Help to buy scheme 'no longer fit for purpose', says Shore Capital

Analysts at Shore Capital said that there needed to a “winding down” of the Help to Buy scheme in five years’ time or it could be a permanent fixture on the new homes market and that it was “no longer fit for purpose”.

The Help to Buy scheme was intended by the government to widen the pool of potential buyers which would stimulate the building of more homes by housebuilders and also replace the need for housebuilders to provide shared equity schemes from their own balance sheets when they did not have the resources to fund an expansion of working capital and fund share equity investments.

The scheme, which was launched in 2013, offers loans guaranteed by the state for up to 20% of a property's value, or 40% in London, allowing people to get on the property ladder with just a 5% deposit.

At the weekend the Labour party criticised the scheme for only helping people or families earning over £100,000 and people who were looking to move up the housing ladder, rather than get on it.

Shadow housing minister John Healey told BBC Radio 4’s Today on Saturday that the government needed to do more to target people on low incomes and for a cap on the income of families taking part of the scheme.

He said: "I don't think it's right that taxpayers' help is going to people who are earning over £100,000, many of whom say they could have afforded to buy that without that help.

"A lot of this help is not even going to people who are buying for the first time. So ministers have got to do a great deal more to target this scheme on help for those with ordinary incomes, younger people who really need the help most."

Shore Capital said that the scheme was “causing a major distortion of the housing market” and if it was allowed to run through the target end date of 2021 “there needed to be a winding down of the scope and scale of the programme so that there is either not a cliff in five years’ time or there is a temptation to make the 20% government loan a permanent feature of the new homes market”.

The broker said there would be “cascade of impacts” on housebuilder if there were steps either to scale back, limit or even remove the scheme.

Shore Capital said fewer sales could be made as larger housebuilders have factored in the scheme to their pricing, and without the additional help, “there would be fewer buyers despite the suggestion that many buyers are otherwise more than capable of buying”.

It said that this however, was “the most powerful card that housebuilders hold and could threaten the government with lower output at a time they know they have to ensure that housing output goes up”.

Housebuilders may have to match government funding with current average price used by the scheme of £259,000 and the use of the scheme on 35-40% of new home sales, the total assistance given to a house builder with 10,000 unit output is £195m per annum.

Share Capital suggested that the state could ask housebuilders to contribute half, which would make a “significant” dent in free cash flows.

Average prices would likely drop if the scheme was withdrawn, as the average first time buyer home using the scheme sells for £248,000, compares with just £166,000 for the overall average of all first time buyer homes bought with a mortgage or £151,000 for existing homes.

New homes can command a premium, but not 65% and without the support of the scheme, Shore Capital believes that the average price of new first time buyer homes would have to drop, which would a marked impact on revenues and margins through lower overhead recovery.

Lastly, the broker said that buyers would have more bargaining power. If other buyers not using scheme push too hard on the price, it is suggests that there are other buyers using the scheme who will pay the full asking price, so Help to Buy has reduced or removed the revenue per unit, which Shore Capital believes would shave margins in the process.

The broker said that the scheme is “beginning to look like it is no longer fit for purpose” and the money it uses could be put to better use and if there was a hint that scheme is reconfigured or reduced or even eliminated, it would be a negative for housebuilders.