It goes against nature… and the Bank of England
Help to Buy is a government scheme which lends homebuyers money for a deposit. It means those wanting to buy property only have to come up with 5% of the property’s value as a deposit but doesn’t put additional risk on the mortgage company, as the loan comes directly from the government.
The scheme has already supported £5.9bn worth of mortgages – it’s actually likely to be a lot more now as the most recent figures go up to December 2014. But that’s nothing, the scheme plans to support up to £130bn of high loan-to-value (LTV) mortgages, lending out £12bn in total.
With house prices rising as rapidly as they have been, some kind of intervention in the market is absolutely necessary. First-time buyers have had a difficult time saving to get anywhere near a deposit – so for the more than 40,000 people it has assisted, Help to Buy has been a lifeline.
But for the majority of people who don’t fit into this category, it’s been a menace.
What’s wrong with Help to Buy? We look at the evidence:
1. It drives up property prices pushing potential first-time buyers further away
When the scheme began to grow, it started pushing up property prices, and it likely still is. The cost of homes bought by first-time buyers rose by 18% between March 2013 and September 2014, according to the Office for National Statistics.
Meanwhile, this figure was only 14% for home-mover properties.
What this means is the cost of a 5% deposit rose by £1,500 while during that time earnings only went up 1.5%. Some potential first-time buyers have actually been pushed back out of the housing market because of this.
2. It helps those who already have money
At a push right now you could get a studio flat in a tower block on the Essex border for just over £100,000. It’s not going to be nice (in fact, it’s going to need some serious refurbishment – we checked) but it’s cheap (for London). A total of £5,000 is all you’d need to scrape together thanks to Help to Buy, but even then it would take over two years of saving £200 a month to be able to afford the deposit for this property (which let’s remember is a tower block bedsit), and it would cost you thousands more to refurbish. These are savings you need to make while paying rent and extortionate London transport. But, as long as you’re earning the average salary of £27,000, it’s just about do-able.
But these aren’t the people it seems are being helped by Help to Buy.
The mean borrower income for those who bought a house in London through Help to Buy is £77,369. In fact, 9% of people who completed on a house through Help to Buy had an income of £80,000, with 4% earning more than £100,000 a year.
The people earning average salaries in London can’t get anywhere near without some sort of outside help, let alone buy somewhere they’d actually like to live in, Help to Buy or not.
3. Nearly a fifth of loans went to people who already owned property
A scheme like Help to Buy, which has proven to be damaging to the housing market, should be used sparingly, with only those who have genuine need for it. But after the scheme was opened out in 2013 to people who are not first-time buyers, 8,782 people who already owned property bought their homes through the scheme. This represents nearly a fifth of all people who used Help to Buy.
4. It hasn’t helped Londoners
Londoners have the biggest battle when attempting to get on the property ladder. A house worth £200,000 in Newcastle could be worth £2m in the right part of London. In London more than anywhere else, would-be first-time buyers are competing with cash-buying, multiple-property-owning landlords who are gazumping first-timers and renting property back to them, making big bucks in the process.
Only 5% of Help to Buy completions were in London the lowest percentage of all regions, bar Northern Ireland (where the population is 1.8 million, compared with London’s 8.3 million). Top of the table was the South East and North West, both at 14%.
In fact, Help to Buy purchases were so rare in inner London that Kensington & Chelsea only had two completions (adding up to nearly £1m between them), followed by Camden and Hammersmith & Fulham both with seven. The City of London, perhaps as you’d expect, had not a single Help to Buy assisted purchase.
If Londoners are prepared to move out further out however, Help to Buy purchases in Croydon were at 206 – with an average of just short of £250,000 per property.
5. Help to Buy is aiming to do the opposite of what the Bank of England (BoE) is trying to do
The BoE has been working hard to reassure markets that mortgages will be handed out only to people who can afford them, after an abundance of high loan-to-value (LTV) mortgages were partly blamed for the recession.
LTV mortgages of more than 90% are incredibly hard to come by without Help to Buy. They made up just 2% of all mortgages until Help to Buy picked up steam, and in 2014 they represented 5%.
This has since fallen back thanks to new mortgage rules introduced by the BoE making it more difficult for those with lower incomes and more outgoings to get a mortgage.
Some say the BoE is right to curb high LTV mortgages, especially as it means someone could buy a £600,000 property with a deposit of £50,000 – this would sidle buyers with a lot of unnecessary debt if the value of the property dropped significantly.
Build more bloody houses
As unpalatable as it is for those already on the property ladder, the best economic solution is to lower house prices, or at the very least, keep them stable. In order to do that, we need to build more houses and build them where the jobs are.