Help to Buy will have a sting in the tail in terms of cost and repayment - not to mention house price inflation - and could end badly
One of the basic lies of life is: “I’m from the government and I am here to help you”. And so it is with Help to Buy (H2B). Of course it has stimulated demand - and of the six companies which reported figures in Q3, the average rise in their order book was 37%. But, like many central initiatives, there is a sting in the tail in terms of cost and repayment – not to mention artificial house price inflation, which could end badly.
Launched in April in England (and from 30 September in Scotland), the first phase of H2B provides for the government to make interest free shared equity loans (for five years) for up to 20% of the purchase price - to all buyers of new homes with a minimum deposit of 5% (and a maximum purchase price of £600,000 in England and £400,000 in Scotland)
However, from the beginning of year six, interest will be payable by the purchaser at an annual gross rate of 1.75%, rising at RPI plus 1% per year thereafter.
The equity loan can be repaid at any time within 25 years or the term of the mortgage, or when you sell the home. But, the amount of the equity loan to be repaid will vary according to the value of your home: i.e. if the price goes up you pay more in pounds, while if it falls, the buyer’s deposit is at risk.
The second phase has been bought forward from January to this week (7 October) - and here the government will underwrite 15% of the value of a mortgage, allowing people to buy properties with a minimum 5% deposit - and this will apply to all home purchases (new and existing) in England of up to £600,000. But you still have to qualify for a mortgage and the person named in the mortgage must live in the house
At the time of writing, RBS and Lloyds had ‘signed up’ but had not yet decided how much their products will cost. Some commentators are talking about an 80% Loan to Value mortgage costing 4.5% to 5.0% fixed for two years.
It is just like pouring petrol on to already hot flames; and it cannot end nicely
But, according to Moneyfacts, today’s best 80% two year deal is at a fixed rate of just 2.39% - from West Bromwich Building Society. Yes, “the devil is in the detail”.
Fundamentally, too, H2B studiously ignores the real issue: supply.
As Mark Clare, CEO of Barratt, eloquently espoused last month: “[The] shortage of homes of every tenure cannot be fully resolved in the short-term.
“It is conservatively estimated that as a nation to satisfy demand from household formation we should build around 260,000 homes per annum but we are building around 135,000. The social and economic consequences of this housing shortage are considerable”.
Steve Morgan, chairman of Redrow, is even more forceful: “The system in practice remains a bureaucratic mess and is still failing to deliver implementable planning permissions at anything like the rate the country requires and the house building industry needs to expand.”
It is clear that the boost in demand that H2B may provide will do nothing to resolve these issues impacting on supply.
Meanwhile, the more mature reader will remember the double MIRAS (Mortgage Interest Relief at Source) debacle in 1988 when Nigel Lawson announced a temporary extension of the scheme. It meant that the two people in the same household could claim tax relief on mortgage interest. In turn, this caused folk to rush in to home purchase and artificially spiked prices; and anything artificial has a limited shelf life (just like H2B). No, it didn’t bring about the financial crisis that followed but it was certainly a contributory factor.
H2B is increasing demand for houses but supply is constrained by capacity and planning, which means prices will rise. It is just like pouring petrol on to already hot flames; and it cannot end nicely. Either, H2B will be scrapped with all the attendant problems that this will bring - or there will be another crash. Supply is the key.
Tony Williams is founder and chief executive of Building Value