Too Many Able Buyers Help Themselves To Help To Buy
Since the launch of the Help to Buy Equity Loan scheme in 2013, around 65,000 households or a third (31%) of people using the scheme could have purchased their home without using Help to Buy.
Whilst one of the main aims of the scheme was to stimulate a stalling property market in the aftermath of 2008’s financial crash. As a consequence there was no means testing, restriction or income cap on using the scheme. However, as the market has recovered, the scheme has been marketed as a way of helping those struggling to acquire property gain a foothold on the ladder.
As of December 2018, the Help to Buy Equity Loan Scheme has helped 211,000 households purchase their new-build property since it was launched in 2013; 81% of which were first-time buyers. By the time the scheme ends in March 2021, it is estimated that 352,000 properties would have been purchased using Government backed equity loans.
The scheme has been criticised slightly for helping the affluent buy expensive property as opposed to helping middle to lower income households gain a foothold on the property ladder.
The ‘Help to Buy: Equity Loan scheme – progress review’, completed by the National Audit Office (NAO), discovered that 10% of the households using the Equity Loan scheme had a combined household income of more than £80,000 with 4% of users earning more than £100,000.
That being said, 37% of Help to Buy users were adamant that without the scheme they would not have been able to afford their home. This means the Help to Buy Equity Loan Scheme has helped 78,000 households that may otherwise have struggled to purchase their own property.
Because users were able to utilise a mortgage and an equity loan, they were able to benefit from elevated levels of finance. The report claims that this has enabled four-fifths of the 211,000 users of a Help to Buy Equity Loan to purchase a property considerably sooner than they expected.
The elevated financial status of service users has also contributed to unexpected outcomes and benefits. Buyers outside of London typically borrowed around four and a half times their annual income when combined with the equity loan; outside of the loan, this number drops to three and a half times the annual income. This increased spending power has led developers building properties with more bedrooms, enabling buyers to move up the property ladder sooner than expected.
However, the NAO report warns that buyers looking to sell their property shortly after making the purchase run the risk of landing themselves in negative equity. The report claims that the new build premium, an inflated cost which reflects that the property is yet to be lived in, has returned to pre-financial crash levels of between 15% and 20%.
Currently, market indices suggest that the average property increase is around 1.4%. Some have speculated that these figures could rise to 8% by August. This means that anyone looking to sell their home within the first five years of buying it, could run the risk of selling it without enjoying the benefits of increasing the equity and in some cases could be forced to sell for less than their purchase price.
Despite the steady increase in property prices since 2013, the slowing market has already contributed to 5% of households, who purchased property in the first eleven months of the scheme, currently in arrears.
Whilst the report warns that some households are already struggling to make their repayments and some may struggle if property prices do not increase at a faster rate, developers have benefited greatly from the scheme.
In fact, there has been a 14.5% increase in new build property since the scheme launched in 2013. Additionally, between 36% and 48% of all new properties built by the big five developers were sold using the scheme. Over 50% of all Help to Buy purchases used a property built by five of the six largest developers.
Of the 2,000 developers signed up to the scheme, the majority are small to medium sized developers. Although this a fantastic for smaller construction companies, the report also found that many small to medium sized developers have struggled with the administration required to sell the properties with the scheme’s support.
The report concludes by stating that the government aim to wean the property market off the Help to Buy dependency. Between 2021 and 2023, when the scheme will finally end, the government will place a regional cap on the maximum price available to users. The scheme will only be offered to first-time buyers after 2021.
However, the new-build property market has grown accustomed to the scheme and both buyers and developers may struggle once governmental support is rescinded.
Paula Higgins, the Chief Executive of the HomeOwners Alliance, says:
“The Government’s Help to Buy scheme was launched after the financial crash to stimulate lenders to lend and encourage house builders to build. And while it has succeeded in helping a lot of people get on the property ladder who couldn’t have otherwise afforded it, the National Audit Office confirms it has also helped many people on the ladder that could have bought without the scheme.
“The HomeOwners Alliance Annual HomeOwners Survey published this month found that two thirds of UK adults and 64% of renters think that the Help to Buy equity loan scheme is a good idea in terms of helping first-time buyers get on the ladder as it addresses the major hurdle of saving a deposit.
“But one in six (17% of UK adults and 15% of renters) of our survey respondents think Help to Buy is a bad idea. The major criticisms are that the scheme inflates house prices and contributes to excessive house builder profits.
“When Help to Buy comes to an end more people will have to turn to The Bank of Mum and Dad – already the 12th biggest lender last year. Without the Bank of Mum and Dad more first time buyers will struggle even more to buy a home. Our 2019 Annual HomeOwners Survey, polled by YouGov, found more than three quarters (77%) of those renting homes in the UK would like to own their own home – that is 3.5 million aspiring to own. But 2 million (6 in 10) of them think they will never be able to. The majority of first time buyers quoted high property prices and struggling to save for a deposit as the biggest barriers.
“When Help to Buy ends in 2023, those without the Bank of Mum and Dad may turn to Shared Ownership as a means of taking their first step onto the housing ladder. But it’s a complicated scheme. Our survey found that less than half of UK adults (49%) and 46% of renters think Shared Ownership sounds like a good idea as an alternative to renting. A third (33% and 32% respectively) think it is a bad idea.”
How beneficial has the help-to-buy scheme been to the conveyancing sector? Will the end of the scheme lead to a reduction in construction output?
Read the full report here.