Why Help to Buy was actually Help to Sell

Help to Buy – A Well-Intentioned But Flawed Scheme That Upped Prices

The Help to Buy scheme was launched by the UK government in 2013 with the aim of assisting those struggling to get onto the ever-moving property ladder. By providing an equity loan to bridge the gap between a 5% deposit and 20% deposit required for a mortgage, the scheme enabled first-time buyers who had managed to save a small deposit to purchase a home. At its launch, Help to Buy was promoted as a ingenious initiative that would create affordable pathways to homeownership. However, nearly a decade on from its introduction, the flaws and unintended consequences of Help to Buy have become clear. While well-intentioned, the scheme has likely contributed to inflated house prices and benefitted developers more than first-time buyers.

What was Help to Buy?

The Help to Buy equity loan scheme was made available to first-time buyers across England in 2013, with Scotland and Wales later introducing their own similar initiatives. It enabled buyers to put down a 5% deposit on a new build property, with the government providing an interest-free equity loan to cover up to 20% of the purchase price. This meant buyers only needed a 5% deposit and a 75% mortgage to make up the remainder, making it easier to get onto the property ladder.

To be eligible, buyers had to be first-time purchasers and the home needed to be a newly constructed property under £600,000 in value. Existing homeowners and those purchasing properties above £600,000 did not qualify. The equity loans were interest free for the first 5 years, after which a fee of 1.75% had to be paid on the outstanding loan amount. The loans would run for 25 years, or until repaid, upon which the government would claim back its 20% stake in the property value.

The scheme was mainly aimed at those struggling to save enough for a deposit, with stagnant wage growth and rising house prices putting homeownership increasingly out of reach. With banks reluctant to offer mortgages to buyers without at least a 10% deposit, Help to Buy presented an opportunity for the government to enable first-time buyers to overcome this barrier through the provision of equity loans.

Who Used Help to Buy?

Between its launch in 2013 and 2022 when it was closed to new applicants, Help to Buy was used by over 290,000 home buyers according to government statistics:

– 82% of properties bought were by first-time buyers
– 17.4 billion was the total value of loans provided
– 72.9 billion was the total value of properties purchased through the scheme
– 82% used it to buy houses, while 18% bought flats
– 51% of borrowers had household incomes between £20,000 – £50,000
– Just 2% had incomes below £20,000
– 5% had incomes above £100,000

On the surface, these figures paint a picture of Help to Buy assisting the core target market of first-time buyers get onto the property ladder. With over 200,000 first-time buyers utilizing the scheme, it appears it provided the leg up anticipated in terms helping raise a deposit.

However, when you dig into the types of properties bought and income levels of borrowers, questions start to emerge around how well targeted and equitable the scheme really was.

Criticisms and Flaws

While Help to Buy assisted hundreds of thousands to purchase a home, it has been increasingly criticized for failing to help those most in need and actually further inflating house prices. Some of the main flaws include:

Artificially Increased Prices

There is evidence that Help to Buy contributed to rapidly rising prices for new build homes, particularly those targeting first-time buyers. By stimulating buyer demand while doing nothing to increase supply, it enabled developers to hike up prices on properties eligible under the scheme. Analysis shows prices rose sharply by amounts similar to the 20% loans being offered following the launch of Help to Buy. Rather than increasing affordability, it allowed developers to capitalize through inflating costs.

Benefited Developers Over Buyers

By only being applicable to new build homes, Help to Buy funneled demand towards developers. It did little to make existing properties or the overall housing market more affordable. Instead, developers were able to use the scheme to sell their properties that were increasingly out of reach for many first-time buyers without family help. It turned out to be more of a Help to Sell scheme than Help to Buy.

Favored Middle Income Earners

With over 50% of loans going to households earning £20,000 – £50,000, Help to Buy primarily benefited middle income Brits. Given the median UK household income is around £30,000, these were not necessarily the buyers struggling most to raise a deposit or access mortgage financing. The minimum income required to qualify for a mortgage on a modest Help to Buy house was around £30,000. Consequently, critics argue it did little to help lower income families get on the ladder.

Fueled Rising Household Debt

By enabling buyers to purchase more expensive properties, Help to Buy contributed to a build up of mortgage debt. According to the government’s own figures, the average purchase price of a home bought via Help to Buy was £216,000. With many buyers stretching their budgets to buy properties potentially overvalued due to the scheme itself, it has locked many first-timers into high levels of mortgage debt. If house prices drop, these buyers could end up in negative equity.

Alternative Approaches

While clearly well-intentioned in its aims to assist first-time buyers, Help to Buy does not appear to have been the most effective policy in hindsight. Here are some alternative schemes that could have delivered better outcomes:

Mortgage Guarantee Scheme

Rather than subsidizing deposits, the government could have introduced a mortgage guarantee program. This would have provided a government guarantee to lenders on mortgages issued to first-time buyers with 5% deposits, enabling access to 95% LTV mortgages without interest rate premiums. This would have avoided inflating demand or needing buyers to take on additional equity loan debt.

Investment into Local Authority Housing

The government could have established initiatives enabling individuals to invest into homes bought by local councils and housing associations to be used as affordable rental accommodation. With individual investments helping cover deposit costs, this could have increased affordable housing stock without fuelling more government borrowing.

Empty Homes Strategy

There are hundreds of thousands of empty and unused homes across the UK at any given time. The government could have provided tax incentives, backed by local authority funding, to bring a portion of these properties back into use as affordable housing. This would have been another way to increase supply available to first-time buyers rather than stoking demand.

Part-Buy, Part-Rent Schemes

Some other countries have used part-buy, part-rent models targeted at first-time buyers allowing them to buy a portion of a home (say 30%-50%) and pay affordable rent on the remaining share. This incrementally builds their equity while avoiding excessive mortgage debt. Such schemes could have offered a better alternative than 20% equity loans.

Conclusion

Looking back, Help to Buy appears a flawed approach to assisting first-time buyers in light of its impacts on house prices and levels of buyer debt. While the program had good intentions, its design and implementation left much to be desired. Hundreds of thousands did benefit, but likely at the expense of making housing less affordable for future generations of prospective buyers. The lessons learned point to the need for smarter solutions that expand supply, provide targeted support based on need, and avoid further inflating house prices. With the housing crisis still gripping the UK, fresh ideas and political will are required to make home ownership accessible to all.