Thursday, 21 November 2013

Help to Buy: the positives. And negative.

Politically, the first phase of Help to Buy looks a resounding success according to statistics out today. Since the April launch of the scheme, designed to let buyers purchase newly built homes with a 5% deposit (and the government taking up to a 20% stake in the property), 5,375 had been sold. This looks like almost 20% of all housing completions, with that figure likely to rise (see Briefing, Economic).

The vast majority were for first time buyers, not second home owners; they were for low-to-middle earners, who had been frozen out of the housing market; and they were well spread across England, not just the affluent South East. That ticks all the right boxes for a government still seen by many as leaning more to big business, Southern England and the well-heeled.

It is also helping getting Britain building, with Q3 private starts up 29% in England, albeit from a low base. For the big builders H2B is probably going to account for around a third of output over the next couple of years.

But the people literally buying into this may find they have taken on more than they can chew. The mean price of a property bought under the scheme was £194,167, with an average equity loan of £38,703, indicating the vast majority of buyers are putting down the minimum deposit.

Interesting, official statistics do not give the mean household income of buyers, but present it in bands. 22.5% are in £20 - 30k, 27.2% are in £30 - 40k and 19% up to £50k. Let’s have a stab and say the mean is £35k. That corresponds to 5.5x total household income. That seems quite a lot.

The loan from government is free for the first five years. In year six a fee of 1.75% of the loan’s value is charged, thereafter the fee increases by the Retail Price Index (normally higher than the Consumer Price Index favoured by government for most other measures) plus 1%. This could soon get quite expensive, especially if families expand. And if, on top of all this, interest rates are not markedly higher in six or seven years, in the (possibly apocryphal) words of Margaret Thatcher, I’m a Dutchman.

Assume, too, that buyers will not get quite as good a deal on incentives compared with more mainstream buyers (although builders will not admit to it, they market H2B as an incentive, even though it is entirely paid for by government). Then there is the issue that new homes, like new cars, lose their “premium” the day the key is turned.

The long and the short of it is “hardworking households” may find themselves paying through the noses for “cheap” loans on homes that were overpriced and facing the prospect of their tiny equity rapidly turning negative.

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