Is the Help to Buy scheme working?

A recent report by home moving service Really Moving has cast a very interesting light on the UK government’s Help to Buy scheme. In essence the scheme helps first-time buyers climb onto the property ladder. Buyers will receive up to 20% of the cost of a new build property, 40% in London, which is interest-free for five years. Aside from the fact that the government will have a stake in the properties in question, after the interest-free five-year period borrowers will be charged 1.75% on the outstanding balance. However, this is not where the fun and games start!

Are developers taking advantage of the Help to Buy scheme?

The report highlights evidence that developers are targeting those taking advantage of the Help to Buy scheme. As a consequence, Help to Buy investors are seemingly paying a premium for the new build properties. This premium ranges from 0.9% in Wales up to 21.6% in Yorkshire amid concerns that first-time buyers are “overpaying” for their dream homes.

The most obvious knock-on effect of this “overpaying” is the fact that in reality those using the scheme could end up in negative equity very quickly. The introduction of more new developments, targeting the Help to Buy scheme, could put pressure on properties not in this bracket. So, we could end up with a local two tier property ladder, one for new developments and one for existing/relatively new developments.

Negative equity could be a major problem

Many people had assumed that negative equity was a thing of the past with various Help to Buy schemes and the reduction in UK property prices to more affordable levels. However, at a time when Help to Buy premiums are apparently emerging we have seen the return of 95% mortgages. Even though there are relatively strict guidelines regarding mortgage affordability it seems that competition across the sector has forced some companies to relax their lending criteria.

Whatever you think the probable outcome of Brexit, there is a degree of uncertainty in the UK property market at this moment in time. We have not seen the sell-off that many have been predicting since 2016 but growth is certainly slowing. While it seems inconceivable that the UK and the EU will not come together to forge a deal, developments today suggest that a no deal Brexit on 31 October is a real threat.

Wasting taxpayer’s money

If those taking advantage of the UK government’s Help to Buy scheme are really paying premiums on new development market rates, this is concerning. Effectively, hundreds of millions of pounds of UK taxpayer’s money is being put at risk and could inadvertently help push some homebuyers into negative equity. It would only take a slight wobble for the UK economy to see an increase in unemployment and create a knock-on effect in the UK property market with a growing number of forced sellers. If prices were slowly dragged downwards this could create a self-fulfilling prophecy which would be extremely challenging.

Looking longer term

The UK government will need to address these accusations of premiums charged to those acquiring new properties using Help to Buy funding. However, without tampering directly with market forces it is difficult to see how the authorities can rein in this activity. This comes at a time when the UK is facing uncertainty due to Brexit but the long-term prospects still remain strong. The UK economy is still growing, unemployment is near record lows and demand for private rental property/first-time buyers is still at relatively high levels. Yes, there may be some short-term volatility as a consequence of Brexit, as well as allegations of overpaying for new property development, but in the longer term there are still many reasons to be optimistic about UK property prices.

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