20 May 2013

Hundreds of new homes from Help to Buy: at what cost?

The Fairclough’s new home looks like an ordinary home, the start of a new life for the couple from St Helens. The remarkable feature of the development has long since disappeared: it used to be the Knowsley Road, ground of the mighty.

But this property is in fact an experiment vital for the entire British economy, upon which George Osborne’s hopes for recovery rest. Mark and Lindsey’s pad is the second in Britain in an experiment in which you the taxpayer are invested for the next half decade.

The Chancellor’s Help to Buy scheme announced at the Budget has already started to help. There’s no getting away from the delight of the Faircloughs, only the second couple in Britain to complete through the scheme. “We’ve got our own home now and we’ve got big ideas,” said Mark. They got married last year, and now a home and a conservatory is plausible.

“Knowing what the mortgages are like now you need a 10 to 15 per cent deposit. We were renting as well as saving up for deposit: it was hard,” Lindsey told me.

Many couples like the Faircloughs have been hit by what the chancellor calls a failure in the mortgage market. Banks that made huge losses have been unwilling to lend to people with small deposits. Help to Buy gets round that by the government providing a loan to top up deposit which should increase housing market transactions from current low levels.

Housebuilders also build to order, they are delivered “just in time” to demand, rather than en masse. If more people move into new homes, construction – a weak part of the economy – will start growing again.

The CEO of Taylor Wimpey, Peter Redfearn told me definitely hundreds, maybe thousands of extra houses would be built because of the scheme, creating knock on growth. “It enables us to pick things up to build more homes on the sites weve already got open, and also gives us more confidence about investing in future sites and the infrastructure and land to grow the business,” he said. “We’re certainly talking hundreds… probably talking thousands – that’s creating more jobs, and more economic activity locally”.

The mechanics of the scheme are rather intriguing. Right now the treasury is paying between £20,000 and £120,000 in cash per home directly to housebuilders. It adds to the national debt for five years, but not the annual deficit, because the treasury takes a 20 per cent stake in the house. So it is borrowed money, but it doesn’t count as public sector borrowing instead a “financial transaction”. The banks fund 75 per cent, a less risky and therefore cheaper mortgage, and the buyer pays a 5 per cent deposit. It basically opens up affordable mortgages to buyers with small deposits.

Is there not a simpler solution to jump start the market? Why not let the market clear, and prices fall to reflect falling real incomes, weak economic growth? Indeed why doesn’t Taylor Wimpey just cut the prices of its homes?

“Life’s not that simple,” Redfearn tells me. He mentions the impact on local existing homes if new home prices were cut. “I don’t think it’s very desirable for people who have already bought from us, and people in the surrounding village. Everybody wants a certain stability in housing”.

Sir Mervyn King at the last inflation report press conference, expressed some concerns about Help to Buy. The bank’s financial policy committee will have the chance “to opine” over its impact on financial stability. He clearly thinks it must be temporary. These schemes have a habit of making themselves permanent.

A former Bank of England economist Danny Gabay, believes it risks a 30 per cent bump to house prices, and is “nuts” and “if we were asked to design a policy to weaken Britain’s long term growth prospects we could not have done much better than Help to Buy. The problem is too much debt, as the chancellor tells us. “It’s not public sector debt bad, private sector debt good,” he says.

Intriguingly the properties are often being marketed as if they have had a 20 percent price cut, even if the price booked does not. This illuminates a side effect of Help to Buy: who will buy a non-subsidised second-hand house in an area with help to buy new builds? And what will buyers do when the 5 year loan is due?

They either face an interest rate shock, a capital sum, or will have to sell the house, hoping that prices have increased more than 25 percent. The first 5 per cent loss will be borne by the buyer. Buyers we spoke to were clearly of the view that they would sort this out in 2018.

This scheme is about far more than housebuilders and individual homeowners. I understand that in conversations with the IMF, the Treasury have been keen to point out H2B and the Bank of England funding for lending scheme as examples of their willingness to stimulate the economy. Yes a stimulus using borrowed money that increases public and private levels of debt in order to boost the economy. Do not confuse this with a “Plan B”, which involves extra borrowing to boost the economy in order to borrow less later. The boost is hardwired until after the next election. Help to Sell, or Help to Buy an election are the more critical nicknames for the scheme.

Help to Buy is designed to create not just more room for the Faircloughs, but for the Chancellor too. It’s not without its controversy. More on the IMF verdict tomorrow.

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