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One of my regular tasks is monitoring newly published reports about the UK housing market for my weekly email. Recently, I’ve noticed that, while government releases have focused on their planning reforms, the private sector is more interested in the demand for new homes, with many calling for a new equity loan scheme for housebuilders to attract buyers.
To recap, the previous Help to Buy equity loan scheme to enable first-time buyers to get on the property ladder was controversial. It provided buyers with a 20 per cent equity loan, allowing them to purchase a new-build home with just a 5 per cent deposit. It was originally needed because lenders were unwilling to offer loans above 75 per cent of the property price on new-build homes following the financial crisis. It quickly became a politically popular way to increase home ownership among younger generations.
But there were concerns about the scheme. It boosted housebuilder profits but the evidence that it increased wider house prices is less certain. It also lived up to one nickname — help to buy bigger — as buyers used it to boost their budget. However, the London version of the scheme was scandalous. The combination of a 40 per cent equity loan, a stagnant housing market and the leasehold and building safety crisis left too many people trapped in unsellable homes after buying flats with unsafe cladding.
Despite these issues, the scheme successfully increased the building of new homes. So far, the total value of repaid loans has exceeded their original cost. Given the government’s focus on housing delivery, it wouldn’t be a surprise if they introduced a new version, although maybe it should be called Help to Build, explicitly acknowledging the support it provides housebuilders and not just homebuyers.
So why, when we apparently have an undersupply of millions of homes across the country, are the housebuilders, their advisers, and lobbyists so keen for a demand side subsidy?
Although there is undoubtedly a need for new homes, as I highlighted last month in an FT column, only those who can afford to buy in the market directly affect demand. If you’re a renter who can’t afford to buy, you’re reliant on investors buying the new homes you can then rent. Rising interest rates, stretched affordability, and weaker price growth have led to a subdued market thanks to weaker demand. As a result, fewer people are moving home and turnover is, aside from the recent stamp duty spike, well below historically normal levels.
Lower turnover is a problem for housebuilders because they compete with the wider secondhand market. The prices they charge and their sales rates are typically determined by the house prices and activity in the local market. This means there has tended to be a relationship between overall market activity and private new-build completions over the past 50 years, with completions making up around 10 per cent of overall transactions nationally. The Help to Buy equity loan scheme’s biggest success was in increasing new-builds’ share of overall transactions consistently above this 10-to-one ratio. But for now, demand for new homes is constrained. Consequently, housebuilders have reduced their output as they wait for market conditions to improve.
Housebuilder sales rates are still lower than their pre-pandemic average, according to analysis by Savills. Meanwhile, the latest government estimates for additional dwellings are well below levels needed to hit the ambitious target of 1.5mn new homes by 2029. With the shortfall in delivery, Savills have identified a “demand gap of 70,000 homes per year that needs government intervention to be filled”. Constrained demand is clearly an issue for the government’s housebuilding aspirations.
What can government do? The first option could be to pump up the market to increase the price buyers can pay. Relaxing lending restrictions is always a favourite for this. But it is difficult to sustain without unintended side effects such as a creating a bubble that prices more people out of the market.
A more appropriate alternative is to deliver a broader mix of housing tenures that relies not just on market sales but on rental and affordable homes too, across a larger number of sites. But in the current market, even this is challenging. For example, shared ownership is a popular policy option but is a niche product that I wouldn’t encourage anyone to use. The private rented sector has been a key driver of new build demand over the last couple of decades. However, the buy-to-let investor is rarer these days and the build-to-rent sector is growing but not yet at a scale to replace the shortfall in overall demand.
Affordable housing will be key to hitting the government’s target and directly meets the need rather than demand for new homes. But it is heavily dependent on government funding while housing associations are more focused on their existing homes than growing stock. Without a radical rethink about the way we fund and build new homes, it leaves a new equity loan scheme as the only option.
Unsurprisingly, there have been plenty of calls for a new equity loan scheme. The Home Builders Federation, for example, set out details for a replacement equity loan scheme, with a 5 per cent deposit and 15 per cent equity loan from government, including a 1 per cent contribution from the developer. So if you are thinking of buying a new build home, should you hold out and hope the government will unveil one?
Given the government’s firm commitment to its 1.5mn housing target, some form of equity loan scheme seems likely. But be wary of pinning your hopes on it as it is likely to be much more limited than the original. It’s also not clear how successful it would be in this environment.
Given the various scandals during the Help to Buy years — over Bovis’s build quality, bonuses at Persimmon and leasehold at Taylor Wimpey — we should hope any new scheme will include tougher requirements around build quality, safety and sustainability. Housebuilders have one more ask: please don’t call it Help to Buy. They would prefer a new brand name without the legacy of the previous scheme.
Neal Hudson is a housing market analyst and founder of the consultancy BuiltPlace