The Government’s new Your First Home scheme is aimed at the right problem. Homes aren’t affordable. To rent or to buy, the cost of housing is simply too high. That’s the root cause of the housing crisis, and in my view it’s one of the biggest problems the whole country faces.
So the question is right. The answer is wrong.
More of the same drug
Your First Home is a government equity loan. That’s debt. It’s more lending. It’s like trying to solve an addiction problem with more of the same drug.
When you expand the amount lent per person, that expansion gets capitalised into house values and makes homes even less affordable. That’s the problem. The scheme might make the difference for some young people between getting a home or not, but the terms it does it on don’t favour the buyer. They favour the housebuilders, and some would say unfairly so.
I was hoping they wouldn’t do it at all. If they did, I hoped they would at least let first-time buyers use it on any home, not only new builds. That would have been fairer in lots of ways. As it stands, it also pulls buyers away from ordinary people trying to sell their homes, because the equity loan can only be used on a new build.
Walking in the door into negative equity
Last time round, there was evidence that homes bought with Help to Buy sold for more than identical homes bought without it. It’s as if buyers with Help to Buy stop being sensitive to price, while buyers without it hold out for a bit less.
We’ve seen this happen before. The Government’s own evaluation of Help to Buy found buyers already paid around 5% more for a new build than for a similar second-hand home, and around 1% more again when they bought through Help to Buy. It also found more than half of Help to Buy buyers could have bought without it.
Help to Buy pushed London prices up 8% with no extra homes built
In London the effect was even bigger: an academic study in the Journal of Urban Economics found the scheme pushed new-build prices up by nearly 8% without getting a single extra home built there. It did boost the finances of the developers who took part. The subsidy didn’t make homes more affordable. It went into the price.
Last time you needed a 5% deposit. This time it’s 2.5%. And the new-build premium comes off the moment you buy.
People who bought the first time round had two big advantages that don’t exist now. House prices were rising sharply, so if you went into negative equity you soon had your head above water again. And mortgage rates were below 2%.
Now prices aren’t rising sharply, and they’re not going to, even with this scheme. Mortgage rates are much higher. So you’re borrowing 97.5% in total, at much higher rates, to buy a product, not a home. When it’s new, it’s a product, and the day you walk through the front door for the first time you’re in negative equity. In today’s conditions you could be stuck there for seven to ten years.
In this climate, it’s a terrible deal.
One Help to Buy buyer from last time put it better than I can: “I’m in year 6 of the last Help to Buy scheme, and I’m about to lose £150,000 on my new build flat I bought for £460,000. Worst decision in my life.” Asked whether he’d do it again, he said he’d rent, wait until he had a 10% deposit and buy a home that wasn’t a new build. And that was the last scheme, which wasn’t as bad a deal as this one.
It’s understandable why people want it
I get it from young people’s point of view. Home ownership feels unfairly out of reach, and they want it so much. Of course they do. In your thirties, living with your parents, you can’t really live your own life or start a family the way you’d hoped.
So if you don’t look at the finances, it’s appealing. Can we make the monthly payments? Yes. Do we qualify? Yes. Do we get into a new house? Yes.
If you’re buying a freehold house you plan to stay in for at least ten years, with a solid job and no plans to move, there’s a bit more justification. It’s still not a great deal, and it still pushes prices up for everyone else. But anyone else is putting themselves in an extremely disadvantaged position. You could be trapped in that home for ten years, and if you want to move you’ll need savings to cover the gap between what you owe and what the home is worth.
I don’t blame anyone for taking it, as long as it genuinely improves their life and they understand the reasonably likely worst case and accept it.
A word to brokers
Brokers will see more first-time buyer enquiries from this. If you don’t make the warning clear, you’re not doing your job. Tell buyers plainly that the value drops below what they paid on day one, that prices won’t rise fast enough to rescue them, and that they may not be able to sell for up to ten years. It’s not enough to say “watch out for negative equity, but it should be fine.”
Transferring wealth the wrong way
For all the talk of wealth taxes, this does the opposite. It transfers wealth from young people taking on debt to older people who own shares in building firms and other assets. That’s a mathematical fact. Housebuilder shares jumped as soon as the scheme was announced.
The last government that ran this, under Cameron and Osborne, understood the financial dynamics. With hindsight, even George Osborne has reflected that he’s not sure he’d do it again.
Building more won’t fix prices
Part of the thinking is that the scheme will boost house building and help towards the 1.5 million homes target. But house building is falling because there isn’t the demand. And building more doesn’t bring prices down.
In the rental market, simple supply and demand works. Buying doesn’t work that way, because it’s distorted by debt. Millions of people would love to buy their own home, but they can’t get the money, so that demand doesn’t move the market. We don’t have a shortage of homes. We have an empty homes problem.
What we need are more social and council homes, so the state stops relying on the private sector for its social housing obligations and wasting taxpayers’ money on temporary accommodation that keeps rents high.
What would actually work
House prices don’t need to fall. They just need to stop going up. The way to do that is to gradually bring lending multiples and loan terms back down. No big chop and no cliff edge. Just stop turning the dials up and start turning them back down a little. Keep lending to as many people as you can, but stop increasing how much you lend each person.
The other thing we need is jobs. With unemployment rising, especially among young people, it’s simple: no job, no home of your own. This isn’t a party political point. It’s an economic one.
Talk about homes, not house prices
The whole lending and moving industry has relied for so long on “everyone should buy because house prices always go up” that it’s become ingrained. For a while it worked. Now it’s the reason there are fewer transactions.
If you earn your living from transactions, from selling mortgages or selling homes, volume matters more than price. If homes were more affordable, more people would take out a mortgage and buy one. It really is that simple.
I tell estate agents to talk about the process, not prices. When someone asks what’s happening to house prices, the only answer is “I don’t really know, but if you need to move, I can make sure you get full market value, because this is the process we follow.”
I’d say the same to lenders and brokers. Stop talking about house prices. Stop talking about a home as a pension or an investment. Make having a home the point. “We can give you the mortgage you need to get you into a home.” More mortgages get sold, more people buy homes, and everyone’s better off.
We didn’t learn our lessons from 2008. We’ve tried to relight the fire that burnt us last time. Might Your First Home help a few people into a home? Yes. Is it good for the housing crisis overall? Absolutely not.
It’s a really disappointing setback on the road to affordable homes.
Charlie Lamdin