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.

Follow @faisalislam on Twitter.

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20 reader comments

  1. bmf says:

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

    So instead of making housing cheaper people will pay more forever. Only they won’t, because housing will crash. And interest rates will rise.

    UK is nuts. The populace have given up on social mobility and instead are all being sold the same houses at ever greater cost and think this makes them “richer”.

    I’m emigrating in 14 days. Thank goodness I won’t have to pay £400K for a shoe-box in the South East. Keep eating the young UK – it’s what you are good at.

  2. Susan Hughes says:

    Horrified when I watched your report. This silly couple splashed out on acwedding rather than saving forvtheir house, and are now planning to spend on ‘home improvements’ rather than saving to pay back the taxpayers’ loan. It made me want to cry, it’s like watching a slow motion train crash.

  3. Stuart says:

    As soon as this scheme ends, the government will have to introduce another similar one or house prices will immediately fall – probably by around the 20 per cent

  4. Michael Wilkinson says:

    Having a deposit is Zero proof of capability to repay a mortgage,Im amazed its even considered.ANYONE CAN RAISE A CAPITAL SUM,CREDIT CARD PARENTS, FRIENDS ,BANK LOAN.IT PROVES NOTHING !
    wHAT DOES PROVE SOMETHING IS A RECORD OF UNINTERRUPTED PAYMENT OF RENT.

    Sorry about the caps.
    What ministers actually think these schemes through.
    Oh yes,the people we voted in.
    Ah well we get what we deserve !
    .

  5. Philip says:

    We should be allowing house prices to fall and building lots more houses. There remain plenty of useable brownfield sites – and we should be stopping new housing being bought by the “buy to let” brigade on the back of tax concessions. the banks are right not to repeat the mistakes of the recent past when mortgage lending went bonkers. What the Government should be financing, if anything, is help for people who a decline in house prices leaves with unmanageable negative equity, so that they don’t lose their house…or get bridging to move into a cheaper one. The last thing we need is economic growth to be based on consumption basd on house price inflation and the City making vast profits from forms of gambling which don’t benefit the economy or the community one iota.

    1. Rachel Mawhood says:

      “We should be allowing house prices to fall” – but the MPs won’t allow that because it would mean that their property porfolios also reduced in value. The property porfolios that the taxpayer helped buy for them.

      Meanwhile, we keep printing money while everyone looks to everyone else to come up with a solution.

  6. QP says:

    “everyone wants a certain stability in housing”

    But only if it is stably high and not low!!!!!

  7. Guy says:

    Wow! This is what we need more of! Taxpayer subsidized sub-prime lending. What could possibly go wrong?

    Don’t make houses cheaper, just lend more money at the taxpayer’s risk, when the banks are too scared to do so.
    Get the burner back under the house price bubble.

    How much did Taylor Wimpey back-hand Osbourne for this policy?

    Mr Gaby has this right – this is nuts.

  8. Philip Edwards says:

    Faisal,

    Don’t you think it’s about time to expose the mortgage scam and “home ownership” con trick for what they are?

    Any building only costs so much to construct. After that it becomes merely a profits gouge for spivs. And the profits gouge can only exist if there is a permanent shortage of supply. Ipso facto, the existence of land banks financed by money banks……for later profits based on inflation and notional “value.” It’s an immoral circle that MUST keep turning or it will fail.

    It’s also a comical ripoff that will continue as long as people believe they “own” a house they actually rent from the mortgagor for most of their lives.

    It’s the spiv economy made manifest.

  9. Simon says:

    Another good piece Faisal. I cannot believe the lack of outrage over these house price boosting schemes. They are indefensible, no one with a brain believes they ‘help first time buyers’, they’ll make it worse for everyone who doesn’t qualify.

    I’ve been saving for 15 years so will not qualify, so I will face unfair competition. The irony is I’m still worse off now with more than 20% deposit than I was with no savings 15 years ago thanks to crackpot schemes like this and reckless monetary policy.

    This government even has the benefit of hindsight from the recent house price and debt driven financial crisis, so it beggars belief they think people are daft enough to swallow more of the same. We deserve a big credit downgrade on the back of these schemes alone because they show total lack of economic competence.

  10. StuartM says:

    So now that the banks are lending more responsibly (as common sense dictates and the government told them to), thereby avoiding another sub-prime crisis and further bailouts, etc., so the government have taken over to create massive house price inflation, and carry out the irresponsible high LTV loans that they told the banks not to because of the risks. And the government are using tax payers money t do this and doing it interest free.

    Does our government learn nothing from recent mistakes ?

    They need to build more houses (and that is NOT a Planning issue). e.g. build 300000 houses on those plots that already have planning permission so there is enough housing, and house prices will gradually reduce as availability becomes easier.

  11. David says:

    Since when did saving for a deposit become an issue ,isnt that the way people brought houses untill the madness of 100% mortgages !!

    There is no issue with mortgages the problem is people don’t earn enough to save when houses are so badly overpriced.

    Am I the only one who see’s a flaw in the actual loan ? It seems you only have to pay it back when you sell the house.What if the house is never sold does the loan just sit there gaining interest forever never being paid back ?So in reality surely this loan is actually a subsidy and is an acknowledgement that houses are too expensive.

    The sad truth is no political party is going to let house prices fall as it’s a vote loser meanwhile people are being tempted to take on loans they can’t afford especially on poorly sized new build properties

    1. StuartM says:

      Or that “saving” is just daft given that every £1 you save today is worth less tomorrow (even after interest). Save and you money loses value so the government is discouraging saving through maintaining high inflation and low interest rates. Again, if we are going to use this supposedly fantastic capitalist system we should be letting the market set the rates they can take – not be talking about how great capitalism is and then doctoring critical things. I personally think we are no longer operating under a capitalist system but rather a system based on greed. But either way, if the government wants a capitalist system then it should not be biasing things like guaranteed home loans from government at 0% interest, not holding low interest rates through MPC/BoE and things like Funding for Lending, not allowing inflation to stay so high (e.g. through things like poor exchange rates and QE).

  12. Muggwhump says:

    In many respects help-to-buy was the last budget, so large is its scale and so distorting its effect on house prices and the housing market.

    You have to ask what is this scheme designed to do? What is it preventing?

    Well if it was withdrawn we’d go back to 20% plus deposits straight away and in the end house prices would have had to fall.
    House builders were getting desperate, if help-to-buy hadn’t come along they’d have had to drop their prices to get sales going.

    It also bails out the banks that otherwise would be left with a £300billion hole to fill.

    So we see who it is really designed to help. But that help comes at the price of all those who can’t – and never will – afford to live anywhere in this property bubble economy yet who stand behind the guarantees none the less.
    Nothing for them except the bed-sit, converted shipping container or the shed-bed.

  13. Fozziebear says:

    Ever since houses became ‘investments’ instead of ‘homes’ we were in trouble. I am so angry at this situation, and even angrier that it is easier for a landlord to get a BTL mortgage than a person to get a mortgage to buy a home.
    Private rents are rising year on year with no control, yet interest rates are ‘controlled’ to keep people who borrowed too much in the bubble, quids in with lower mortgage payments. A nice rise in interest rates will sort this mess out. It will be a shame some people will lose houses but if we stop BTL snapping them up, the houses will still be there to buy, only cheaper.
    I feel better now.
    (former mortgage holder now private tenant)

  14. Property Spotter says:

    Help to buy could turn out to be the last chance for the smart money to get out before we have a real correction in prices.

    Landlords are already selling up, some clearly not by choice – http://propertyspotter.blogspot.com/2013/05/btl-portfolio-closing-down-everything.html

  15. Jim89 says:

    I come from a normal, working class background. First member of my family to go to uni etc etc landed a graduate job out of uni with a ‘well known accountancy firm’ in London on above average wage. However not being a Londoner and not having wealthy parents I found my generous wages going straight to a landlord and lining their buy to let pockets with no hope of owning in the next decade. Result is I quit my job and have accepted a lower wage job so I can live at home and save money in order to be able to (hopefully) afford to buy one day. You may say this is supply and demand at work but result is lost income tax take for the treasury and I,think more importantly a real constraint on social,mobility as people from modest backgrounds can only work near to their parents home rather than moving to many of the prestigious London centric industries. Would really like to see you do a piece of this Faisal as it runs counter to helping the strivers that GO and DC talk about. Incidentally I think H2B is lunacy and will wait for the crash before buying – that’s if politicians, central bankers et al allow the correction needed to allow wages to align to asset prices.

  16. michael blowers says:

    It always amazes me how when these kind of reports come out how many people comment that the most healthy thing is for a market correction, or prices to fall. If only the commentators were running the show. Alas, that is not the case and vested interests are nested too close to the benefits of high property prices, and every policy of geared to maintaining this.

    This is a market seriously out of kilter with reality. The average person can’t afford the average house. Its a depressing picture not likely to change any time soon.

  17. nephets says:

    For that its worth.

    I find it interesting that this country needs growth.
    Growth requires increased productivity and innovation.
    Increased productivity dictates that you get more of something for less cost.
    Yet the UK housing system continually provided less for more !
    Why does the government (which needs growth)
    continue to provide vast sums of money to subsidise a vastly ineffective industry ?

    I fear the housing system is simply a cartel and like all cartels, it needs to be broken up
    to allow innovation and real competition to be introduced.

    Hopefully this would go some way to improving things for the future.

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