Help to Buy – a solution to home ownership or a detriment to the housing market?

By Ben Morris - Wednesday, May 09, 2018 14:34

With the latest news that the number of people in the UK buying a home for the first time rose to the highest level in over 10 years in 2017[1], more Brits are being encouraged to make that step from renting to investing in bricks and mortar by taking advantage of the government initiative Help to Buy (HTB). But is HTB all that is cracked up to be and will it increase housing supply in London?, asks Ben Morris, Head of New Homes at Colliers.

With the latest news that the number of people in the UK buying a home for the first time rose to the highest level in over 10 years in 2017[1], more Brits are being encouraged to make that step from renting to investing in bricks and mortar by taking advantage of the government initiative Help to Buy (HTB). But is HTB all that is cracked up to be and will it increase housing supply in London, asks Ben Morris, Head of New Homes at Colliers?

The government recently announced that it has helped buy more than 100,000 homes across England through its HTB initiative. First-time buyers can put down as little as a 5% cash deposit on a registered HTB newly built development in England and receive a Government equity loan – for up to 40%* of the purchase price (40*%* in London). This scheme is designed to support first time buyers take that first step onto the property ladder i.e. not for buy-to-let or sublet purposes. Buyers can take advantage of this scheme for properties up to a maximum purchase price of £600,000 with a maximum mortgage of 4.5x their household income (single or joint). 

However, what has been the effect of the HTB scheme on the rest of the market?

There has been a lot of speculation about many would-be first time buyers (regardless of HTB) who would have bought anyway thanks to the ‘Bank of Mum and dad’. Parents see HTB as a way of gifting less than they initially thought they would or postponing the full gifted deposit – and who can blame them. Therefore, it’s difficult to measure the true success of the initiative if many of these buyers would have bought anyway.

In addition, it would seem that the Government has put a handbrake on buy-to-let (BTL) investors with mortgage tax relief legislation, stamp duty hikes and now portfolio stress testing. This market is a critical catalyst for the creation of new housing in the capital as investors are generally more willing and able to commit to purchasing a unit far earlier in the lifecycle of a development, thereby meaning thank the banks will commit to funding housing projects. New developments which are eligible for HTB can only be marketed within nine months from completion and contracts will be issued to buyer’s solicitors within six months from completion.

The issue is that if that unless there is a large enough uptake of units when the project initially launches outside of the nine-month window, developers are unlikely to start construction at all and therefore first time buyers will never get the opportunity. So, no surprise that new housing supply in inner London has now peaked in 2017 and the supply of new stock in this key market will now rapidly reduce; the number of new constructions starts in 2017 was 35% less than 2015 - a principal measure of new supply.

Demand is not changing so if it remains the same and supply reduces, house pricing will remain the same or more likely increase and this will push up house prices which will make it difficult for owner occupiers in the secondary market to move sideways or downsize.

From an end-user tenant viewpoint, the rental market is still very much alive as the population is now more transient and people don’t just want to live in single location. However, the BTL legislation means that there are now fewer landlords, so less rental properties are available, which in in turn, is pushing rents up. Therefore, tenants that are trying to save for a first-time buyer deposit will find this even harder. 

Lastly, the HTB equity loan was originally offered interest free for the first five years. So, five years down the line in April, some of the earliest people to utilise this government incentive (outside of London) had to start paying 1.75% interest on the loan’s value. This fee is only set to rise each year in line with RPI and does not reduce the loan’s value – buyers must either repay it completely when they sell their home or make minimum repayments of 10% of the property’s value. This has inevitably caused some concern for those occupiers who might struggle to pay these additional bills or exit the scheme altogether.

So what does the future hold? First-time-buyers who otherwise would not have made it onto the first rung of the ladder so soon will reap the benefits of low interest rates (for now), low loan to value mortgages and therefore have more money in their pocket every month. But in order for these first-time-buyers to have the opportunity in the first place, the government must recognise that the rest of the market is being hampered by tough policies on investors.

Despite there being no restrictions on first-time-buyers purchasing many years from completion, none of them actually do, meaning that the investors who are often the first to commit off-plan and are effectively the trigger for construction to begin on the project. It’s a catch 22 and an issue that needs to be assessed from all angles of the market.

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