The Government’s Help to Buy scheme has inflated house prices in England, according to a House of Lords report.
The Help to Buy: Equity Loan scheme will have cost around £29billion by the time it comes to an end in 2023, according to the report by the Lords’ built environment committee.
It said that this did not provide ‘good value for money’ for the taxpayer.
The Help to Buy: Equity Loan has been available since 2013, and around 340,000 households have used it to make a purchase – the majority of these were first-time buyers
In particular, it claimed that the value of homes in more expensive areas had been pushed up by ‘more than the subsidy value’ – meaning that home buyers would have paid less for their properties had the scheme not existed.
This suggests that housebuilders charged more for their Help to Buy-eligible homes, knowing that buyers would be able to borrow 20 per cent of the purchase price from the government, interest-free for five years.
The report said the money would have been better spent on building more homes instead.
If there are more homes available to buy, this can decrease house prices as supply and demand become more evenly balanced.
‘Evidence suggests that, particularly in areas where help is most needed, these schemes inflate prices by more than their subsidy value,’ the report said.
‘In the long term, funding for home ownership schemes do not provide good value for money, which would be better spent on increasing housing supply.’
What is a Help to Buy: Equity Loan?
First-time buyers can use the Help to Buy Equity Loan scheme to purchase a new-build property up to the value of £600,000, with a maximum equity loan of £120,000 (20 per cent). In Greater London, the maximum equity loan is £240,000 (40 per cent).
The loan is interest-free for five years and helps buyers to boost their deposit and get a better mortgage rate.
After five years, borrowers must either pay the government back the current market value of their stake, or start paying interest. They can also repay early if they choose.
The interest rate starts at 1.75 per cent in year six, and after that it rises in line with the Retail Price Index measure of inflation plus 1 per cent each year.
Someone who bought a £200,000 home with a 20 per cent (£40,000) Help to Buy equity loan would pay £712 interest in year six, and £896 in year 10 – on top of mortgage payments.
The scheme has run since 2013 and will continue until 2023.
New restrictions were introduced last year which means it is now only open to first-time buyers, and there are regional limits meaning homes purchased must cost no more than 1.5 times the average first time buyer property price in that area.
The Help to Buy: Equity Loan scheme has run since 2013 and will continue until 2023.
However, the housebuilding industry, which has benefited from Help to Buy in the form of subsidies and higher customer numbers, argued that the policy had been effective.
Quoted in the report, the Home Builders Federation said Help to Buy had ‘led to a sustained period of record investment in land and labour for future housing delivery, therefore increasing supply’.
Since 2013, nearly 340,000 homes have been bought using the equity loan, mostly by first-time buyers.
In the financial year 2020-21, a record number of borrowers took advantage of the Help to Buy scheme.
In the financial year 2020-21, the average price first-time buyers paid for their home was £290,000 – above the then-national average of around £255,000
More than 55,600 households bought their home with the support of a Help to Buy equity loan.
The average price first-time buyers paid for their home was £290,000, above the national average of around £255,000, and their typical household income was just over £55,000.
The scheme helped first-time buyers to afford a home amid rapid house price inflation over the past 18 months.
However, the same price inflation could mean that those who took out Help to Buy loans five years ago and are now due to repay them, could end up paying back substantially more than they borrowed.
Instead of loans being a set amount borrowed, as a mortgage would be, Help to Buy loans are taken as a stake in the property.
This means that as a home rises in value, so too does the amount needing to eventually be repaid to the state.
If you borrow 20 per cent of the purchase price, you repay 20 per cent of the value after five years, so when prices rise, so repayments.
According to Hargreaves Lansdown’s analysis, if a buyer borrowed 20 per cent from the Government to buy the average property in May 2015, and then repaid the loan in May 2020, they would have to pay back £5,318 more than they borrowed.
But someone doing the same a year later would have had to repay £8,751 more than they borrowed – so the rising market would have cost them almost £3,500.
The House of Lords report also made suggestions about how to increase the supply of new housing more generally.
It suggested that the government should spend more money on building new social housing, in order to reduce the £23.4billion annual cost of subsidising the rent of tenants in private accommodation.
It also called for the government to set out a clear planning strategy in order to give housebuilders the certainty they needed to deliver more homes, and to increase the number of apprenticeships available in the construction industry.
The Government is due to respond to the report by 10 March 2022.
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