At the root of England’s housing crisis is a lack of supply. England has far fewer homes per capita than the rest of western Europe. To catch up, England would need an extra 5.9 million homes. Labour have made a pledge to build 1.5 million homes, but are expected to fall 500,000 homes short of that target. And in the place where housing is most in demand, our nation’s capital, they are even further behind.
A buyer with just 2.5 per cent equity in their home is extremely vulnerable. If house prices fall even slightly then they’ll be trapped in negative equity
Andy Burnham’s solution? Subsidise demand. On the eve of the Labour party conference, Burnham announced a new scheme called ‘Your First Home’. It is essentially a rerun of George Osborne’s Help to Buyscheme, except where Help to Buy required first-time buyers to build up a 5 per cent deposit, Your First Homewill get them on the property ladder with just a 2.5 per cent deposit. Industry is happy. Persimmon, Taylor Wimpey, and Barratt Redrow have all seen double-digit share price rises.
How helpful will it be for the rest of us? There has been a degree of Help to Buy revisionism in recent weeks. A conveniently timed study from the Ministry of Housing and Local Government (MHCLG) appeared to overturn the conventional wisdom that the subsidy did little but pour fuel on the housing crisis fire. It is not a bad study by any means. In fact, compared to what the government typically publishes in these circumstances, it is unusually rigorous. It is important, however, to interpret its findings with care. It is not proof that Help to Buy was the right policy at the time, nor is it proof that a re-run of the scheme would work in today’s housing market.
Help to Buy only applied in England, so it was possible to learn about its effectiveness by looking at how building rates varied at the England-Wales border. The study looked at Welsh and English border towns which were effectively identical, except that one side of the border did not benefit from Help to Buy. The study estimates that between 17 and 27 per cent of the new homes built on the English side of the border were because of Help to Buy. The evaluators then extrapolated that nationally using estimates of how responsive supply was to extra demand across the country.
There are limits to the study. The biggest is whether the new homes built were genuinely extra homes, or whether builders were going to build them anyway and were just able to do so faster. The headlines that say Help to Buy’s benefits outweighed its costs fivefold rely on the former assumption, but the latter is just as plausible. Building faster is still a benefit, but it doesn’t warrant the triumphalism of some advocates of the scheme.
Then there’s the issue of whether Help to Buy would have the same effect today. In 2013, Britain was still recovering from a global financial crisis – a crisis which had its roots in the failure of lenders to apply adequate credit checks to home buyers. Banks, in part because regulation had tightened, were reluctant to lend without a 10 per cent deposit. At the same time, interest rates were at historic lows. Many first-time buyers were in a situation where they could easily afford a mortgage but lacked the funds for a larger deposit. Help to Buy existed to fill the gap.
Today, the problem is essentially reversed. Banks are offering 95 per cent mortgages again, but high interest rates have made the monthly repayments far harder to afford. In fact, even when would-be first-time buyers can find a 5 per cent deposit, they are still constrained by how much the banks are willing to lend.
Households who bought through Help to Buy often saw their monthly outgoings drop almost instantly because of ultra-low borrowing costs. This just isn’t the case today. High interest rates have sent monthly mortgage repayments as a share of income to their highest level since 2008.
In fact, a growing number of people who bought under Help to Buy are struggling as they refinance under far less favourable conditions. According to the MHCLG study, one in ten buyers under the scheme are in arrears, while about a third are making their payments, but only just. A sizeable chunk (17 per cent) feel worse off as a result of buying through the scheme. There’s no end in sight either with continued conflict in the Middle East and the prospect of Trump banning diesel exports likely to push the Bank of England into further rate rises.
This is the big risk with Burnham’s reheated Help to Buy. A buyer with just 2.5 per cent equity in their home is extremely vulnerable. If house prices fall even slightly then they’ll be trapped in negative equity. Add in the risks of buying a new build and this feels like a recipe for disaster. There are other risks to worry about. If AI continues to advance and starts generating big productivity gains, businesses may go on an investment spree pushing global interest rates up further. That’s a lot of risk to be exposed to with very little cushion. And if buyers can’t make their payments on their first home, then it’ll fall on the state to bail them out.
The biggest problem for getting things built right now is viability. Developers will only build if it is profitable. The issue is that the cost of building new homes has gone up substantially in the last few years. Housebuilders must now contend with higher interest rates; slower planning approvals; the requirement to include expensive building safety features like second staircases; green regulations designed to make homes more energy efficient; the requirement to provide ‘affordable homes’ at below-market rates; new taxes; higher material costs; and higher labour costs. The Home Builders Federation estimate that altogether this has added £76,000 to the cost of building a home since 2020.
And at the same time, house prices are down. Many developments that would have been profitable to build five or so years ago are simply unviable. Unless Labour fundamentally changes the calculation, building 1.5 million homes in five years is a pipe-dream. A rerun of Help to Buy won’t do that.
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