A (failed) attempt to defend Help to Buy

It bothers me that most people believe that property in the UK is grotesquely overpriced. And it bothers me that almost everyone we consider to be thoughtful considers Help to Buy to be a horrible bubble builder. There is almost no such thing as a consensus that turns out to be correct.

So with that in mind, John Stepek and I thought we had better look again and see if Help to Buy is actually a good thing rather than a bad thing. We have joined up with the Panorama team to ask a few survey questions of you all on house prices and to look at the various issues of Help to Buy (you can watch Adam Shaw presenting that show on Monday) and we have also had a roundtable on the matter in the office (subscribers can read this in the magazine tomorrow – Adam came to that too).

But I’m sorry to have to say that so far none of it has changed our minds much. The main point made in H2B’s favour is that houses are very affordable at the moment – thanks to ultra-low interest rates, the Nationwide affordability ratio is near a 30 year low. So the only thing stopping people getting on the housing ladder – or for that matter moving up it – is the high deposits required by the banks.

If loan to value ratios were the same as they normally are, we are told, all would be well. Transactions would rise (low transactions are a major problem for anyone who wants to move these days) the whole market would be kick started and at least some of the whining from first time buyers would come to an end.

So what this second phase of H2B does is to try and achieve all that by taking away the deposit problem without introducing any new problems. It provides the banks with a 20% buffer that encourages them to lend at reasonable rates to those with only a 5% deposit, but then insists on strict affordability criteria.

The Treasury doesn’t stipulate what these are or should be, but it is much discussed that RBS is stress-testing up to interest rates of 7%. Borrowers need to be able to meet their payments even if mortgage rates hit 7% and be spending no more than 55% of their post-tax income on their mortgage.

Finally, in terms of safeguards, there is the Bank of England’s Financial Policy Committee: it is charged with assessing the impact of the scheme and its parameters every year. If it looks like it is causing trouble, the FPC will shut it down.

So there you go, say the scheme’s fans. H2B simply solves a blockage in the system – it doesn’t let people who can’t afford houses buy houses, but it does let people who haven’t got deposits buy houses. It also isn’t available to anyone who owns another property so can’t be exploited (as bad government policy usually is by the well off*).

This all sounds fine. But I am not sure it is. There’s a reason why the banks won’t lend to people with tiny deposits. Their balance sheets are still a mess and they know that house prices are too high. So they can’t afford to take the risk.  It doesn’t seem to me to be a good idea for the taxpayer to take it for them.

But more important is the fact that UK houses are still in bubble territory. That isn’t necessarily the case in much of the north or the less accessible bits of the country (in some places we are all but back to fair value) but it is the case in the south east.

When interest rates rise, house prices will fall (if you aren’t sure on the mechanics of this you will have to read this week’s magazine). The people getting in to the market via Help to Buy at the moment should be able to afford their payments even with rates at 7%. But they might find that cold comfort when they find themselves in negative equity and stuck in their apparently affordable home for rather longer than they hoped.

It seems deeply unkind to us to encourage new buyers into an overpriced market just to free things up for everyone else. Surely there are better ways to get transactions going again. How about leaving the market alone for a while and letting prices continue their fall in real terms (as per the last five years). Or how about slashing or abolishing stamp duty? Transactions in anything tend to rise when transaction costs fall.

*Unfortunately this isn’t quite true. I have already been told of well-off home-owning friends sending their less well-paid partners off to get H2B mortgages on flats they then intend to let out (regardless of their mortgage lender’s rules)

You can read our latest property roundtable in this week’s issue of MoneyWeek magazine, out on Friday. And look out for the Panorama on the subject on Monday, 11 November at 8:30. 


  • Boris MacDonut

    Help to Buy allows people who want to buy a house, who want to make a long term commitment to settle down, to build a life and raise kids to do so. The taxpayer has very little risk here a maximum of £12 billion in the worst case scenario about twice the cost of the white elephant air craft carriers taking ten years or more to build.
    H2B would be better called Help to Banks as it is designed to assuage their fear of lending and prop up the dire balance sheets.
    It is good that their due diligence tests a rate of 7% as thta has been the usual level this past 25 years, However markets do not expect such rates to return for well over 5 years, by which time most new buyers will have a decent bit of equity undertheir belts. I fear MW is being too timid and cautious here.

  • Yogi

    MW I simply do not understand where you get the house prices will fall bit from or this bubble territory because you have not considered the demand or the cost side. You cannot compare this market with any other in the US and Ireland there is oversupply in the market in the UK there is ridiculous under supply and some of the highest real building costs in the world. The country has under built houses for 20 years the shortage will soon approach 4 million that’s 15%. There are 2 price drivers in the property market, scarcity of supply (London, hot spots and the countryside) and cost. Outside of the scarcity issue which is covered by excessive demand, total cost of construction at around £140K for the smallest of properties is the bottom line and we are already there, if prices drop then houses simply don’t get built (2008 – 2012). Outside of the property hot spots borrow-ability (20% deposit requirement) is the issue, the government has restarted the economy and will collect more in tax via the insurance scheme (help to buy). MW, have you talked to any house builders or anybody in the property market before making these ill-informed judgements. I also expect more ill-informed rubbish from the BBC lefties, is it not amazing that they have not challenged Labour on the real reason for the increase in energy prices, yes its lack of synergy so we now have to pay for the acquisition costs.

    • Boris MacDonut

      Yes Yogi, but Merryn’s article is not devoid of merit. I do like the idea of abolishing stamp duty.
      The demand pressures will only get worse. reference yesterdays figures from the ONS and the UK likely to gain 10 million more souls in just 20 to 25 years. The number of households will burgeon and we will need at least 300,000 more housing units each year just to stand still.

      • Yogi

        Boris I agree with you the lower the taxes the better, however all that stamp duty removal would do is to inflate the value of high cost houses a better route to affordability is to lower house costs by reducing some of the add on costs to a house builder like section 106, the infrastructure levy and impact of 40% social housing, force the utility companies to provide connections free of charge as they did when they were nationalised, this would take around £50K off the cost of that basic house – very significant.

        • Boris MacDonut

          No. The removal of stamp duty has also been shown to increase GDP by up to 0.8% permanently and to boost pension funds by about £600 Million pa.It is anm insidious drag on competitiveness and only outdone by Employer’s Nics in that respect.

  • Ramid

    The points being made pre-suppose that customer/buyer attitudes remain consistent. A small house price ought to be around 4x local average wage, the rest is land price. I see more flats being built locally, not in the villages, but in my local town, and it’s suburbs. Not a lot of land cost per dwelling, close to transport and entertainment, no need for a car. Look up as you walk through your local town, the ‘prime location stores’ are mostly ground floor, increasing number of buildings looking for new tenants, these places are ripe for conversion to condos. It will happen when the current owners recognise that the internet has demolished the business case for town centre shopping and they change, or sell and let someone else change the buildings. There is no shortage of opportunity to build new dwellings, as long as not thinking of traditional semi.

    • Boris MacDonut

      Ramid. I am at a loss to see why you think houses should cost 4 times average wages. That would be just £114,000 and most folk would want to buy two. This could not happen without massive government interference and rigging of the market.
      It costs what it does to live in the UK. Want to live somewhere better (Switzerland or Norway ) it costs more. Want to live somewhere worse(Spain or the USA) it costs less.

  • Adviserman

    Who defines a “bubble” anyway ?

    A hint for me, ( depending whose figures you use ) is :

    1. the Average UK property costs £163k with the
    2. Average salary of £25k, ergo
    3. a 6.4 multiple ( long term average is about 4 ) and
    4. when Mortgage lenders won’t give more then 5x at a maximum

    Also, as an ex City Accountant turned IFA, I have recently had 3 Lenders undervalue properties ( one London, one Maidenhead and one Warrington ) at around 8 – 10 % lower than the selling Estate Agents, during the mortgage process. The property values were £135k, £499k and £1.2m, so across the board.

    When the overseas based, super prime London property “investors”, ( repatriating their cash assets into a stable currency base with a solid rule of law) dry up, and interest rates are even rumoured to be on the rise, the supply – demand imbalance may even up a little and we may see a more rapid price fall than experienced so far in mainstream UK.

    Also, Repossessions are relatively low at present, but what may happen to that when the currently low interest rates rise as there are many who are “treading water” even now !

    Where are the increased salaries going to come from to support the increased house prices, or even the current ones, in future ? As a country, we have few natural resources ( shale gas ? ? ? ) and our high wage rates are making our high value manufacturing and perhaps even Service / IT / Financial sectors less competitive in world markets.

    The previous repliers makes some good points, as does Merryn, but I won’t be expanding my BtL portfolio just yet – I’ll wait a few years to pick up some bargains after the crash !

    • Boris MacDonut

      Adviserman. As an ex city accountant and an IFA you should know full well that average house price is approaching £230,000. Also UK average salary is now £28,500 and average income (as that is what buys houses) is £33,500. Then you must drill down to who actually buys houses. Above £1million 75% are bought by foreign millionaires. The rest are bought by the richest 68% of people. So you must eliminate the average income of the poorest 32% who never buy houses.
      What this means is the typical house value for most Britis buyers is about £200,000 and the income of those buyers is about £40,000.I do not accept the so called “long term”ratio of 4 times salary. This betrays a profoundly out of date understanding and falls back on what was happening in the 1980’s as if it were some sort of gold standard. People make the same mistakes on demographics as pointe dout on TV this week by Prof Hans Rosling.

  • Ellen12

    I recently visited a friend who has a lovely apartment on a newish development between Twickenham and Teddington, beside the Thames. It is a beautiful development in a lovely area. However, I thought the development was very quiet for a place that would have so many dwellings. There were a few people around but it felt empty and when I asked my friend about it she said that lots of the apartments are empty all the time and she would like more neighbours to give the place more of a feeling of home.

    These apartments, I guess, are some of thousands foreign and domestic buyers have bought up and left standing idle. It really is highly immoral in a city where homelessness and inadequate housing is one the the most important issues for the people who live there. I do not think it is any more acceptable then buying up the water supply and then refusing people the water they need to sustain them.

    Squatting was made illegal by this conservative government and if you go on holiday for a fortnight and come back to find your home occupied by squatters, you should feel violated and aggrieved. But to buy a home and leave it to rot, in a city where people need homes like this to survive and thrive, I think is a much bigger sin and the owners of these dwellings do not deserve the protection of the police to keep squatters out of them. I am not convinced we genuinely have a housing shortage in the capital but it is clear that housing is not primarily being used as homes for people to live in.

  • Alec

    Cheap money got us in to this mess in the first place, central bankers, Greenspan, George and King as well as Brown and Balls who were responsible for the banking crash. The housing bubble they pumped up should have been left to market forces but politicians preferred to rig the system instead of taking the pain. Sooner or later
    the “tab” will arrive.

    • felonious

      CDO’S got us into this mess, they were marketed as AAA rated investment products but were nothing more than junk; they were helped along by the greed of both sellers and buyers who were offered the holy grail of an eternal 7%+ return on the investment.
      You can blame the politicians all you like, but I believe that if you don’t do your “due diligence” you have no one to blame but yourself.
      The politicians easing the rules and the deregulation of financial markets are equally to blame, so you seem to imply; however, trading unencumbered by rules equals a free market, so that was the problem all along – not enough regulation.

      • Inquisitor

        A combination of factors got “us” into this mess, both from the public (incl central banks) and private sectors.

        Which “rules” were eased, specifically, that caused the mess? Which “deregulation” do you refer to? Also, since when does a free market equal “no rules”? Does allowing unlimited credit expansion count as “no rules” when the central banks coordinate the process and pick up the tab when it all blows up? Can’t honestly tell with some of you people…

  • mr

    I broadly agree with the thrust of the logic pointing to houses being over-valued, particularly when the average price to average earnings ratio is cited. But the correction to this, which will surely come, could as likely be by way of earnings increasing with inflation, which, too, will surely come.

    My advice to my 3 sons, 1 owning and wanting to upsize, 1 buying right now and one planning to is not to wait for prices to fall (it may not happen any time soon) but to buy cautiously ie not to overextend but rather to base the borrowing on single earnings, to get the longest available mortgage term & then overpay on, say, a 20 year basis with as long a fix as possible at a rate < 5%.

    Probably the best thing about H2B is that it is freeing up the market so those wanting to move can get on with it. Such a return to normality could even help the market to find its proper level, higher or lower, and if it is on a sound, sober basis where each borrower's ability to repay is robustly checked I can see little harm resulting.

    The underlying cause of the last few "bubbles" is what should have been tackled and that was excessive optimism about people's ability to repay and not excessive amounts of credit per se. I have lived through 3 such phases, in 3 different houses which doubled in price in 7 years, 5 years (and that one again in a further 10 years) and finally in 8 years. It seems another one is due sometime in next year or 2 anyway! Meanwhile the new prudent (if that word hasn't been devalued by Gordon's continued inappropriate use of it) regime of affordability checks should take care of things.

    • Boris MacDonut

      mr. Normality is often cited as base rates of 5% and mortgage rates of 7%. Out of interest neither the money markets or the BoE is even pricing in rates of 2.5% by 2023. Yes another decade of these “abnormal” rates. So I’d advise your sons to expect rates rises of no more than about 2 or 3% (average of 1.5%) in the next ten years. On a typical £123,000 mortgage that is just £150 a month.
      Coupled with your own experience of houses doubling every 7.5 years and the recent predictions of prices rising 30% by 2020 they should indeed be optimistic.

  • mr

    Thank you for that insight Boris. I have no problem with their optimism, certainly long term. I’m just trying to guide them in not over-egging things in the short term!

  • John (Chichester)

    The only redeeming version of H2B (in my view) would have been in support of self-builds and only self-builds. That would have added to new build numbers and provided an inspirational start to FTBs or those interested in such projects. Limit to £300,000. That would have restrained house price increases and maintained price to incomes ratio.

    Current arrangement preposterous and purely politically motivated and aligned to builders’ interests and Kirstie Allsop. I only hope this market blows up before the next election and we get some realism into market valuations.