Supplementary written evidence from the Department for Communities and Local Government

At the PAC hearing on the 2nd April, I committed to provide house builder and economist views on the impact of the Help to Buy equity loan scheme as well as explore the relationship between the Help to Buy equity loan scheme and the buy to let market in London.

As members of the committee noted, Housebuilders have been very supportive of the Help to Buy equity loan scheme. For example, the Chief Executive of Barratt, Mark Clare, hailed the first part of Help to Buy as an “outstanding success”. Stewart Baseley, the executive chairman of the Home Builders Federation, said on announcement of an extension to the scheme that “Help to Buy has reinvigorated the home building industry, contributed to a sharp increase in new housing starts and allowed thousands of first-time buyers onto the housing ladder.”

Independent analysts have also credited Help to Buy with a positive impact on the supply of housing. Morgan Stanley, in their Banks and Economics report on the 10th March stated “We think the market still underestimates how critical Help to Buy 1&2 are proving for construction, credit and broader recovery.”

Further details of other house builder and analyst comments are included in the attached annex.

We have also looked into the relationship between the Help to Buy equity loan scheme and the buy to let market in London. The majority of new build properties sold in London could have been offered with Help to Buy equity loan scheme, with 87% sold for less than £600K[1]. However, by February there were 1,131 sales with the support of Help to Buy equity loan, 7% of the total Help to Buy sales. This is relatively low given that London accounts for approximately 17% of total new build properties completed in 2013 in England. However there is little evidence to suggest that this is due to either buy to let investment or foreign investment. The chance of a new build property becoming a rented property is only slightly higher in London, with 32% of new builds becoming a rented property in London compared with 30% in the rest of England.[2] 

Neither is this explained by foreign investors, though there are pockets of high concentration of foreign investment. According to the November 2013 Bank of England Financial Stability Report, foreign inflows have concentrated in ‘prime’ Central London properties and new builds.  Overall transactions by ‘foreigners’ are relatively low in London around 3% of all transactions, according to Knight Frank’s research.[3]

It would seem from this evidence that buy to let or foreign investment does not explain the relatively low level of Help to Buy equity loan sales in London. The Help to Buy equity loan scheme aims to address the demand side barriers to building new homes. The London housing market, as a large global city, does not have the same barriers to demand that is seen in other parts of the country, which may explain the relatively low take up of Help to Buy equity loan in this area.

Sir Bob Kerslake

Permanent Secretary

10 April 2014

ECONOMIST OPINION

Help to Buy: Equity Loans and ‘housing market bubble’

Institute for Fiscal Studies

“…the UK housing market has picked up significantly in the past year, with prices increasing across most of the UK in 2013. However, prices remain about 9% below their previous peak in nominal terms, and 25% below in real terms. Only in London have prices reached their previous nominal peak – although they are still 17% lower in real terms…

“There is concern among commentators as to whether a housing ‘bubble’ is developing in the UK. A bubble – as opposed to simply an upturn in prices – arises when price trajectories are driven largely by speculative buying based on expected future price increases, rather than by economic ‘fundamentals’ such as improving underlying economic conditions and easier access to finance. On balance, the data currently available do not provide clear evidence of a housing bubble, even in London – though the likelihood of a bubble is greatest there.”

IFS Green Budget 2014[4]

EY ITEM Club

“The Treasury’s shared equity loan scheme launched in the Budget as the first component of the ‘Help to Buy’ (HtB) scheme has also been a big success. Reservations under this scheme have now passed 12,500 and are well on the way to meeting the Treasury estimate of 74,000 over three years. This performance supports our view that there is a lot of pent up demand in the housing market, which has been held back by a lack of mortgage finance…”

“The supply response has also been very encouraging. Building industry estimates indicate that the numbers of homes built in the first eight months of this year were up a quarter on the same period of 2012. The house building component of the construction PMI published in October was the strongest in a decade. Planning applications have also bounced back strongly from last year’s lows. Research by Frank Knight LLP reveals that outline planning applications for private residential schemes of 50 units or more were up 31% in the May-August period on a year earlier (151% in London). Detailed planning applications in April – July were also up by 31% in (131% in London) [sic]. This response suggests that the construction industry has a lot of spare capacity and that the revival of these markets will boost house building as well as prices.”

Autumn 2013 Forecast, October 2013[5]

IHS Global Insight:

“The strength of house prices is not yet a serious concern outside of London and housing market activity is still not unduly strong compared to long-term norms, so in many respects it is premature to talk of a housing market bubble…

“…the strong pick up in housing activity and government support is underpinning markedly stronger housebuilding—which is leading the construction sector’s upturn. Indeed, the budget on 19 March provided further support for housebuilders. Specifically, the Help to Buy scheme for newly-built houses will be extended to 2020.”

IHS Industry Economic Report, 28 March 2014[6]

Howard Archer, chief UK economist at IHS Global Insight

Bank of England:

“At higher property values, housing transactions tend to be less reliant on high loan to value lending. So buyers may have been less constrained by the relative tightness of credit conditions in the aftermath of the financial crisis. In London, the housing market has received additional support from relatively strong growth in employment as well as demand from foreign buyers. Foreign inflows have been concentrated in ‘prime’ central London properties and new builds. But, overall, they appear to have accounted for only a small share of the London market — around 3% of all transactions, according to some estimates…

“Many investors have bought property without significant leverage. Lending standards have remained tight, with loan to value ratios at more conservative levels than pre-crisis. And the share of transactions characterised by very low yields remains modest.”

Financial Stability Report, November 2013[7]

Morgan Stanley:

“We think the market still underestimates how critical Help to Buy 1&2 are proving for construction, credit and broader recovery.

“Help to Buy is proving a key catalyst for construction.

“Housing starts are up 16% since HtB1 was introduced April last year and running at a 6-year high; we estimate ~30% of all new builds in England are currently funded by HtB – or almost all of the increase.”

Banks & Economics - Help to Buy more beneficial: What if extended or axed?, March 10 2014

HOUSE BUILDERS’ VIEWS

Nicholas Wrigley, Persimmon's chairman, February 2014, "Persimmon achieved a strong result for the year as we responded quickly to the increased customer demand that resulted from improved mortgage lending, the introduction of Help to Buy in April 2013 and the increase in consumer confidence as the UK returned to more meaningful economic growth.”

Mark Clare, CEO Barratt following the Annual Report and Accounts 2013. “We saw a particularly strong sales performance in the final quarter of the financial year following the announcement of the Help to Buy (Equity Loan) scheme”.

Mark Clare hailed the first part of Help to Buy … as an “outstanding success”. He said a turnaround in consumer confidence and an increase in mortgage lending in the winter of 2012/13 had also been crucial.

Barratt Developments said it had created 3,000 new jobs in the past year after it increased the production of new homes to meet demand. They said it would take on 1,100 apprentices, graduates and trainees by 2016, nearly twice as many as it had previously announced.

Of Barratt homes completed between July and December 29% used Help to Buy.

David Ritchie, Bovis commented that that help to buy: equity loan scheme had provided "strong impetus" to the new build industry.

Stewart Baseley, HBF executive chairman. "After some very tough years that saw housing supply drop to record low levels, it is now increasingly evident that housebuilding activity is on the up. Help to Buy is allowing people who can afford to buy a home to do so. As a result of this increase in activity, the industry is recruiting a significant number of people and training more apprentices."

Quotes in response to announcing an extension until 2020

Barratts

“This is very welcome news for home buyers and the construction industry alike. Britain urgently needs more homes and by setting out a longer term framework for Help to Buy this announcement will enable the industry to deliver just that, with all the benefits that will bring to the economy in terms of employment and spending in the supply chain. We need this greater certainty as the land we are buying today is for homes we will be building in 2016 and beyond."

HBF - Executive chairman of the Home Builders Federation Stewart Baseley

“We warmly welcome the Chancellor’s commitment to extend the Help to Buy Equity Loan scheme. “Help to Buy has reinvigorated the home building industry, contributed to a sharp increase in new housing starts and allowed thousands of first-time buyers onto the housing ladder. We hope that other parties will be able to ensure that a political consensus is in place before the election to allow builders to get on with planning their businesses and employing the necessary apprentices to help tackle the country’s worsening housing crisis”