By Noel Meredith, Executive Director of United Trust Bank
The headlines following the recent budget were dominated by the Chancellor’s changes to pensions and annuities. However, the announcement that the Help to Buy scheme would be extended until 2020 should provide house builders with assurance that the flow of first time buyers now making their way onto the property ladder won’t suddenly be stemmed. Well not for six more years at least.
Official figures released by Downing Street soon after the budget show that around 17,000 homes have been bought under the Help to Buy scheme to date with around 80% of those transactions being for first time buyers. Interestingly more than three quarters of the house sales through the scheme have been for properties outside of London and the South East. Outside of England, though, the uptake has been lukewarm at best with only 33 sales in Northern Ireland, 416 in Scotland and 131 in Wales. By extending the scheme to 2020 the Government expects a further 120,000 sales to be enabled through the scheme.
There are growing concerns however, that Help to Buy is helping to fuel a house price bubble especially in areas where the scheme was helping to push up demand for properties where there is already an undersupply. As such these bubbles can be found in specific geographic locations rather than being widespread and it’s this factor in particular that developers need to take into consideration when planning projects and estimating future sales values based on the prices being achieved now.
House builders must be aware of the sustainable price point for their end product based on an ongoing balance between supply and demand in their location. Prices achieved in other areas, even if relatively nearby, may have been pushed up because of a pent up demand for properties which has now been met, either because more of the in-demand properties are now available or because more buyers now have the means to buy the properties, or a combination of the two. This may have prompted rapid price increases initially which may eventually level out to something closer to normal house price growth for that area. Builders rushing to take advantage of this surge in local prices may find that by the time their units are ready for marketing the initial wave of interest has died down, supply is more plentiful and buyers now have more to choose from. Unfortunately, this is a recipe for what economists call a market correction. Prices drop to a sustainable level based on demand and supply returning to normal levels. And that’s what developers need to bear in mind when putting a proposal together for a development finance partner. Before handing over the money they will want to be assured that if artificial influences are removed, their plan will still stack up.
If Help to Buy’s detractors are right, the scheme may eventually cause prices to rise beyond sustainable levels in some areas. With mortgage eligibility still dependent on income and affordability, willing buyers just won’t be able to secure a loan even if they have managed to scrape a 5% deposit together. Although buy to let investors may be more numerous, their numbers possibly swollen by the newly retired putting their pension pots into property rather than an annuity, they will be looking for generous discounts to protect their investment yield.
So whilst the extension of Help to Buy for a further six years can give confidence to house builders that there’s a scheme in place to try to keep first steppers coming into the market, they should also keep one eye on the potential for it to also create bubbles. Encouraging demand whilst not increasing supply will not solve the problem of house ownership being beyond the reach of low and middle income earners in certain areas. In order to increase supply we must see the Government address the thorny issue of planning regulations and allow more good quality land to be considered for development. Builders must also have access to finance for their projects. In short, you can’t solve a housing shortage without building more homes and failure to do so may lead to bubbles appearing and bursting all over the UK.