Does Help to Buy pose a risk to Britain’s public finances?

The government’s flagship Help to Buy scheme to ease access to the housing market has long attracted controversy. Criticism ranges from allegations of shoddy workmanship on new homes to the charge that the scheme is benefiting the wealthy rather than those struggling to get a foothold on the property ladder.

There are also claims that Help to Buy is being exploited by housebuilders at the expense of home owners. But there is also concern about a broader economic issue - might Britain's taxpayers be at risk in the event of a downturn in the housing market?

A recent report on the scheme by the UK's National Audit Office says: “At points when the market turns down (whether over the near, medium or longer term), the taxpayer could lose out significantly, as the government’s investment in housing capital would reduce in value. Furthermore, property owners could face the trap of negative equity, exacerbated by the new-build premium.”

Market distortion

Up to now the Ministry of Housing, Communities and Local Government has administered 211,000 loans under the scheme, with a total value of ￡11.7bn. Help to Buy is now significantly embedded in the UK housing market; housebuilder Bellway recently said that Help to Buy loans helped finance almost 40% of its completions.

If there is a market crash, Help to Buy properties may be particularly exposed, because the structure of the scheme causes distortion in the market by its very nature. Properties just under the ￡600,000 cap may offer relatively poor value for money because the scheme creates more competition for housing up to that price level. If the housing market turns down, these properties may look disproportionately over-valued and could bear the brunt of falling prices.

In this event, individuals and families that have bought these properties could suffer negative equity - where their outstanding borrowing is greater than the value of their home - and be unable to move elsewhere; it could also restrict their ability to remortgage, leaving them stuck paying expensive variable interest rates. At the margins, this could lead to an increase in defaults and repossessions, leaving the public sector to bear the losses.

Mitigating risk

To some extent, the government has already tried to mitigate its risk. At the end of 2016 it abandoned the Mortgage Guarantee scheme, which aimed to help buyers with a small deposit by enabling lenders to buy a guarantee on their loans. The guarantee meant that lenders would be compensated if the buyer couldn’t pay their mortgage loan and the property couldn’t be sold. The government is also restricting Help to Buy equity loans to first-time buyers. 

In the event of a downturn leaving them with large numbers of foreclosed properties, the government - along with other creditors such as the banks - can sell the properties to recoup the money they have lent. However, the quality of properties becomes important, and it is an area in which serious problems have emerged. Poor practice has been uncovered, ranging from questionable build quality to excluding independent surveyors, selling properties under leasehold terms, and safety issues.

The country's biggest housebuilders have come under fire for sub-standard workmanship that fails to meet basic building regulations, and homeowners say the builders have been slow to rectify problems. Significant safety issues have been raised with some new-build properties that have been bought under the Help to Buy scheme, and met with indifference on the part of housebuilders when it comes to addressing the problems.

Profits for housebuilders

These criticisms have fuelled the perception that Help to Buy is helping housebuilders more than buyers. Analysts have pointed out that the profit housebuilders make on individual properties has tripledsince Help to Buy was introduced. The country's three main housebuilders operate in a near-oligopoly that has helped sustain higher prices, the critics say, and this could come back to haunt the government in the future. If poorly-built homes prove difficult to sell, the government may not be able to recoup its financing through repossession and sale, and may be left as the unwilling owner of a large stock of sub-standard housing.

None of this matters particularly if the housing market continues to edge higher, but the country's febrile political climate and the looming threat of a no-deal Brexit are manifestly eroding confidence. UK house prices slipped in July, while estate agents’ average stock per branch reached its highest level in four years. The problem is acute in particular areas, notably in London, the focus of much of the country's housing wealth.

Miles Shipside, director and housing market analyst at online real estate portal Rightmove, points out that while housing market fundamentals remain sound in many parts of the country, the political climate is denting confidence and prompting potential buyers and sellers to hesitate.

Brexit bust?

Few in the market are convinced by the apocalyptic forecast of the Bank of England of a house price crash of up to 30% in the event of a chaotic no-deal Brexit, but it cannot be dismissed altogether. If food and fuel prices increase at the same time, substantial financial hardship could result.

On top of these concerns, there is frustration that the scheme is not in fact achieving the goals for which it was created. The National Audit Office survey indicated that 63% of people using Help to Buy could have bought their properties without it. Opponents claim the scheme perpetuates the UK’s dysfunctional housing market by keeping prices artificially high, while failing to fix the shortage of affordable homes. 

By 2023, the government will have invested up to ￡29 billion in the scheme, tying up resources that might have been used to better effect elsewhere. Despite the authorities' promise to wean the property market off Help to Buy, it is difficult to see how this could happen smoothly and without disruption.