NewHomes director for Mortgage Advice Bureau, Andy Frankish, comments on how the Chancellor George Osborne's decision to extend the Help to Buy equity loan will affect the UK.
“The Chancellor George Osborne is making a habit of shock announcements.
Over the weekend not only did he announce what he called “the first Garden City in 100 years” at Ebbsfleet in Kent but he also took a lot of us by surprise by announcing that the Help to Buy equity shared scheme would be extended until the “end of the decade”.
There is no question the equity loan product has made a significant impact and allowed developers to ramp up output and I think we do need to take a step back and remember why this scheme was launched in the first place.
Housing is going to be at the centre of the manifesto of most political parties over the coming 12 months, indeed Osborne’s comments have been described by many as vote winning.
However, some confusion still exists in the two different Help to Buy schemes.
Calls last week to remove Help to Buy have come on the back of increasing house prices and the Bank of England governor Mark Carney’s comments on interest rates.
But the availability of 95 per cent mortgages is not the only factor in this complicated equation.
Help to Buy equity loans were introduced to the market to kick-start new house building in the UK, as one of the major factors in increasing house prices is the availability of new stock against the huge demand for people to own their own property, and this has worked.
Speak to any major house builders in the UK and they will have significant growth plans over the next three to five years.
But a rapid increase in output brings with it other issues like the availability of land, planning constraints, supply of materials and availability of labour. But let’s remember in all the criticism of the product those last two points.
Over 80 per cent of materials used in building houses in the UK are sourced from the UK and we have already seen extensive recruitment in both the building and supply trade to cater for this growth.
The big three developers have already invested heavily in apprenticeships where employment for young people is most needed.
So without being an expert economist, it is easy for me to see the immediate positive impact that building more houses has on the wider economy.
The reality is that any political statement is going to have people knocking it and I would expect more heavy criticism when the developers announce their profits come June as you can guarantee these will be up considerably on last year.
I can already see the headlines like “Builders profit from taxpayers’ money” hitting the front pages.
I do recognise as a tax payer the general public’s concern but some of the analogies to the US market in 2006 are wildly overstated.
Help to Buy is not an adverse product, indeed credit scoring for the scheme only accepts the highest quality of customer.
Also every headline I read leads with the £600,000 purchase price alluding to this being a product that the already wealthy are taking advantage of.
So the government’s report into the scheme by the National Audit Office on 6 March made really interesting reading but made very few headlines.
In summary, the report states that to date £518m of equity loans have been issued, no small number.
This equated to 12,875 loans and there are a further 9,600 customers that have been approved for the scheme but not yet drawn down the money.
On paper these numbers are large but taking into perspective looking at other government spending and the overall number of housing transactions they are very much in line with initial predictions.
And let’s not forget this is a loan on an equity basis so at some stage in the next 25 years these funds will come back in with a potential increase in the equity value which is estimated at £4.8bn on the initial investment of £3.7bn.
There is also an annual rate of return for loans passing five years, based on the amount lent so far this will be just short of £10m a year and rising.
It’s when you start to drill down into these numbers things get interesting. The average purchase price for customers using these loans is £201,800, which is below the national house price average.
The average household income of families using the scheme is £44,700 and most significantly 89 per cent of users are first-time buyers, and if commentators are worried about affordability the average income to mortgage ratio is 1:3.4.
All in all, this tells me the product is pretty much hitting its target audience spot on.
Despite the political nature of yesterday’s comments Osborne has sent a clear message to developers that they have government support to invest in land and increase unit production.
If there is one concern I have about the scheme it is its ability to deliver the volume of units this country really needs.
I don’t think this is the only answer but it sends a clear message to all developers to ramp up output as the consumer funding to buy new build properties will be available until the end of the decade.”