Did Help to Buy help?

Originally posted on February 16 on Inside Edge 2, my blog for Inside Housing

If you believe Brandon Lewis, the Help to Buy equity loan scheme is a resounding success: it’s helped thousands of people to buy a home who could not have done otherwise; and it’s done it without inflating house prices.

But does an external evaluation for the Department for Communities and Local Government back up his claims? The good news for the housing minister is the central verdict that 43% of homes built under Help to Buy were additional and would not have been built without the scheme. And the report certainly has a positive conclusion:

‘Overall, the scheme has met its objectives in terms of increased housing supply. It has done this via a stimulus to demand which has fed through into an expansion of supply and with little evidence of a serious and destabilising impact on house prices.’

But look a little deeper and there is plenty of ammunition for critics of the scheme too. Most obvious is the flipside of that headline figure: if 57% of Help to Buy homes would have been built anyway, is that really a good use of the £9.7bn that the scheme is set to cost by 2020?

And the 43% is not quite what it seems either on closer inspection. It’s an amalgam of answers to three questions and is the proportion of buyers who ‘would not have been able to afford the same or similar property in the new build or existing markets without the scheme’s assistance’. Some of them, in other words, could have afforded a cheaper home without Help to Buy.

In addition, as Brickonomics points out, the 43% appears to include people who answered ‘don’t know’ or ‘neither agree nor disagree’ to the three questions.

The report’s authors say this is a ‘best estimate’ of the impact since ‘it is not possible to establish any meaningful counterfactual and disentangling the effects of the policy from other related policy initiatives add further complication’.

If you listen to house builders, the scheme launched in April 2013 is also very good news. The report estimates that Help to Buy supported around 33% of their sales. Combine that with the 43% figure and it concludes that Help to Buy added around 14% to total new build output. House builders think the scheme could have contributed as much as 45% to new build output in 2013/14 and that sales would have fallen without it.

But isn’t this all a bit Mandy Rice-Davies? After all, the schemes that came before Help to Buy required house builders to fund part of the equity loan or mortgage guarantee themselves. The report only mentions sales incentives in passing but the scheme has also enabled developers to eliminate offers such as free white goods and increase their profit margins accordingly. And it does not look at soaring house builder margins, profits and share prices at all, and rather assumes that these will translate into more homes in future.

A dip in housing starts and completions in 2012/13 is seen as evidence that output would have fallen without Help to Buy. However, it could also suggest that house builders delayed construction until they could benefit from the scheme and private enterprise starts duly leapt by 30% in 2013/14.

The report also finds more intangible effects on confidence, with Help to Buy sales feeding through into land purchases and increased output of homes of all kinds. This may be true but it’s a funny kind of confidence that has private enterprise so reliant on state support. Free market sales are falling.

The response from lenders is much more mixed. Some have always been dubious about lending on new homes because of the new build premium that disappears as soon as the home becomes second-hand. While some now seem more likely to lend on new homes, others say they preferred the predecessors to Help to Buy because house builders had ‘skin in the game’.

Help to Buy aimed to help buyers caught by the post-credit crunch mortgage shortage that made it very difficult to get a loan for more than 75% of the value of your purchase. The 20% equity loan (plus a 5% deposit) bridges that gap. However, the general availability of mortgages for people with small deposits has also improved over the same period.

To my mind, the equity loan scheme is the respectable end of Help to Buy. Unlike the mortgage guarantee scheme, it supports supply rather than just demand. Unlike the ISA, it provides loans that are repayable rather than handing out free money (unsurprisingly 250,000 people have opened an account so far and who can blame them?). It grew out of schemes that played a major role in rescuing the housebuilding industry from disaster after 2008.

If you accept the 43% additionality figure at face value, a generous assessment might be that it represents a reasonable return for the government’s stake so far; even more so when you take account of Hometrack’s conclusion that the government is sitting on a paper profit of £213m from its share of rising house prices.

But whatever the record so far, does that mean it’s time to boost Help to Buy even more? A harsher judgement might apply if we consider the decisions first to extend the scheme for another five years and then to double the equity loan to 40% in London. Both look a dubious proposition if more than half of the homes supported by equity loans would have been built anyway.

An emerging problem identified in the report is what happens when somebody who bought with an equity loan wants to move. Some 36% of buyers said they felt unable to move up the property ladder.

Similarly, look at the position of someone wanting Help to Buy now. True, they can get a 20% equity loan, but the price of a new build home is up 24% since the start of the scheme.

And then consider Starter Homes. Surprisingly they are not mentioned in the report but the FT reports this morning that 70,000 people have joined the queue even though the scheme has not been launched yet. The original Help to Buy looks a reasonable proposition by comparison with a scheme that offers a 20% discount financed by cannibalising affordable housing provision that disappears into the pocket of the buyer after five years. How is that remotely justifiable if more than half of the sales would have happened anyway?

However, a discount will surely be much more attractive than a loan to buyers, so won’t the two schemes just compete with each other (as Savillswarned last week)? Alternatively, buyers will use a combination of the two schemes to buy a bigger and better located home than they could otherwise have afforded. In London, the government could end up supporting 60% of the value of homes, around the same as the proportion that would have been built anyway.

Everyone knows this. But Help to Buy is just part of a wider support system for the housing market as a whole alongside quantitative easing and ultra-low interest rates. This has inflated house prices and left people not already on the housing ladder needing ever more help to buy while homeownership continues to decline. Even ministers know that eventually it will have to be weaned off the drugs – just so long as it’s not until after the next election.