Are first-time buyers really getting a leg-up from the government with Help to Buy loans? The Young Money Blog team digs deeper…
Many young people are confused by the Conservatives’ flagship home-buying programme. “H2B” has many eye-catching dimensions, from the Help to Buy ISA, which offers tax-payer bonuses for money put towards a deposit, to Help to Buy Shared Ownership.
But it’s the equity loan scheme that is back in the spotlight with an excoriating investigation in the Mail newspaper today.
The claims will renew fears that the scheme does little to benefit the long-term finances of first-time buyers and is simply perpetuating a form of crony capitalism for housebuilders like Persimmon, which sells 150 Help to Buy homes a week and whose chief executive was paid £47m last year.
Doubts over the scheme, which ponies up an extra 20% loan so new buyers can afford to clamber onto the disappearing property ladder, have been rife since it was launched by the coalition government in 2013.
Only new-build properties are eligible for Help to Buy loans (wonder why?) in contrast with the Help to Buy Isa, the savings scheme with a government top-up which confusingly has the same branding.
In London, the extra loan is a whacking 40%, adding a huge amount to the already dizzy amounts new buyers have to borrow just to land a two-bed flat in Zone 6.
Now it’s emerging that:
New 2-bed flats in Catford, south-east London, are priced higher than 3-bed terraces and 3-bed semis with garden and garage in the same area
Living-rooms are barely big enough for a sofa and second bedrooms are more like boxrooms
Help to Buy took one couple’s borrowing power from £230,000 to £400,000 to be able to afford the £425,000 price tag
The couple were offered £13,500 cashback when they expressed doubts over the price
Three market experts say the flat is over-valued by 15% – so it’s really worth £370,000
This rate of overpricing is typical for Help to Buy properties – leaving H2B buyers with huge problems when they come to sell.
The couple featured in today’s reports (wisely) pulled out of their H2B deal. Had they ponied up the £425,000, and wanted to sell in a year or two because the flat is so tiny, the flat could have been properly valued at £370,000 – leaving them with a £55,000 shortfall.
They could easily have ended up with ‘negative equity’ – more than twice the size of their initial £25,000 savings.
And there is a double whammy hitting owners of Help to Buy newbuilds: the next buyer will not be eligible for the scheme, as the property will then be second-hand. That reduces significantly the pool of first-time buyers who would be able to afford it.
Today’s report also found:
Housebuilders shopping around for professional valuers until they find one prepared to agree to the price they want to sell at
Housebuilders offering deal sweeteners including legal fees, stamp duty, or hard cash to push a sale through
But these do not come out of profits – they are paid for in the inflated selling price…
Persimmon, the UK’s biggest housebuilder, told its shareholders last week that six out of ten of its first-half sales were Help to Buy assisted. Its profits jumped by 13%. Chief executive Jeff Fairburn has already picked up £44.9m through a controversial bonus scheme, taking his total pay last year to £47m. The 52-year-old was last week given access to the second and final tranche of shares through the scheme, worth another £37.8m.
Reuben Young, a spokesman for campaign group Priced Out, said last week:
Huge profits of large developers are being propped up by the Government’s ill-advised Help to Buy scheme. Although it helps the lucky few who make use of it, Help to Buy pushes homeownership even further out of reach for everyone else, as it pushes prices even higher.
But it’s time to ask whether they really are the ‘lucky few’, or potential victims of a scheme that should be re-named Help to Sell.
YOUNG MONEY BLOG VERDICT:
We have always been sceptical of house-buying schemes that tie in first-time buyers to a limited number of new-build properties with a long list of onerous conditions. These schemes tend to be masterminded by private house-builders with a dodgy track record of land-banking, rip-off leaseholds and shoddy building standards. House-builders are very much the puppeteers in our modern housing market, pulling the government’s strings and trying to persuade us all that buying new homes at inflated prices is somehow in our interests, when really it’s only in theirs. Why else do you think they have an array of sweeteners, from free legal fees to juicy cashback, to try and seal the deal?
First-time buyers desperate to get on the housing ladder may view Help to Buy equity loans as a shortcut, circumventing the need to save up a higher deposit. But that would be a mistake. FTBs have got to make sure that what they are buying is accurately priced, has real market value and meets their needs over the next five to ten years – homes that are small, poorly-built and overpriced are not worthy of our hard-earned deposits. Young Money Blog advises anyone thinking about buying one of these homes to go back to the drawing board and ask if the loan is masking the property equivalent of a white elephant. It’s far better to save up a bigger deposit, even if it takes longer and requires more sacrifices, so you can choose properties from across the market.