Help to Buy: 'The Harrogate Problem'

Alex Beavis
Head of Mortgage Products - Skipton Building Society

Nationally, lending under the Help to Buy: Equity Loan scheme accounts for almost half of new build lending in England since 2016. In fact, more than one in seven first time buyers now use the scheme to access the property ladder, a fact that suggests that the scheme has been broadly successful in supporting borrowers who would otherwise have struggled with either the deposit or affordability for a first home.

In their review published last October, the Ministry for Housing, Communities & Local Government, drew similar conclusions, stating that at a national level, the scheme has driven identifiable improvements to both the supply and demand dynamics of the UK property market.

From a developer perspective, the result is that recovery in the new build market has been faster and stronger with the Help to Buy supercharger firmly fitted to the engine. On the demand side, as those opening stats suggest, the scheme continues to facilitate a large number of transactions with 195,219 total sales to 30 September 2018 – 81% of which to first time buyers. Increased demand, more transactions, and a greater incentive for developers to increase the output of new build homes – what more do you want?

And yet Help to Buy isn’t without detractors. It’s no coincidence that the major housebuilders have seen profits soar as developers continue to capitalise on the perfect storm of rising house prices, a lack of affordable housing and the never-ending queue of desperate millennials open-palmed and ready to spend their state-sponsored cash on new build property. Just ask ex-Persimmon CEO Jeff Fairburn, under whose stewardship the builder saw profits hit £1bn for the first time in 2018; netting shareholders a tasty dividend yield of 10.36% and Mr Fairburn an exorbitant £75m pay packet. One has to ask: is this the best use of government cash?

The answer, as I touched on last month, is probably not. In fact, scratch the surface and you’ll see that not all Help to Buy transactions are helping the most needy would-be home owners. General consensus is that the scheme works best in facilitating ‘bigger, better, sooner’ purchases. In other words, scheme users are buying larger houses that they could otherwise afford, in better areas and more quickly than would otherwise be possible without a helping hand from Treasury coffers. Proponents will say that the so-called ‘second steppers’ using the scheme in this way are freeing up other suitable second-hand properties for would be first time buyers. Critics will say the scheme encourages larger developers to build more expensive homes with higher margins and that more investment is needed to support smaller developers, self and custom build initiatives and more targeted schemes like Starter Homes and Shared Ownership.

Whatever your personal view, what we do know is that from April 2021, a new scheme will launch with first-time-buyer-only eligibility restrictions and regional price caps in place to deliver support for additional 110,000 first time buyers through to March 2023. This new scheme will take total government lending on UK housing stock to £22bn – roughly the same size as total balance sheet assets at the 166-year old building society for which this author works. A remarkable statistic.

Looking at the new rules, the logic makes perfect sense, with funding now targeted more directly at would-be first time buyers requiring the most support. However, for housebuilders, particularly the larger ones with development plans already in place for beyond 2021, the new price caps might pose some issues. Step forward ‘The Harrogate Problem’.

Analysis I conducted using the latest gov.uk help to buy data release suggests that based on average Help to Buy purchase prices for first time buyers in H1 2018, prices in 28 unitary authorities, three major metro districts and 11 county districts already exceed their regional caps – a full two years before the caps even come into force. Bad luck for developers with planning for first time buyer homes on sites in London where the new cap of £600,000 was exceeded based on the average purchase price in 26 of the 33 boroughs.

In London that might’ve been predicted. However, outside the Capital there are similar issues. In Harrogate, not far from HQ here in Skipton, the average FTB scheme purchase price was £301,000 in H1’18. From 2021, the maximum permitted under the scheme is just £228,100 – nearly £73,000 less than the current going rate, before we account for any house price inflation between June 2018 and April 2021.

Elsewhere, the exact same issue exists in other affluent provincial towns with Warwick, Malvern, Colchester, Preston and most of Cheshire facing the same issue. In metro areas, and perhaps more surprisingly, scheme purchase prices in North Tyneside, Trafford and Salford each already exceed future regional caps.

So what does this mean for both developers and first time buyers? Firstly, I wouldn’t be surprised if the new caps have already seen developers tear up existing site plans in more expensive regions with architects and planners asked to concentrate efforts on designing lower cost, smaller and therefore, more affordable, new homes.

Next – might we also see the end of the bull run on housebuilder share prices? Lower caps will necessitate one of either lower margins or lower sales with Help to Buy no longer providing a panacea for profitability.

Finally and perhaps – most importantly, might we now see the end of reliance on Help to Buy to stimulate the housing market – even before the 2023 closing date? Developers, faced with cuts to profitability in desirable regions will be more incentivised to work more closely with lenders and fintechs, invest in innovative (and cheaper) modern methods of construction and explore partnerships with both public and private providers to provide the diverse set of housing propositions and tenures needed to address the ongoing issues within our housing market. The so-called ‘Harrogate Problem’ might just be the start of the housing solution.