From The Financial Times, 8 August 2017
By Judith Evans
Critics say scheme has succeeded only in boosting company margins and profits
Housebuilders have been charging a premium of up to 5 per cent for homes sold using the government’s Help to Buy equity loan scheme, adding extra obstacles for those who want to move up the housing ladder, according to a new analysis.
Prices for homes sold under the scheme have been rising faster than the wider market, with other new-build homes effectively cheaper thanks to incentives such as price discounts, according to the analysis by broker Stockdale Securities.
Help to Buy, the flagship housing policy of David Cameron’s government, enables people to buy new homes with deposits of only 5 per cent, using an equity loan from the government for 20 per cent of the home’s value outside London and 40 per cent of the home’s value in the capital.
But critics argue that the scheme, which has supported more than 120,000 house purchases since 2013, has boosted margins and profits at housebuilders without reducing pressure on Britain’s stretched housing market.
Alastair Stewart, an analyst at Stockdale, said conversations with housebuilders indicated that Help to Buy was “marketed as an alternative to the variety of incentives that have been on offer to other buyers”.“
These include discounts to list price, higher specifications of homes or features and part-exchange,” he said. “Help to Buy was presented to buyers as ‘the incentive’ even though . . . the housebuilder bears no risk whatsoever.”
Buyers already pay a so-called “new build premium” to live in a brand-new home with unused appliances, which on average amounts to 17 per cent of the home’s value, according to separate findings by estate agents Countrywide. But the boost begins to diminish as soon as the buyer moves in and starts to create wear and tear on the property. Countrywide found last year that buyers using Help to Buy in the early years of the scheme were only half as likely to upgrade to a new home as the average first-time buyer.
When the need to save a larger deposit is taken into account, many Help to Buy purchasers will find themselves “prisoners” unable to step up the housing ladder, Mr Stewart said, because vendors must pay the government back the equity loan as a proportion of the home’s sale price, while mortgages for 95 per cent of the value of a home are difficult to obtain for “second steppers”. “What we consider almost totally inconceivable is the concept of the majority of buyers under London Help to Buy ever amassing the levels of equity required to move to a larger home in the capital,” Mr Stewart said, adding that the costs of a deposit, stamp duty and other charges for such a move would amount to almost £100,000.
In weaker housing markets in the north of England, the so-called “Help to Buy premium” is greater, Mr Stewart said, adding buyers may risk negative equity if underlying markets do not rise.
The Stockdale research comes as government ministers consider whether to continue Help to Buy after its current scheduled end date of 2021. Many housebuilders are lobbying for the scheme to continue, but have braced for it to be tapered over time. A report that it might end early — subsequently denied by the Department for Communities and Local Government — briefly sent housebuilders’ shares down as much as 5 per cent last week.
But some companies have broken ranks to criticise the scheme.
Rob Perrins, chief executive of Berkeley Group, has called it “inflationary”, while Jolyon Harrison, chief executive of Gleeson, which builds low-cost homes, has said the price ceiling for houses bought through the scheme should be reduced.
David O’Leary, policy director at the Home Builders’ Federation, an industry group, said a shift towards selling houses rather than flats accounted for some of the apparent price rises under the scheme, together with the later introduction of the London version. “Help to Buy has allowed the new build sector to buck the trend in the wider housing market, where transactions have been pretty sticky, and also helped first-time buyers to sustain the same sort of presence in the market,” he added.
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