Help to Buy fallout spells more trouble for developers
As worries about the Help to Buy (H2B) scheme continue to pile up, it looks like the housebuilding industry is in for a rough ride at a time when it can ill afford any more setbacks.
Reports of borrowers facing repayment difficulties on their equity loans as they reach the end of their initial five-year interest-free period are on the rise.
Given the significant number of H2B homes, we may well be witnessing the start of an escalating problem.
The perceived shortcomings of H2B also risk jeopardising any future Government housing initiatives – at least in the short term.
The H2B scheme, which ended in March 2023, assisted 328,242 first-time buyers (FTBs) onto the property ladder since its launch in 2013; it offered buyers an equity loan of up to 20% of the purchase price of a new-build property, rising to 40% in London.
While the initial sixth-year interest rate is just 1.75%, it increases in line with inflation thereafter.
Coupled with rising expenses on their mortgage, the increased cost of repaying both the mortgage and equity loan simultaneously is proving to be too much for some overstretched borrowers.
The scheme has long divided opinion. Critics argue that it merely inflated house prices and boosted developers’ share price and profits, while supporters maintain it provided a much-needed incentive for developers to build more affordable homes and help FTBs onto the housing ladder – with both claims arguably holding true.
London Mayor, Sadiq Khan, has called for an extension of the initial five-year interest-free period to give borrowers some breathing space.
The Government has not addressed the issue yet but since an extension would likely incur minimal cost to the Government by simply deferring payments, it might be a potential vote winner.
Public discontent and anger in the UK, especially from non-homeowners is increasing and the issues with H2B will no doubt add fuel to the fire.
Many of us will have watched in dismay as the origins of the current housing crisis were depicted and unravelled in the recent BBC 2 programme, ‘Britain’s Housing Crisis: What Went Wrong.’
The two-part series laid bare a catalogue of errors over the last twenty or so years that contributed to the unaffordable rents and mortgages we are currently seeing, with H2B featuring heavily.
The programme highlighted the unfortunate reality of how, at times, the well-meaning intentions of Government figures over the years had actually worsened the housing crisis rather than fix it.
The portrayed villains in the story were clear – the Government and developers, with much of the blame placed at developers’ doors.
While they managed to defend themselves against allegations of land banking, they were less successful when it came to the profits and house price gains as a result of H2B – not to mention the ground rent and cladding scandals.
While affordable housing is considered by some to be a fundamental right, the reality is that developers operate as profit-driven businesses, not building homes out of the goodness of their hearts.
The more profit they can generate for their shareholders, the better. But if they flood the market with properties, they run the risk of affecting demand and potentially causing a decline in house prices.
The same argument applies to affordable homes; they simply do not provide as significant returns compared with the larger four-to five-bedroom properties.
To get a sense of the current state of the housing market, one needs only to look at the incentives currently being offered by housebuilders, as well as their reluctance to reduce asking prices.
Some developers are sweetening property deals with a free Tesla alongside certain energy efficient homes, while others are allowing buyers to pay rent to partially cover their 5% deposit.
Aside from the actual builders, the two fundamental components needed to build more houses – the Government and developers – will likely never be in alignment regarding their reasoning for increasing housebuilding.
With warnings from the Home Builders Federation that net housing supply could drop as low as 110,000 per year, we need a fundamental rethink of how we encourage builders to construct more homes, without a repeat of H2B.
Simon Jackson is managing director of SDL Surveying.