Help to BuyJun 14 2019

Govt exposed to 'significant risk' through Help to Buy

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Govt exposed to 'significant risk' through Help to Buy
Gareth Fuller/PA

The Help to Buy equity scheme could leave buyers in negative equity and has left the government exposed to "significant market risk", according to the National Audit Office.

In a progress review of the scheme, published yesterday (June 13), the watchdog concluded it was too early to tell if the scheme had been value for money or whether the "very substantial portfolio of loans" would result in a net return or a cost to the taxpayer.

Through the government’s Help to Buy equity loan, buyers can borrow 20 per cent of the cost of a new build property — 40 per cent in London — from the government with no loan fees for the first five years of owning the home.

This means buyers only need a 5 per cent cash deposit and a 75 per cent (55 per cent in the capital) mortgage to make up the rest. 

The initiative has helped thousands of borrowers take their first steps onto the property ladder with more than 200,000 properties being bought via the scheme since it launched on April 1, 2013, according to data from the government.

However the NAO’s review pointed out that the scheme exposed the government to market risks over which it had limited influence and put buyers at risk of entering negative equity.

The government's housing agency Homes England’s annual accounts stated that "a downturn in house prices or other economic conditions could place the balance sheet under considerable pressure" while the review noted the return on investment was sensitive to house price changes.

According to the parliamentary watchdog, the government had put reasonable arrangements in place to benefit from increasing property prices through the scheme but stressed the taxpayer could lose out significantly if the government’s investment in housing capital was to reduce in value.

Latest data from lender Nationwide showed annual house price growth across the UK remained below 1 per cent for the sixth consecutive month in May, while the cost of a property was declining in London.

On top of this, Homes England, which provides the government loan on the property, is exposed to greater risk. If a property is repossessed, the mortgage lender gets the first cut of the sale proceeds, then comes Homes England.

The review also found that some buyers risked falling into negative equity — when the property value falls below the amount owed on a property loan — due to the so-called new-build premium.

New-build properties typically cost about 15-20 per cent more than the equivalent lived-in home so buyers who want to sell their property soon after purchase could be in negative equity as this premium drops away.

As for those benefiting from the Help to Buy scheme, the review found that three fifths of users could have bought a property without the support of the scheme — although only one in three could have bought the property they wanted — and that 19 per cent were not first-time buyers.

About one in 10 buyers had a salary of more than £80,000 while one in 25 exceeded the £100,000 mark.

Although unclear if this was the target demographic for the scheme, the NAO regarded this as an acceptable consequence of the scheme being widely available and stated buyers in general had been able to buy faster and borrow more money.

About four-fifths of buyers reported that the scheme had enabled them to buy a property sooner while buyers took out mortgages and equity loans that together were typically about four and a half times their annual income, increasing to more than six times in London.

By comparison, first-time buyers generally take out mortgages three and a half times their annual income.

The review found developers profited well from the scheme. The scheme supports five of the six largest developers in England and the profits of all five have increased since the start of the scheme.

Since the scheme's inception, total combined housing sales for the five firms have increased by more than 50 per cent, the NAO found.

The office’s evaluation found that some 5 per cent of buyers who had bought in the first 11 months of the scheme were in arrears — totalling about £54,000 of loans — and in most cases, this was because arrangements were not set up when the loan was issued.

From September 2016, this was addressed by setting up a direct debit at the start of the loan.

Last month, warnings were renewed about a crunch in the Help to Buy space as more borrowers using the scheme faced charges for the first time while others saw theirs hiked considerably. 

The review concluded that the government’s greatest challenge was to wind down the scheme and minimise negative effects on the housing market.

Fears have been growing lately that the housing market has become too reliant on Help to Buy as research showed the scheme had funded up to 97 per cent of new build sales in some regions.

Commenting on the review, Fran Boait, executive director of Positive Money, said: "It’s now beyond clear that rather than helping those who can’t afford to buy a home, Help to Buy has mainly been a subsidy for a housing bubble, benefiting property developers and existing homeowners.

"Instead of policy interventions like Help to Buy which incentivise lending towards property, the Treasury and the Bank of England should introduce measures which encourage investment towards productive economic activity.

"Only this wholesale shift in investment will allow a rebalancing of the UK economy away from unsustainable asset-price led growth and begin to make homes affordable."

But Sam Curtis, regional director at Loan.co.uk, said the report was "quite positive".

He said: "Realistically, people will generally ride out being in negative equity until the housing market bounces back because they physically can’t afford to sell, so government risk is mitigated by this. It may, however, take longer for the government to tie up the money."

Mr Curtis went on to say that developers profiting was an inevitable outcome of more houses being built and the reaction to the proportion of non-first-time buyers benefiting "depended on why the government launched the scheme" — to help first-time buyers or to build more houses.

imogen.tew@ft.com

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