The many failings of the government’s exploitative Help to Buy scheme

Two hundred thousand people in the UK have now bought houses using former chancellor George Osborne's Help to Buy equity loan scheme.

The taxpayer has lent those people £10bn, an average of £55,000 each. The maximum you can borrow from the taxpayer is 20% of the purchase price cap of £600,000 in most of the UK and 40% of the cap in London so £120,000 and £240,000.

You might think this sounds wonderful that it is yet another of the marvellous legacies left to us by the last government. Lucky us. And certainly, the scheme's fans waste no time pointing out the good that has come of it. It has been a huge boost to the housebuilding sector, since the only homes you can buy under the Help to Buy scheme are new-build homes, keeping it going through what could have been very dark years following the financial crisis.

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You can, if you like, think of the £10bn paid to the housebuilders by the state via the scheme as a special kind of quantitative easing just for them a little bonus on top of the ultra-low interest rates caused by the main QE programme. One mortgage lender says Help to Buy is now "a cornerstone of the UK property market", stimulating the bottom of the ladder and providing "essential support to the whole of the UK's property sector". So that's nice for the property sector, at least.

At the same time, the scheme has shoved many first-time buyers on to the lowest wobbly rung of the housing ladder 81% of Help to Buy scheme users are first-time buyers and there are now more of them than there have been in 12 years. You could put this down to very low mortgage rates, falling prices and a spate of what mortgage providers like to call "innovative" products intergenerational loans, for example but it would be hard to deny the role of Help to Buy as well.

Yet these happy side effects go very little way to balancing out the unhappy. Let's start with keeping the industry going. Help to Buy hasn't helped the smaller players much, since hordes of them had already gone down with the market in 2008-2009. So the main beneficiaries have been the big developers.

They've been provided with an almost endless source of state-financed, captured and slightly desperate buyers. Research suggests Help to Buy purchasers pay 5% to 8% more than ordinary buyers of new-builds, allowing the builders to increase their prices while maintaining their almost unrivalled record of delivering entirely unsatisfactory products. Note this is not just about shoddy quality and design, but also the sale of leasehold houses with escalating ground rents, which made up 18% of Help to Buy house sales in early 2017. Nasty.

You'll be wondering where all the extra money goes, given that it clearly isn't being paid to the architects or building-material suppliers. The clues are in the results. Look to Persimmon, developer of some of the meanest looking houses in Britain (don't take my word for it; go and look on their website). Half of its sales are Help to Buy. Pre-tax profits have just passed £1bn. Operating margins have just hit a record 30.8%. Think about that: this isn't a company, it's a state-sponsored taxpayer exploitation machine.

Still, at least we aren't alone in being exploited by the sector. The first-time buyers are our fellow patsies. The very existence of Help to Buy forces up house prices in general by creating new demand. But first-time buyers also have to buy new-builds to get Help to Buy cash. That means that on top of the general price rise, they have to pay the average 16% new-build premium as well as the "just because we can" premium that comes with buying a Help to Buy classified home.

Then, after five fee-free years, they have to start paying interest on our loans to them 1.75% for the first year, rising at RPI inflation rather than the lower and supposedly government-preferred measure of CPI, plus 1% a year until the loan is paid off. The average APR assumed by the scheme is 5.2%. For context, note that Virgin has a ten-year fixed-rate mortgage on offer at 2.7%.

There's more. The taxpayer loan to the buyer really is an equity loan, so what must be paid back is a percentage of the value of the house at the point of sale. If you borrowed £40,000 to buy a house for £200,000 (20%) and the value rises to £400,000, you have to pay back £80,000 (on top of the interest, of course).

The point is that two nasty risks come with the complications of your deal. First, that your initial overpayment leaves you in negative equity on the traditional part of your mortgage (and the taxpayer potentially on the hook for some of the losses, by the way). Second, that the value of your house goes up and, just as with the old shared appreciation mortgages of the 1990s, you pay back the loan and then don't have enough equity to buy again. Miserable.

Still, regular readers will know how I feel about value. Persimmon is on a price/earnings (p/e) ratio of 8.7 and yields 9.7%, which is cheap when you think that the Help to Buy money-for-old-rope scheme doesn't end until 2023. Good managers are buying it and I understand why.

But here's something you haven't heard me say often in this column, red in tooth and claw about your investments as I am. I wouldn't buy the big players in this sector on moral grounds. They exploit the taxpayer. They exploit the incompetence of government. They exploit the young. And they have played a huge part in the destruction of the UK's visual environment.

Moral objections and short-term value aside, I wouldn't buy them for the long term either. There is a shift in public opinion under way, one that is fed up with public policy that favours the perceived needs of big business above all else and that I suspect will soon express itself in politics.

So if you are piling stocks into your Isa or Sipp for a 10- or 20-year period, think about looking at them in a new way. Do any of the metrics of these companies suggest generally crappy behaviour? Do they perhaps pay an oddly low tax rate? Have an oddly low wage bill? Or oddly high margins? Or do they perhaps have an extraordinary reliance on the taxpayer to make their top management multimillionaires?

If so, maybe you should wonder if their business models are sustainable in a world where voters are no longer mad to let anyone have something for nothing. They might not be.

This article was first published in the Financial Times