HBF policy director David O’Leary looks at the success – in terms of popularity and politics – of Help to Buy equity loan and the possibilities beyond 2021
This year’s April Fools’ Day marks the fourth anniversary of the introduction of the hugely successful Help to Buy equity loan initiative. It is a scheme that has had a serious impact on the business environment for housebuilders and stimulated a step change in housing supply in England with more than 100,000 completions recorded. The date also marks the scheduled halfway point in the scheme’s lifetime, with Help to Buy (HtB) loans currently slated for withdrawal on March 31 2021.
For most people, and many industries, 2021 seems a long way in the future. After all, 2013 seems like the dim and distant past in which the UK was a committed member of the European Union, David Cameron led a Coalition government, Barack Obama seemed likely to be succeeded by Hillary Clinton and Leicester City’s dreams of reaching the Premier League were dashed by last minute play-off defeat. It is fair to say that a lot has changed since then, but for housebuilders acquiring land, confronted by an often tortuous planning process, 2021 is looming large.
HBF has been flagging this deadline for some time and has already begun discussions with lenders and government over the long-term future of the scheme. For businesses making investment decisions in 2017 and 2018, the sales environment of 2021 and beyond is central to their assessment, particularly when considering a major outlay on a large site with planning and build out planned over multiple years. This message has been received, as reflected in the Housing White Paper recognising “the need to create certainty for prospective homeowners and developers beyond 2021, so will work with the sector to consider [its] future.”
The recent closure of the Help to Buy mortgage guarantee scheme came and went with minimal fanfare but that scheme was introduced to serve a time-limited purpose and never intended to stimulate supply. With a relative improvement in the mortgage market the problem that it was set up to overcome could be seen to have been resolved. The same cannot yet be said for the equity loan scheme. With timescales as they are, builders will need a ministerial signal at the earliest possible opportunity. This is a big challenge both politically and financially with 2021 being not just the other side of a general election, but also a new spending period.
When the equity loan scheme was announced by the then chancellor George Osborne at the Budget in 2013, few would have predicted the impact it would have on the industry and housing delivery in England. Whilst economic conditions have improved since 2013, HtB, alongside the NPPF, has unquestionably roused investment, producing a 52% boost to net supply in just three years and a 56% increase in planning permissions. Confirming his motives at the time, the chancellor told the House of Commons that deposit requirements for mortgages had “put home ownership beyond the great majority who can’t turn to their parents for a contribution. And that’s not just a blow to the most human of aspirations, it’s a setback to social mobility and it’s been hard on the construction industry too.” In economic theory terms, the scheme has been successful in converting high demand for housing into effective demand for new homes, i.e. real demand representing a genuine intention and ability to purchase at the prevailing price.Recent history
Help to Buy built on earlier initiatives such as HomeBuy Direct, FirstBuy and NewBuy but is far less stringent on eligibility for home purchasers and is significantly more flexible and accessible for housebuilders with a light touch registration process allowing companies of all sizes to offer the product without compromising their balance sheets administered on a plot-by-plot basis rather than via upfront categorisation.
For decades governments of all political stripes have sought to promote home ownership through various low cost home ownership products or incentives such as mortgage interest relief at source (MIRAS) which was phased out from 1988 and unavailable on new mortgages in 2000. Today’s iteration, complemented by a culture of super-low interest rates, includes generous savings vehicles such as Help to Buy ISAs along with Shared Ownership, discounted market sale or Help to Buy, all designed to support first time buyers. Along with Starter Homes, there is clearly a need to develop some form of stratification of schemes and products to mitigate cannibalisation and promote complementary initiatives.
The home ownership priority is shared with public policy makers across the world, with a multitude of approaches in use elsewhere. In Norway home owners benefit from advantageous tax status alongside a suite of first time buyer loans, “investment grants” similar in nature to Starter Homes and Housing Allowances to help lower income renters to save for a deposit. In Canada and Hong Kong there is a requirement or an incentive to use mortgage indemnity insurance on high LTV loans. In Canada, the government effectively guarantees an element of these loans to facilitate healthier lending to first time buyers and others.Impact
One of HtB’s main strengths is its simplicity and universality but this comprehensive coverage inevitably brings deadweight. An independent evaluation for DCLG based on the first year and a half of the scheme’s operation estimated that its existence had stimulated additional new build output of around 14%. Assessing the counter-factual is especially challenging because of the inability to disentangle the decisions made by purchasers and builders. For builders, greater effective demand will have undoubtedly increased the speed of delivery in the short term and the volume of investment in the longer term. Meanwhile, the presence of the initiative has been a contributing factor in a changing product mix. Typically this is characterised by first time buyers jumping a rung of the housing ladder. As illustrated by the recent HBF report, Goodness Spacious Me, property sizes and bedroom numbers have increased even faster than the headline housing output figures as buyers, less constrained on affordability, have sought out homes that allow for growth.
Even allowing for some degree of deadweight, Help to Buy has been remarkably self-targeting: more than eight in 10 purchasers have been first time buyers, two-thirds of whom had an income of less than £50,000; and the overall average sales price to date is £220,000, with just 11% of sales between £350,000 and the scheme’s £600,000 cap. The time of Help to Buy’s inception means that the investment that government has made in the housing market has yielded a significant return. Table 1 explores the benefit from the investment in the first 100,000 homes bought with HtB. In total the government has provided equity loans for the purchase of new build property worth just over £23 billion. Because no figures are available for redemptions or remortgaging I have applied a national rate of house price inflation for each month’s HtB completions uprated to November 2016 prices. This assumes that HtB completions have been spread evenly around the country and that new build values have mirrored the wider market so should be treated merely as an estimation of the performance of the back book to date. Using this broad brush approach, the estimated uplift in value of the equity book is around £500 million up on the initial £4.64 billion investment.
In reality Treasury will have already recouped some of its outlay (with a return) and this will only increase as the earliest purchasers rapidly approach the point in 2018 at which interest becomes payable on the equity loan. This raises the possibility of a scaled down HtB scheme becoming self-financing through recycled returns at some point in the future.Politics at play
The scheme has been unequivocally successful by all measures, including – for ministers – politically. This can be seen in analysis of areas with most HtB completions at the time of the general election. Before May 2015, Conservatives held 12 of the 15 constituencies with the greatest number of HtB purchasing households. This included the Labour target seat of Gloucester which had been red from 1997 to 2010. Not only did the Conservatives hold onto all 12 seats, the party took the other three as well, two from Labour and one from the Liberal Democrats. Looking at the top 30 constituencies for sales up until that point, before the election Conservatives held 21 of the 30. Following two gains from Labour and two from the Liberal Democrats, the final total was 25 Conservative seats and five Labour. Conservatives increased their vote in 24 of these 30 areas, and across all 30, the average increase in the Tory vote was 2.5%, two-and-a-half times the national average.
Turnout is significantly higher amongst owner- occupiers compared with renters. In 2015, turnout amongst different tenures varied considerably, from outright owners 77%, owners with mortgages 69%, social renters 56% and private renters 51% (Ipsos MORI).
In the 30 constituencies, Help to Buy purchasers could feasibly have made up around 1% of local electors; rising as we approach 2020. In addition to owner occupiers being much more likely to cast their vote, they were, in 2015, far more likely to support the Conservatives. The party had a lead of 24 points and 8 points amongst outright owners and mortgage holders respectively. Up to September 2016, HtB had directly assisted more than 80,000 households to purchase their first property, a home ownership policy success only bettered in recent times by the Right to Buy from the early 1980s to mid-1990s. Assuming 1.8 adults per HtB household, this amounts to almost 150,000 voters in just the first half of the scheme’s lifetime. Ministers and their advisers across government and party headquarters will be aware of the scheme’s ongoing potential both economically and politically.Options for the future
Given the place that housing supply occupies on the list of political priorities it is unlikely at this stage that any conceivable government in 2020/21 would not wish to see either a continuation in some form of the HtB scheme or a replacement product or initiative of some kind.
Ministers may be minded to pursue a further extension of the scheme beyond 2021 but it would be remiss of HBF and the industry not to give consideration at this stage to the possible alternatives in the context of the broader lending environment and LTVs for new build properties. To this end, a mortgage indemnity product backed by government to improve the affordability, or “normalise” lending for new build purchases at higher LTV mortgages could be an option. A more targeted HtB successor may be attractive, eliminating some of the deadweight whilst retaining the stimulus. A targeted scheme could drill down on prospective purchasers (first time buyers or maximum income caps), the loan (proportionally smaller equity loans) or the property (lower price cap). Within each of these options there would be the potential to further taper down the restriction over time to gradually phase out the scheme. As touched on above, there may be scope for this to be at least partly self-sustainable via interest payments on existing equity loans and recycled uplifts as redemptions become more frequent. Following the passage of the EU Mortgage Credit Directive, which whilst emanating from Europe was supported by domestic regulators, housebuilder equity loans are now more complicated to originate and administer but could be an option provided suitable foresight. In light of competing policy priorities ministers may also consider the relative accessibility of such an approach for SMEs.
At this stage discussions have been very much about principles rather than detail but we hope for the emergence of a consensus over the coming months. There is a need to avoid an absolute cliff edge and for post-2021 arrangements to be flagged with requisite notice. The HtB scheme’s many successes alongside an understandable desire to limit government’s direct financial exposure to the housing market must all be weighed up across Whitehall in the coming months. Governments are not always renowned for thinking long term but having a 2021 vision will be critical to housebuilding prospects for the next decade.