Developers get another easy ride budget

“In a boost for U.K. homebuilders, Chancellor of the Exchequer Philip Hammond will introduce a new Help to Buy program that will run from 2021 until 2023.

The scheme extends the original program, which has drawn criticism for boosting prices. It will be limited to first-time buyers and regional price caps will be introduced, limiting the value of the home to 1.5 times the price for an average debut home purchaser.

The government gives home buyers an interest-free loan of 20 percent to 40 percent of the purchase price under the program. The announcement was made alongside the publication of an independent, government-commissioned review of the original program. Some had feared the review might result in the policy being scrapped, but it confirmed the policy has boosted house building.

Persimmon plc, the U.K.’s largest home builder, has gained about 107 percent since the introduction of Help to Buy in April 2013. About 60 percent of the company’s home sales are through the Help to Buy program, according to research by analysts at Liberum. The policy, which has already been extended once, was due to expire in 2021.”

One thought on “Developers get another easy ride budget

  1. Help to Buy has always been limited to “first time buyers” – this is NOT a new policy. But this didn’t stop those first time buyers being relatively wealthy people taking advantage of a publicly funded scheme, and it only resulted in house price inflation and made the situation it was suppose to help even worse. (And for all I know the definition of “first time buyer” could be loose enough to allow people who we (i.e. the man on the omnibus) might consider NOT to be first-time-buyers never-the-less to qualify for the scheme – for example if the husband sells the existing house and the wife buys the new one, does that count?)

    But, as usual, this government has decided to throw even more money at a policy that has demonstrably failed, either because they are too utterly stupid to recognise that it was a failure, or because they are too weak and scared of losing power to ever admit to failure, or perhaps because contrary to their public statements this policy is actually deliberately designed to favour a Tory-voting middle-income demographic rather than the Labour-voting lower-income demographic that they say it is targeted at.

    Here is an example to illustrate the folly of this…

    Example 1:

    In financial services, the technical term for using a loan to be able to buy something is “leverage”.

    If (say) you have a £50,000 deposit and can get (say) a £200,000 mortgage, you can use this to buy a £250,000 house. If 5 years years later you sell it for 20% more, then after you pay off the mortgage you would have £100,000 left over and would have doubled your capital. Of course, you would have to have paid interest on the £200,000 mortgage of (say) £25,000 so your net gain would be really only 50% of your capital. But that is not bad for 5 years – and that is the benefit of a leveraged (i.e. mortgage) investment.

    But if you can get an interest free loan of 40% of the property value, then you could buy a £415,000 house with the same deposit and mortgage plus a £165,000 interest free loan, and after 5 years sell it for 20% more and have £133,000 after paying off the loan, less the same £25,000 in interest payments, so so your interest free loan has cost you nothing but earned you a further £33,000. In other words, we the tax payers have subsidised you in the amount of £33,000.

    Example 2:

    You want a new three bedroom town house (the third bedroom being literally just big enough for a single bed). Housing is a sellers’ market because demand is exceeding supply, so rather than developers battling it out to get you to buy their property rather than someone else’s, they know they will sell it, and the question is only just how much they can get for it. So when typical customers for the 3 bedroom house will have a £50,000 deposit and a £200k mortgage, then they will price it at £250,000.

    But when that same customer can get a £100,000 interest-free Help-to-Buy loan, then they can afford to pay £350,000 for the same house – in which case why should the developer sell to someone for £250,000 when they can actually show the buyer how to apply for the £100,000 Help-to-Buy loan and then sell that same property for £350,000 instead. This enables them to pay (say) £40,000 of their additional profits directly to their CEO, and (say) another £40,000 to other executives and £20,000 in a higher dividend to shareholders. In the mean time the customer has paid £100,000 more for the same property which they may not get back when they come to sell it, but which they still need to repay.

    So another way of looking at this is that it is a government-approved scheme to transfer £100,000 of the house buyer’s wealth directly to the developer.

    The reality is that it is probably a mix of both of these explanations. Which is, of course, the best possible result for the Conservative Party who came up with this policy. Not only do the middle-earning voters think that the Conservative Government has helped them make more money with an interest free loan (at tax payers’ expense), but the developers (who completely coincidentally are also Conservative Party donors) have also made a “nice little earner”. Job done! Cushty!


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