The Government has brought forward the second part of the Help-to-Buy scheme for house buyers. The first stage of Help-to-Buy (H2B1) was introduced in April 2013 and provides interest-free loans for first-time buyers of up to 20% of the cost of new-build properties if they can add a 5% deposit themselves. This has triggered a steep rise in demand for new mortgages, helping to lift lending to first-time buyers by 31% in the past year. The second phase (H2B2) has the potential to be ten times the size of H2B1, possibly funding up to 750,000 high loan-to-value mortgages over a three-year period.
Towards the end of last week the Chancellor was implying that H2B2 may be scaled back. However, over the weekend, and possibly in response to what he feared was a positive response to some of the measures outlined at the Labour Party conference, the Prime Minister, who sees Help-to-Buy as a potential vote-winner, has hit back. He announced that H2B2 will start earlier than planned - in October 2013 rather than January 2014 - homebuyers will be able to apply for a H2B2 loan from 7 October 2013, although the earliest the loans will be paid is 1 January 2014.
H2B2 would be expected to stimulate an increase in the number of housing transactions, with greater demand for larger homes as the middle market begins to mobilise. The impact on the new build market is that demand could increase for larger properties rather than just first-time buyers’ homes. Supporters of the Help-to Buy schemes are keen to point out that the number of transactions is still below the pre-crisis level, while prices are still 25% below the 2007 peak (allowing for inflation). Critics say that this could lead to the housing market getting out of control.
If the Government’s priority is to increase the supply of houses, we are not convinced that H2B is the correct route. The most logical way to help first-time buyers would seem to be to reduce house prices to more affordable levels by increasing supply significantly. Increasing demand for properties could increase house prices. Even the estate agents, through the RICS, are now calling for some action to cap current house price rises with calls to limit growth to 5%.
As for housebuilders, given that H2B2 involves extending the scheme to all properties, its introduction is expected to have only a limited impact as they are predominantly involved in the new-build market. An increase in the production of larger homes increases margins for the housebuilders. More family homes and fewer apartments not only increases profit margins but also reduces working capital requirements. Overall, though this should not be seen as a “game-changer” for the home construction sector, on which our view has not changed.