How wrong was the government’s Help to Buy equity loan scheme? For its supporters, it has been an essential tool in getting young homebuyers up the ladder. But to his critics, and there are many, he has driven up house prices and boosted profits for the nation’s biggest homebuilders, while littering the country with unattractive, often poorly built new homes.
Now, nearly a year after the original crowdlending program was withdrawn and a year before the end of the latest version, it seems like an opportune time to revisit the bones of the policy, which some fear the market does not become dependent. .
Introduced in 2013, the crowdlending scheme – one of several government initiatives bearing the “Aide à l’achat” label – offered buyers a loan of 20% of the purchase price of a new home. It has regularly been accused of fueling house price inflation, most recently in a House of Lords report published in January. Some £29billion of taxpayers’ money will be spent on the scheme before it ends next year – the report says the money could be better spent building more homes instead of being immobilized in equity loans
In fact, the report’s underlying research only found that the shopping aid had an effect on prices in the outskirts of London, not across the country. This is not surprising given two considerations: First, homebuilders are price takers: the price at which they sell their homes is determined by the price of existing homes in the area. And second, the program originally corrected a market failure: it closed the affordability gap between buyers, the cost of new homes, and mortgage lenders who, since the financial crisis, had been reluctant to lend to higher loan-to-value ratios. more than 75% on new constructions. Rather than energizing the market, he simply put mortgages for new construction on a par with existing properties.
But in London, it’s a different story. Introduced in 2016, the specific London regime increased the equity loan to 40% of the value of the property. And prices soared: the average equity loan taken out in the capital rose from £69,000 in Q3 2015 to £152,000 in Q3 2016. the house was just inside London than outside – creating the geographical discrepancy noted in the research. As a result, the median property price paid under Buyer’s Aid in London fell from £323,000 in Q3 2015 to £447,000 in Q3 2016.
While it’s unclear whether the crowdlending program inflated prices nationwide, it certainly coincided with a return to higher price growth after the credit crunch. If anything can be said to have transformed the housing market in 2013, it was another homebuyer initiative, the Mortgage Guarantee Policy. This persuaded lenders to return to higher volume and riskier lending in the broader housing market, until its withdrawal in 2016. The crowdlending program simply allowed developers of new construction to s to press the broader recovery – and their piggy banks have benefited.
Since 2013, developers have managed to capture the bulk of rising house prices in their profits. At the time, for every new house built by the company, Persimmon, one of the UK’s largest builders, was spending £144,400 on land and construction costs and making a gross profit of £36,500, according to financial records. In 2019 the cost of land and building was unchanged but gross profit had almost doubled to £71,300.
Last year, the equity loan scheme was changed so that it only applied to first-time buyers and was subject to regional price caps. The latter has already led to significant changes in the type, price and location of home purchase assistance.
The caps are most restrictive in the Midlands and the North, where they are lower than the average purchase aid price recorded at the end of the old system. In the third quarter of 2021, the first quarter fully subject to the new rules, average prices were already falling sharply. In the northeast, the average fell 31%, double the drop in the southeast. These price declines reflect the fact that the mix of homes being sold is changing. In the first quarter of 2021, more than a third of the houses sold via the purchase aid were single-family homes, in the third quarter this percentage had fallen to just 14%.
The changes also appear to affect supply. Research by myself and some colleagues found that in the third quarter of 2021, the number of new homes built in areas where the ceiling was above the average price was 15% lower than the same quarter in 2019; in regions where the ceiling was lower, it fell by 46%.
But what will happen when the new regime ends next year? Our analysis comparing private new build completions and broader market transactions suggests that the majority of buyer aid properties have been built beyond what the market might otherwise have offered.
Real estate agency Savills estimates that the end of equity lending could lead to a shortfall of 17,000 new homes a year compared to recent levels. Even that figure may be too low as it relies on the expansion of the homebuilder deposit release program – an insurance-based replacement for private sector purchase assistance.
The future of purchase assistance could also be affected by the government’s upgrade program. Program spending is disproportionately concentrated in London and the South. The latest annual cost of equity loans – up to the third quarter of last year – was higher in London than the total spent in Yorkshire and the Humber since the scheme began. Rising house prices in the southeast – which require larger equity loans – mean the program has been most active in the most affordable areas. But these are not the areas most in need of leveling. The survival of the equity loan beyond its current end date next March will depend on the political priorities of the government.
As for the hundreds of thousands of buyers who have used shopping assistance, the situation is far from clear. Data from Homes England, which runs the scheme, shows a profit on equity loans that have been repaid. This suggests that the majority of those repaying have seen the value of their home increase. But that doesn’t take into account those who haven’t sold or can’t sell. The longer-term success or failure of equity lending cannot be determined in isolation. It will also depend on resolving the cladding crisis, the lease crisis and the building quality crisis, as the resale value of new construction – particularly apartments – looks uncertain following the pandemic and in the face of to the rising cost of living.
Neal Hudson is a housing market analyst and founder of consulting firm BuiltPlace
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