In its 2018 Budget statement, the UK government extended the Help to Buy scheme for new homeowners (due to end in 2021) until 2023 (details on the scheme). The decision attracted a mixed response, and the scheme remains controversial. Many people believe it is a worthwhile way of enabling first-time buyers to get a foothold on the housing ladder, but others claim it has distorted the market and is being manipulated by corrupt developers.
Purely by the numbers, Help to Buy holds a relatively small influence on the UK housing market. Help to Buy sales are currently around 10,000 per quarter, though the figures are growing. In the five years since its launch, there have been 169,102 completions using Help to Buy, compared with total sales of around 95,000 to 100,000 per month (Land Registry).
Help to Buy represents a very small part of the overall market (just over 3%) and while the aggregate £42.2 b value of properties sold under the scheme looks impressive, this is only slightly more than the £37 b value of total sales in September 2018 alone.
First Time Buyers
While it appears improbable that the scheme is propping up the UK property market, the statistics by themselves fail to convey its importance to certain segments of the market. According to the government, more than 80% of all Help to Buy home purchases were by first-time buyers, who otherwise might have been pushed out of the market as a result of both rising home prices and more stringent lending criteria in the wake of the global financial crisis. Help to Buy has bridged a gap, sustaining demand at the lower end of the market that might otherwise have evaporated.
Help to Buy has also been a critical element of the new-build market. Around 220,000 net new homes were created in 2017, of which 84% were new build. The UK’s housing supply has increased for the past four years. While the economy has been relatively strong over that period, Help to Buy has clearly been a factor in expanding supply.
The intermediary the Mortgage Lenders Association says the scheme has been responsible for 170,000 new homes since its launch and has contributed to encouraging lenders to loosen criteria on lending for new build homes. In this light, it has been a significant generator of new housebuilding at a time when, overall, not enough homes are being built in Britain.
Help to Buy is also helping to keep the market moving at a time when there is little movement in other segments. With foreign buyers abandoning the UK market because of uncertainty over Brexit, and buy-to-let investors under pressure from government policy changes and more restrictive lending criteria, Help to Buy is the one dynamic area of the UK housing market.
Nevertheless, there have been concerns about market distortion created by the scheme. There are complaints that the Help to Buy purchase price ceiling of £600,000 simply increases demand for properties just under the cap and leads to a vacuum just above it. Another criticism is that it places first-time buyers, whether they use the scheme or not, in competition with buy to let landlords, artificially inflating prices for all. There is also concern that the scheme has enabled developers to raise prices in response to increased demand, effectively negating the financial benefits of the scheme for purchasers. This is the argument of the Resolution Foundation, which says this explains why new-build prices have outpaced those of existing properties since 2016.
A second, more fundamental, question concerns the overall benefit of a scheme that contributes to ever-increasing higher house prices, which critics insist are damaging for the long-term health of the economy because they lead to higher mortgage debt, lower disposable income and money locked up unproductively in housing rather than circulating within the economy.
A corollary argument is that the economy might benefit if banks currently reliant on mortgage lending for profitability directed their lending toward commercial and industrial borrowers instead. In addition, some analysts believe that a calmer, more stable housing market, less prone to surging prices and abrupt corrections, would boost demand naturally as a result of lower prices, without any need for the ‘rocket fuel’ of Help to Buy, as well as being less disruptive to society as a whole.
Inadequate Housing Supply
While these arguments make valid points, they fail to address the issue of a still inadequate housing supply, and the potentially disastrous short-term impact of a falling housing market at a time when the UK economy is already exposed to the risks of Brexit and an accompanying economic downturn. Historically, there has been a relationship between higher home prices and rising consumption. Growth in house prices appears to create a ‘wealth effect’ by boosting the value of homeowners’ overall assets, which increases their propensity to spend because they feel better off.
Other reasons why a buoyant housing market may contribute to economic growth includes enabling individuals to extract value from their property through equity release or re-mortgaging, and that it encourages people to spend money improving their homes. It may even improve productivity by encouraging geographic mobility, whereas households unable to sell their homes may not be able to respond to employment opportunities by moving to take up better jobs elsewhere.
Help to Buy must inevitably end at some point, but we believe the market has currently become reliant on the scheme and the results of its sudden withdrawal could be disastrous. In our view, it would be more helpful to consider ways to remove artificial distortions in the market. Rather than abandon the scheme altogether, policymakers should examine how it might usefully be extended to support the housing market more broadly, at a time when the sector seems particularly vulnerable to external shocks.