which used figures supplied by the Ministry of Housing, Communities and Local Government, found that only 37% of the roughly 210,000 people who have so far benefited from Help to Buy would not have been able to afford a property without it. Since the scheme is not means tested, anyone can apply and qualify for the loans, including people earning more than £100,000 a year, who reportedly account for 4% of the total borrowers.
One particularly egregious example is Conservative MP Peter Boone who, in 2016, used the scheme to buy a new constituency home, purchasing the £175,000 home in his wife’s name, with a £35,000 equity loan from the government. The first five years of that loan are interest free — hence the term “equity loan” – after which borrowers are charged 1.75% interest on the outstanding amount.
It’s a pretty sweet deal for Mr Boone and his wife, but perhaps not so much for UK taxpayers. But according to the Department for Housing, Communities and Local Government, such abuses are an “acceptable consequence” of designing the scheme to be widely available.
Here’s how the scheme works: First-time property buyers get to put down a deposit of as little as 5% on a new-build home worth as much as £600,000 ($761,000) and receive an “equity loan” from the government. The size of the loan varies depending on where borrowers live. In London, where the price of property is an order of magnitude higher than in most other places, buyers can receive as much as 40% of the property price. Across the rest of the country the upper limit is 20%. The rest of the financing is covered by a traditional mortgage.
While Help to Buy may have had a limited effect in terms of making housing affordable for first time buyers who are genuinely priced out of the market, it has proven to be effective at sustaining the UK’s all-important housing bubble by jacking up the prices of new-build houses, resulting in even less affordable housing. Since Help to Buy was first launched in 2013, average UK house prices have increased by 35%, from £167,000 to £226,000, according to the Office for National Statistics.
Through the scheme, the government has so far issued around 211,000 loans worth £11.7 billion ($14.8 billion) to home buyers. According to the NAO, this has helped increase sales of new-build properties from 61,357 a year in 2013-14 to 104,245 a year in 2017-18. That, in turn, has helped fuel a spike in profits for the UK’s biggest home builders. The nine largest builders dished out £2.3 billion in dividends in their most recent financial year, 39 times greater than the £53 million they paid out in 2012, a year before the scheme was introduced.
The NAO estimates that over the last six years, about 40% of all new-build properties have been bought by buyers using the scheme. This has not only helped to line the pockets of large home builders and banks, it has also transformed the UK government into a major player in the UK housing market. And with that comes potential rewards as well as risks, the report says:
Given that the government has entered the equity loan market place, it has put reasonable arrangements in place to benefit from increasing property prices. However, this is dependent on the performance of the housing market and property values can go down as well as up. At points when the market turns down (whether over the near, medium or longer term), the taxpayer could lose out significantly, as the government’s investment in housing capital would reduce in value.
By 2023, when Help to Buy is scheduled to end, the net amount loaned by the government through the scheme is expected to hit a peak of around £25 billion in cash terms. The government believes it will be able to claw back its investment in Help to Buy by 2032, but a downturn in the property market could hit the value of its loan book. It also means that Help to Buy borrowers looking to sell their properties in the future may have to grapple with negative equity.
Gareth Davies, head of the NAO, warned that the biggest challenge the government faces will be to wean the property market and the home builders off the scheme with as little disruption as possible while still being able to meet its goal of 300,000 new homes being built by the mid-2020s. But many home builders are by now completely hooked on the public funds, with companies such as Persimmon depending on the scheme for around half of their sales. By Don Quijones.