Equity moans

In the furore over the Help to Buy mortgage guarantee scheme, its equity loan counterpart has escaped much scrutiny. A report out today changes that.

Help to Buy 1 started in April last year. Equity loans worth more than £500 million households were made in the first nine months of the scheme to almost 13,000 households. Another 9,600 loans were in the pipeline. If everything goes to plan over the next two years, 74,000 households will eventually benefit from equity loans worth £3.7 billion.

Today’s report from the National Audit Office (NAO) makes you remember that although it is small by comparison with the £12 billion of mortgage guarantees offered by its more controversial sibling, Help to Buy 1 is significantly bigger than the FirstBuy scheme that it replaced.

Amyas Morse, head of the NAO, says that although the scheme is for the most part running smoothly, more worh is needed by the DCLG and the HCA on managing the risks because ‘the scheme’s costs, which come in large part from tying up £3.7 million long term in the housing market, will be substantial’.

Margaret Hodge, chair of the public accounts committee, puts it more robustly:

‘I am shocked that the Department for Communities and Local Government is investing up to £3.7 billion without a clear understanding of how Help to Buy will impact the property market.’ The DCLG will be questioned about the report on April 2.

One worry at the time of the launch, that first-time buyers would lose out because anyone can apply for the new equity loans appears not to have been borne out: 89 per cent of buyers so far were first-time buyers.

But other concerns remain. First is affordability. The speed of the launch meant that more than 200 loans were made to buyers with a deposit of less than 5 per cent.

If you assume that is a teething problem, the thing that leapt out at me from the report was how financially stretched many of the buyers are. The average buyer has a mortgage 3.4 times their household income, which sounds reasonable, but that rises to 4.4 times their income when you include the equity loan.

The mortgage plus the equity loan was more than five times the household income for 30 per cent of buyers and more than four times their income for 49 per cent. And the report points out that ‘lower-income households using the scheme have higher average debt, relative to their income, than higher-income households, which might be expected’.

Second is value for money. Firstbuy started in 2011 and the terms were remarkably similar to those offered under the Labour HomeBuy Direct scheme that the then shadow housing minister Grant Shapps had described as ‘a very expensive flop’ in 2009. (The link is to the bit of the Conservative Party website that has since been sanitised for posterity).

However, in both of those schemes, the equity loan was split equally between the developer and the government. In contrast, all of the Help to Buy 1 loan comes from the government. As far as I’m aware no real justification has ever been offered for this and the NAO report doesn’t discuss it either.

The problems do not stop there. One of the most telling parts of the report for me is the description of the way that the government set out its objectives for the scheme.

According to a business case approved on 27 March, 2013, the objectives were to:

• Support credit worthy but deposit constrained households to buy a newly built property
• Increase the supply of new housing
• Contribute to economic growth.

All of these are laudable aims that could well justify help to buy 1. However, less than a month later, on 22 April, a revised business case ‘changed the first of the scheme’s objectives to maximising take-up, rather than focussing on deposit-constrained households’.

Hmm. ‘The department said that this was because the scheme is designed to support all aspiring buyers rather than address any particular group’s housing need.’

If you’re wondering whether that represents a good use of public money you are not the only one. The NAO report goes on: ‘The objectives do not include any value-for-money criteria, such as maximising the impact per person or per pound spent.’

The financial watchdog does conclude that ‘by enabling people to make purchases more easily, the scheme appears to have boosted developers’ confidence’. I think my confidence might just be boosted if I got the same benefits without having to tie up any of my cash and put it at risk – and if this enabled me to scale back my spending on sales incentives. I might also consider increasing the price of homes sold under help to buy – and there is already a new build premium built into the price of new homes.

But these are not the kind of quips you get in NAO reports. It merely notes that there is no way of telling how many of the purchasers would have bought a home anyway or how many homes have been built that would not have been built otherwise.

No wonder quantifying the scheme’s contribution will be ‘challenging’. Answers to those kind of questions are crucial if you want to assess the value for money offered by help to buy 1. The DCLG’s evaluation of the scheme’s economic costs range from £16 million to £1.2 billion with a central estimate of £494 million. Costs depend on different assumptions about what will happen to house prices and repossession rates.

It’s perfectly possible of course that rising house prices will mean the value of the original equity loans will increase substantially by the time they are paid back (although the money will be tied up in the meantime).  The government will also make money from a fee charged on the loans after the first five years.

However, even this might not be completely good news. The report says that ‘cash flow will vary from year to year and in some years the impact of this could be unaffordable for the Department’. This ‘long-term commitment with uncertain returns’ creates could affect the ability of the DCLG and HCA to manage their budgets since the result could be a risk of over- or under-spending in any one year if income is higher or lower than expected.

More fundamentally, the NAO says that the balance of costs and benefits means that ‘the scheme will only be value for money in broader economic terms if there are substantial benefits beyond the financial returns from fees and sales of equity shares’.

Yet the DCLG ‘has not quantified robustly the scheme’s economic benefits’ and has not evaluated the impact of previous schemes on the behaviour of buyers and builders. It has only done estimates of how many additional homes might be built: if more than 25 per cent of sales result in an additional home being built then benefits will exceed costs.

Help to buy 1 may of course still turn out to be a success – especially when judged on the amended business case. It does at least target new homes and most of the loans do seem to be going to first-time buyers.

But that is by no means certain – and the report does not discuss the untargeted and much more controversial help to buy 2.

Originally published as a blog for Inside Housing