Thomas Cook went bust this week with the loss of 9,000 jobs, and misery for thousands of travellers. The government was asked to cough up £250m to keep it afloat but refused. As a general rule, it is Conservative policy not to interfere in the workings of markets. Firms must be allowed to succeed or fail without government intervention, regardless of the consequences.
Yet over the past six years the government has been intervening on a titanic scale in the biggest market of all – the housing market – and the consequences have been all too predictable.
I am referring of course to Help to Buy. When it was launched in 2013 many people argued that it would be a monumental waste of taxpayers’ money. If you pump billions of pounds into the demand side of the housing market without any corresponding increase in supply then prices will rise. Any housing student will know that, in economic terms, housebuilding is inelastic – it can take years from conception to completion – so new homes are slow to appear when demand increases.
Just to rehearse the story to date: the equity loan scheme is the main component of Help to Buy. It gives buyers of new homes (up to £600,000 in value) a 20% loan on their property (40% in London). They cough up a 5% deposit so they then need a 75% mortgage (55% in London). The loan is interest-free for the first five years and has to be paid back within 25 years, or when the property is sold.
The government owns the loan book, administered by Homes England, so they are taking a punt that house prices will continue to rise, otherwise their investment will fall.
Help to Buy was meant to be a short-term fix to the collapse of the housing market. It aimed to restore the confidence of buyers and builders, but it has become semi-permanent. At the end of last year, 211,000 properties had been purchased with loans totalling £11.7bn. The latest estimate is that Help to Buy will consume £29bn of public funds by 2023, eight times more than the original estimate. From April 2021, the scheme will be restricted to first-time buyers and there will be lower regional price caps. Some developers are selling 50% of their homes under Help to Buy.
But last week the cross-party Public Accounts Committee (PAC) published a report concluding that Help to Buy has not made homes more affordable; that buyers don’t fully understand what they are committing to; that they don’t understand how interest rates might impact on them after five years; and that 60% of buyers could have bought anyway without Help to Buy.
The Committee accepted that Help to Buy was now having some impact on supply (up 14%) but criticised the government for not having any strategy for winding the scheme down; for having no idea how it was contributing to the government’s overall target of 300,000 homes a year; and for lacking a cohesive housing strategy. The PAC report mirrors a similar report by the National Audit Office in June, which concluded that it was helping many people who didn’t need it.
The problem is that housebuilders are now addicted to Help to Buy. In the last financial year, profits of the largest nine builders soared to £2.5bn, compared to only £57m before the scheme began. Persimmon, subject to huge criticisms of their new build quality (even by the present Prime Minister) made over £1bn in profits and paid their boss a £75m bonus. If you look at Persimmon’s profit per house it has more than doubled over the last six years, from £36,540 in 2013 to £73,240. Housebuilders are taking taxpayers for mugs.
The fact that the scheme is limited to new build properties means that buyers are paying about 20% more than they would for an existing property of similar size and quality – the so-called “new build premium”. Add this to the fact that 60% could have bought without Help to Buy and it means that buyers are consuming more housing than they need (ie, the 20% loan allows them to buy a bigger property) and paying more than they need to as well. Over- consumption of housing space does not help the housing crisis. What’s more, Help to Buy, has really only been of benefit to people who are relatively well off. In her evidence to the Committee, Professor Christine Whitehead described it as a “scheme for middle England”.
£29bn is an awful lot of money. The budget for affordable housing is not much more than £1bn a year. If Help to Buy money had instead been invested in genuinely affordable social rented homes it could have built thousands of new homes for people in genuine need and had a far more beneficial impact upon the housing market. By my calculations, with a government investment of £60,000 per property it would have provided almost half a million homes. By contrast, Help to Buy has been a vast expense of money for nothing.