Don’t be fooled: Help to Buy is still dangerous

Yesterday, the Chancellor, Philip Hammond, confirmed that the Help to Buy Mortgage Guarantee scheme would wind up at the end of the year. This was arguably the more controversial of the two Help to Buy schemes announced in the 2013 Budget, but it was originally meant to last only 3 years. And with it gone, we're still left with a Help to Buy loan scheme that is highly counterproductive to any efforts to fix the housing crisis.

The Mortgage Guarantee put taxpayers’ money on the line for high loan-to-value mortgages that went bad. Someone could borrow 95% of their home’s value and if they defaulted the government would cover 20% of the loan. This encouraged the banks to lend to people with small deposits but enough income to cover the high monthly mortgage payments. Now banks are offering 95% mortgages without government help, the Chancellor can painlessly close the scheme.

The original fear was that Mortgage Guarantees would fuel house price inflation and end up pricing more would-be first time buyers out of home ownership. House prices have indeed shot up since their introduction in January 2014, but of 2 million mortgages used to buy houses in that period, only 86,000 were guaranteed by the government. Other factors were at play.

Together with the other 2013 scheme – Equity Loans – Help to Buy has enabled 150,000 first time buyers access home ownership (split across the two schemes roughly equally).

With the Equity Loan scheme set to run to 2020, helping perhaps another 70,000-odd, and 200,000 Starter Homes promised, we might expect to see the government help around 400,000 private rented households into home ownership over 7 years. That’s how many first time buyers there were in a single year before the crash, and there remain 4.5 million households stuck in a private rented sector that doesn’t offer stable, long-term affordable homes.

But despite its puny impact on ordinary renters (only 21% of beneficiaries had incomes under £30,000), don’t think for a second that Equity Loans are a harmless little gimmick, at best a distraction from the wider housing crisis. No: the scheme involves the government pitching into every transaction, taking a stake of 20% of the property’s value.

The new homeowner will eventually have to buy out the government’s share, and pay a monthly fee after an initial period until they do. The amount they pay back will depend on the value of the property – if the price goes up, so does the government’s share. If the price goes down, the government will take a hit too.

Can you see where this is going?

Although the government has helped only a tiny number of people with this scheme, it has involved investing taxpayers’ money directly in the property market. We the taxpayers are party to a £4.2bn gamble that house prices will rise.

It’s not really a gamble, of course. The government holds most of the economic levers that affect the price of houses, from taxation, to planning, to investment in new supply. They have a big incentive to use these levers to maximise their return from Help to Buy.

It is true that they’re worried about a bubble, and have more recently reformed landlord taxation and transparency around foreign ownership to dampen speculation (and give first time buyers an advantage). But they have already presided over several years of house price inflation running at four times the rate of wage growth. Most of us who are still renting are further away from buying than we were before Help to Buy was announced.

And still the government shows no signs of genuinely wanting to minimise house price inflation. They’ve cut inheritance tax which encourages us all to buy the biggest home we can and discourages downsizing. They have refused to invest money in homes for social rent – which would both help those suffering the worst of the housing crisis, and would leave the taxpayer less exposed in a crash. And they’re still dragging their feet on reforms to the green belt, which are essential if overheating cities are to grow sustainably.

This approach will only fuel further increases in prices, leaving more renters at the mercy of the expensive private rented sector.

For 20 years property has been seen by some as the best place to leave your money – regardless of the damage it inflicts on the wider economy through increased rent subsidies, reduced disposable income for renters, and diverting investment from assets that actually provide jobs. If you don’t have any money to invest it is clear that this is unsustainable.

But instead of acting to head off this damaging speculation, ministers have fancied a piece of the action and have piled in with our money.

The housing market is at a peak and if it crashes, the government is going to get burned. Before then it needs to cut its losses and scrap the Help to Buy scheme. I’m sure renters can think of better uses for £4bn of their taxes.


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