NAO warns of ‘significant’ risk to government over Help to Buy loans

The Help to Buy scheme, designed to increase home ownership, could leave the government open to ‘significant market risk’ if prices fall, and many of those using this option could have bought a property without it, a National Audit Office (NAO) report has found

The scheme launched in 2013, and offers home buyers an equity loan of up to 20% (40% in London since February 2016) of the market value of an eligible new-build property, interest free for five years. The loan must be paid back on the sale of the property or when the mortgage ends.

The scheme, which is not means-tested, is open to both first-time buyers and those who have owned a property previously. Buyers can purchase properties valued up to £600,000 but need only take out a mortgage for 75% of the value.

Help to Buy is the Ministry of Housing, Communities and Local Government’s (MHCLG’s) largest housing initiative by value. It is set to close in 2023, but the NAO warns there are no set targets for either the number of new homeowners created or the numbers of new houses built.

Homes England, which delivers the scheme had made around 211,000 loans amounting to £11.7bn by the end of 2018. Over a third (38%) of new-build properties in England between April 2013 and September 2018 were sold using the scheme, accounting for 4% of all property sales in total over that period.

According to the department’s own independent research, 37% of households would not have been able to buy any property without the scheme. The NAO estimates this has resulted in around 78,000 additional sales of new-build homes as of December 2018.

The research also indicated that around three-fifths of buyers could have bought a property without the support of Help to Buy, but not necessarily a property they wanted. Almost a third of all buyers (65,000 households) could have purchased a property they wanted without the scheme.

Around 81% of all buyers supported by the scheme have been first-time buyers, while some 4% had household incomes over £100,000.

NAO’s analysis shows the scheme has supported five of the largest developers in England to increase the overall number of properties they sell year on year, thereby contributing to increases in their annual profits, which have all increased since the scheme’s start. These five developers sold between 36% and 48% of their properties with the support of the scheme in 2018. 

The audit watchdog’s analysis shows that by 2023, when it ends, the net amount loaned through the scheme is forecast to peak at around £25bn in cash terms. The department expects to recover its investment by 2031-32 and make a positive return overall and redemptions are running ahead of expectations.

However, the NAO report highlights that the department’s investment is exposed to significant market risk as it is sensitive to house-price changes and the timing of buyers repaying loans. There is also an opportunity cost in tying up this money in the scheme for a considerable period, rendering it unavailable for other housing schemes or departmental priorities.

There is less need for the scheme now that higher loan-to-value mortgages are more available, and the Department plans to end the scheme in 2023. Nevertheless, there is concern across the housing sector that the end of the scheme will result in a drop in new developments and sales. In the meantime, there will be a new scheme from April 2021 restricted to first-time buyers with lower regional limits on the maximum purchase price.

The NAO recommends that since the department has not undertaken a detailed assessment of the impact of the scheme on the wider housing market, it should expand the scope of its next evaluation to examine such wider effects, including a potential influence on the new-build premium, and identify lessons learned for any future interventions.

Gareth Davies, head of the NAO, said: ‘Help to Buy has increased home ownership and housing supply, particularly for first-time buyers. However, a proportion of participants could have afforded to buy a home without the government’s help.

‘The scheme has also exposed the government to significant market risk if property values fall, as well as tying up a significant public financial capacity.

‘The government’s greatest challenge now is to wean the property market off the scheme with as little impact as possible on its ambition of creating 300,000 homes a year from the mid-2020s.

‘Until we can observe its longer-term effects on the property market and whether the Department has recovered its substantial investment, we cannot say whether the scheme has delivered value for money.’

NAO Help to Buy: Equity Loan scheme – progress review

Pat Sweet

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