It seems as though the debate over Help to Buy and house prices has already moved from economics to politics, with opposition and proponents across the UK political spectrum. Following Ed Balls’s recent call for George Osborne to rein in the Help to Buy scheme, it seems apt to ask whether the scheme is really driving the upward march in house prices in the UK.
Looking at the direct impact of Help to Buy Part 1 – an equity loan from government of up to 20% of a property’s purchase price – statistics from the Department for Communities and Local Government show that 19,394 properties were purchased using Help to Buy equity loans in England between April 2013 and March 2014, the first full year of its operation. Putting this in context, HMRC reported 980,290 residential property transactions in FY2013-14, meaning Help to Buy underpinned just 2% of total home purchases. Statistics for Help to Buy Part 2 are yet to be released since its inception seven months ago, but the Association expects its direct effects to be muted, given that average interest rates on 75% LTV mortgages have recorded little change since October 2013.
Furthermore, despite being frequently cited as a primary area of concern for a potential bubble forming, take-up of the scheme has been weakest in London. The 33 London boroughs accounted for 6.8% of total Help to Buy transactions in the year to March 2014, with only the North East recording a smaller proportion (6.2%).
The political motivations for Help to Buy are clear: to provide a short-term incentive to restart housing construction. The mortgage guarantee element of the scheme is scheduled to last until the end of 2016, whilst the equity loan element was extended until 2020 in Budget 2014, sending a powerful signal that the government is keen to pull out the stops to support a housing market recovery. The resulting increase in house prices is also likely to provide a favourable boost to sentiment ahead of the general election in 2015.
For this reason, economics comes back to the forefront of the argument when looking at the indirect impact of the scheme. Certainly, the equity loans are restricted to new build properties but, despite large increases in 2010 and 2013, private housing starts are yet to recover to pre-2008 levels. In contrast, the average house price in 2013 had risen 13.3% since its pre-recession peak in 2007, according to the ONS.
These dynamics risk intensifying the political and economic debate under a further five years of Help to Buy. Indeed, it looks increasingly likely that any political desire to stimulate the housing market will be in direct conflict both with the central bank’s intent to quell that stimulus and the more pressing effort to objectively determine how best to increase supply.