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26 February 2020updated 27 Feb 2020 10:33am

How Help to Buy could return to haunt the Conservatives

As users of the housing scheme fall behind on mortgage payments, the spectre of the 2007 US subprime crisis is looming. 

By Jonn Elledge

It’s always been blindingly obvious that Help to Buy was, if your priority was to actually solve the housing crisis, a ghastly policy. Pumping yet more money into an overheated market without doing anything much to increase supply was always likely to inflate house prices yet further

And lo, it came to pass. That, indeed, may actually have been the point of the exercise: in 2013, shortly after the launch of the policy, the then chancellor George Osborne told a cabinet meeting: “Hopefully we will get a little housing boom and everyone will be happy as property values go up”, which is one definition of “everyone” I suppose.

Help to Buy was never really about helping first-time buyers as a class: it was about propping up home values and supporting developers, while at the same time helping a lucky few across the line into homeownership, thus generating a handful of good headlines and grateful voters while entirely stuffing everybody else. Last year, a Public Accounts Committee investigation found that more than 60 per cent of those who used the scheme could have afforded to buy without government subsidy.

Anyway. Turns out it’s actually worse than I thought, because now it looks like a lot of the buyers who did use the scheme might be totally stuffed, too.

A quick primer for those who are less likely to spend their evenings poring over housing policy than I am. Help to Buy is actually a brand name shared by a basket of different policies. There were government mortgage guarantees, which came to a tragic demise in 2016. There was an ISA, through which the state would top up your savings as you pulled together the deposit on your first home (although since the ISA only worked up to £3,000, which is too small to act as a deposit on a horsebox these days, I’m not entirely sure what the point was).

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But the one that’s made the headlines this week is the government equity loan scheme, which has seen the state lend buyers up to 20 per cent of the cost of a newly-built home (40 per cent in London). For the first five years, this government loan was interest-free. It was also tied to the value of a property: if the house price increased by 10 per cent, so did the amount the buyer would owe the government, though that also worked in reverse, which would be a relief except for the fact it meant that your home was now worth less than you paid for it. At any rate, it meant that buyers could get on the ladder with only a 75 per cent mortgage and a 5 per cent deposit, making homeownership much more attainable for those without, say, usefully rich and conveniently dead relatives. Great deal, huh?

Well, maybe not. For one thing, as noted, this meant pumping more money into the housing market, leading critics to attack the scheme as – in the words of Fran Boait, executive director of Positive money – “a subsidy for a housing bubble, benefiting property developers and existing homeowners”. In theory, this shouldn’t have been a problem as the scheme was also meant to help incentivise building (the loans were only available on new-build properties). In practice, without broader reforms to the housebuilding or land markets, it’s not clear that it actually led to additional homes, as opposed to ones which would have been built anyway.

That’s one problem. Another is the one reported by the Telegraph on Saturday, under the cheery headline “Help to Buy dream could become a nightmare for thousands of homeowners”. The paper wrote that, as of the end of November, more than 5 per cent of Help to Buy loans were in arrears, which were running at six times the average for commercial mortgages.

In other words, for one reason or another, a lot of people were behind with their payments. This seems to be partly because that five year interest-free period is coming to an end on many loans, bumping up homeowners’ costs. What’s more, once the interest rate kicks in, the government loan is actually more expensive than many commercial mortgages aimed at first-time buyers.

Oh, and while we’re at it, a recent report from the Financial Conduct Authority warned that recipients of Help to Buy loans were more likely to face negative equity. This is, in its way, a statement of the bleedin’ obvious because they have less equity and so even a relatively small fall in house prices would be enough to wipe it out. That may not damage people’s ability to pay back their loans, but it will make them very, very depressed. So, that’s happening too.

It would be overstating matters to describe Help to Buy as the UK’s version of the 2007 US subprime crisis. The American variant was much, much bigger in scale, and the reason it almost destroyed the global banking system is because it generated a vast quantity of non-performing loans which, thanks to the magic of securitisation, could have ended up anywhere. To be absolutely clear: there is nothing like that here.

But the two do share characteristics nonetheless. Both subprime mortgages and Help to Buy were a way of providing home ownership to people who, at current prices, can’t actually afford it. One came from the market, the other from the government; but both were sold as ways of spreading the wealth, when they were actually intended to stop the housing market deflating.

It’s probably too early to panic about those arrears – the government blames administrative problems with taking payments, rather than lack of affordability. But if this whole thing does go horribly wrong, it’s hardly going to come as a surprise is it?