As the equity loan part of Help to Buy reaches its first birthday, and celebrates with a £6 billion extension, it’s worth reflecting on whether this flagship policy has been a success.
The equity loan has received substantially less criticism than its mortgage guarantee successor – not least from Shelter – because it is linked to housing supply by being only available on new-build homes. What ‘success’ means for Help to Buy 1, then, is both how many people it’s helped onto the ladder and how much of an impact it has had on supply.
The National Audit Office’s report on the scheme’s first few quarters in operation concludes that it’s too early to tell what impact the scheme has actually had on stimulating supply – and that even quantifying its added value will be “challenging”. “[I]n a recovering economy,” the report authors note, “developers might have increased supply anyway, or might have speeded up building stalled sites.”
But with almost a year’s data on where loans have been made, we can at least consider whether they have been directed to the places where England’s housing shortage is most acute. We might not be able to tell how much of an impact the loans have had on overall supply, but we can say whether they have gone to places where new building is most needed.
The first thing to note about the distribution of loans made under the scheme is that it is profoundly uneven, with half of them being made in just sixty of England’s 326 local authority districts.
This uneven distribution isn’t necessarily a bad thing in and of itself. The housing shortage is a national problem, but it is not experienced equally everywhere.
But comparing the distribution of Help to Buy loans to measures of housing shortage shows a troubling picture.
There is no authoritative measure of need for new homes in England, but local affordability levels – average wages compared to average house prices – provide an indicator of demand compared to ability to pay. It is reasonable to expect a supply incentive like Help to Buy 1 to be targeted at the least affordable parts of the country, where demand is higher and people’s ability to pay lower. But the trend so far has been towards equity loans being made in the most affordable areas.
Home ownership rates should also give a measure of where people have been shut out of home ownership. The lower the local level of home ownership, the greater the need for new and affordable owner-occupied homes. Mirroring affordability rates, however, in Help to Buy 1’s first year the trend has been towards loans being made where home ownership rates are highest.
The legitimate response to this analysis is that it’s too early for the scheme to have made an impact on new-build completions. In the first year at least, we should expect most loans to be taken where most homes were already being built. Sure enough, the relationship between completions in the year before the start of Help to Buy and the distribution of equity loans is strong.
But this response is far from unproblematic and raises two questions.
Why launch the scheme straight after announcing it?
If the aim of the scheme is to kick-start new building, it should have been given a lead in time so that builders could actually respond. If the equity loan scheme couldn’t be expected to have an impact on supply in the first year after it was announced, why was it launched only twelve days after its announcement? The rush to get it started has written off the first year’s impact on supply and may have wasted over £500 million of DCLG investment.
The argument that builders needed the injection of capital so that they could start new building does not stand up to scrutiny. The added confidence granted by the announcement of the scheme will have opened up access to credit necessary for increasing output for those builders taking part in the scheme.
Is Help to Buy 1 ever likely to be directed at the places it is most needed?
Relying on Help to Buy 1 to deliver the homes England needs presents more problems than just implementation. Its entire premise as a means to stimulate house building is questionable. As the NAO explain, the equity loan scheme is designed to stimulate supply by ‘generating effective demand’. But as we’ve previously written here, the private housing supply system in England is incredibly unresponsive to demand, as demonstrated by the non-existent relationship between average house prices and levels of new building.
Prices represent a measure of demand relative to supply. Economic theory suggests that where prices are higher, supply should increase to meet demand. But the English housing supply system does not respond to higher prices by building more homes. Given that private developers were already failing to respond to price signals before the start of Help to Buy, there is little reason to expect that anything will change in its second year or after.
Help to Buy 1 has managed to avoid much of the criticism of its younger sibling due to its apparent link to new supply. If that link equates to little more than a cursory nod, however, and it isn’t capable of delivering new homes where they’re needed most, it is similarly flawed.