Is Help to Buy a ticking timebomb?

There are certainly some critics of the government scheme but there are many who believe the loans have helped first-time buyers and continue to back the scheme.

The Resolution Foundation's main concern has been the end of the five-year interest-free period for the government's part of the loan.

The Ministry of Housing, Communities and Local Government states Help to Buy (both the equity loan and the Isa) is "supporting people who want to turn their dream of owning a home into a reality and helping more young people save the deposits they need for their first homes".

Lindsay Judge, a housing expert at The Resolution Foundation, says: "I think that when equity loans were first launched and continue to be boosted with additional funds, I think the expectation was to get people onto the housing ladder and then either their incomes go up, or they have other sources of funds, and the expectation is the loans will be paid off."

It is one of those things where you potentially are achieving something you want to achieve in the short term, but perhaps constraining your choices in the longer term and that's really problematic.Lindsay Judge

But since the launch of the equity loan scheme in April 2013, wages have largely stagnated and inflation more recently has been creeping up, with CPI settling at 2.3 per cent in March.

Meanwhile, house prices have been affected by the decision to leave the European Union.

Figures from NAEA Propertymark reveal 86 per cent of properties sold for less than the asking price in March, which is the highest level seen since records began in 2013.

It also reports year-on-year demand for housing is down by 22 per cent, with agents registering 397 house hunters per branch in March 2017, down from 417 in 2016.

There is also the threat of rising interest rates, as the Bank of England eyes another rate hike this year.

Those borrowers who took out the loan five years ago, may have thought the situation today, when they started repaying the loan, would be very different.

On the up?

It would be easy to assume pay would go up in that time, and that the economy more generally might be faring better than it is.

Ms Judge acknowledges: "In 2013, people thought we were coming out of the crash and that we had to be on the up.

"As we all know, real pay has stagnated and incomes have not bounced back in the way people probably thought they were going to do in 2013."

She also admits it is hard for anyone to predict at any point in their life what their situation is going to be like five years down the line, and certainly when buying a house.

However, she notes: "I think anybody who has probably taken one out is probably quite happy to have done it. At least for the first five years it is, in effect, free money. 

"I suppose the question is whether people make good plans ahead of time before the fees come in?

"It is one of those things where you potentially are achieving something you want to achieve in the short term, but perhaps constraining your choices in the longer term and that is really problematic."

Someone else who also has concerns about the Help to Buy equity loan is David Hearne, chartered financial planner at Satis Asset Management.

He does not have any clients with Help to Buy loans as the firm he works at is not a mortgage broker, but he has similar worries about borrowers who now face repayments.

He says: "I just have grave concerns about the ability for people to repay or re-finance their Help to Buy loan, particularly if their income has gone down, perhaps to start a family, if interest rates have gone up, or if their property value has gone down."

He asserts it is "undoubtedly a helpful way onto the property ladder, but at what potential future cost?"

Have we really helped young people, if we sell them the dream of home ownership at an inflated price through state subsidy, with the prospect of a ladder to climb, only to leave them trapped on the first rung?David Hearne

Mr Hearne goes on: "For many, the Help to Buy equity loan is the only way they have been able to buy, and therefore they had to buy a newly built home.

"Five years later, their home is no longer new, and its value competes in the market with every other property.

"However, if the Help to Buy equity loan continues, future first-time buyers will continue to be directed to newly built properties, and not towards the existing market where previous first-time buyers may be wanting to sell in order to move to a larger home if they now have a family."

While he notes the Help to Buy Isa or Lifetime Isa will give a first-time buyer a greater choice of properties to buy, it "is likely to take longer to save and therefore longer to purchase" via this route. 

"That may have been a concern when house prices were rising and the fear of missing out was a strong emotion, however in a flat or falling market, that may not be the case," he says.

For those reasons, Mr Hearne believes the Help to Buy loan is most advantageous to those who expect a significant increase in income during the five-year term.

He asks: "Have we really helped young people, if we sell them the dream of home ownership at an inflated price through state subsidy, with the prospect of a ladder to climb, only to leave them trapped on the first rung?"

Something old, something new

The other side effect of the Help to Buy equity loan scheme has been to boost the price of new build properties. 

Any market intervention carries a risk of unintended consequences, warns Michael Taylor, group marketing manager for proposition development at Santander.

"We have seen a spike in property prices coinciding with the start of the equity loan scheme," he concedes.

"This is good news for those in properties benefitting from growth, but can make it more challenging for those not yet on the property ladder as prices become further out of reach.

"We've also seen a change in buying and building behaviour, with buyers jumping the first rung of the property ladder, meaning more three and four-bedroom homes are being built, and fewer one and two-bedroom properties."

He points out: "This may be OK in the short-term, but it risks reducing the level of one and two-bedroom housing stock for the future and could further compound problems for those people trying to get on the ladder."

Mr Taylor also observes one area that has not received much focus is how the scheme ends.

It is due to end in 2021, although there are some in the industry who think it will continue to be offered beyond then due to its success.

"Having a clear, thought out exit strategy is vital to help mitigate against any market issues that could arise if the scheme were to end abruptly," he notes.

But Mr Taylor acknowledges the scheme has helped increase the production of new homes, boosted the balance sheets of housebuilders and has benefited industries such as construction, driving wider economic benefits.

Future of the scheme

The question of whether the Help to Buy scheme will be wound down in 2021 remains.

For Ms Judge, a question mark hangs over whether the government scheme has been a good use of public money or not.

In October 2017, The Ministry for Housing, Communities and Local Government announced a further £10bn investment for the Help to Buy equity loan scheme.

The government claims the additional funding commitment will help around 135,000 more people to buy homes by 2021. 

It added: "This would bring the total number of households across England that would be supported through the scheme since it began in 2013 to around 360,000."

But Ms Judge points out there is some "dead weight" with equity loans.

"I think it is about 35 per cent of people who have taken them out to date say they could have bought a house without it.

"They sometimes say, I couldn't have bought the same house, but I could have bought a cheaper house or a smaller house or a house in not such a nice area. 

"The other thing is we do know that equity loans, like all demand-side interventions, increase house prices.

"So you can only use an equity loan on a new build property and you can see the price of new build properties has increased faster than the price of existing properties, resale properties," she explains. 

Rob McCoy, senior product and business manager at TMA, welcomes the scheme which has helped prospective first-time buyers become property owners.

However, he also acknowledges that more needs to be done to give borrowers a "helping hand" onto the property ladder.

“With £791m lent in equity loans during the first 12 months of the Help to Buy equity loan scheme, these will all require interest payments to commence if they are still live, which means additional payments for a large volume of customers.

"Despite this, the scheme is open to any first-time buyer, as long as they meet the eligibility criteria and at TMA we believe the Help to Buy loan and Help to Buy Isa should be applauded for their drive to improve the options available to those keen to own a property," he concludes.

As Mr Taylor notes, the success of the scheme will only really become clear in the next few years.

He suggests: "The next two years will be an interesting time for all involved in Help to Buy, as we see how borrowers adapt to making payments on the equity loan, how slick the process is for repaying the equity loan, and how the exit strategy develops as we edge closer the 2021 end date."

eleanor.duncan@ft.com