News Analysis: Help to Buy boom stokes negative equity fears

Rising purchase prices may pose problems for first-time buyers, experts warn

Brokers have raised fresh concerns over the risk of Help to Buy borrowers falling into negative equity as purchase prices through the scheme are rising faster than the rest of the market.

Controversy has been mounting as house builders’ profits climb, and many commentators have questioned ministers’ wisdom in extending the equity loan scheme to 2023 for first-time buyers. Government figures released last month show the average purchase price of a home bought using a HTB equity loan in England reached nearly £299,000 in September last year, up 6 per cent year-on-year.

According to Office for National Statistics figures, the average house price in England rose by only 3 per cent to £249,000 in the year to September 2018.

Meanwhile, analysis by property portal OkayLah has looked at the gap between the price paid by FTBs using the scheme versus the average FTB price for the market as a whole.

When HTB was introduced in 2013, FTBs paid £14,000 less when buying through the scheme than the average FTB price, or £183,000 instead of £197,000. But since then, the dynamic has completely reversed and in Q3 2018, FTBs using the scheme paid nearly £291,000, which was £54,000 more than the overall market’s average FTB price of £236,000.

OkayLah founder and chief executive Paul Telford says: “As much as half of the £1bn or so made by the nation’s biggest house builders has come from the government-subsidised scheme and essentially straight out of the pockets of taxpayers. Not only has this pushed HTB prices up massively, but it leaves those buying through the scheme on very precarious ground.

“While we are unlikely to see a market crash despite the slowdown caused by Brexit uncertainty, a notable softening of property values would leave many in negative equity when considering their HTB property within the wider landscape of the FTB market climate.”

Many brokers agree with the warning. Chapelgate associate director Colin Payne says: “As with buying a new car, as soon as you get the keys to a new build property, you are likely to see a drop in value, so in some regions where prices have fallen over the past couple of years, specifically London, there is a danger that owners could be in negative equity.”

Middleton Finance principal Daniel Bailey shares these worries. He says: “It has always been my concern with HTB whether the price is going to hold up and when borrowers come back to remortgage are they going to have the equity they need? When I have gone back to speak to some clients who have bought new build homes in the past, they are no longer worth what they paid for them and they have had remortgage issues.”

North London estate agent Jeremy Leaf says: “HTB has inevitably pushed up house prices. If too many properties are dependent on HTB, prices become inflated and if a sale is required, the loss is crystallised and negative equity is the result.”

But Association of Mortgage Intermediaries chief executive Robert Sinclair points out that the HTB purchase price may be a sign of a more positive trend in FTB activity.

He says: “If someone buys at 95 per cent LTV, there is always going to be a risk of negative equity if they need to sell quickly. HTB is allowing people to buy a larger property than we would have expected even a decade ago, which means people are not having to move up the chain because they are already buying a three- or four-bedroom house that will last them a lot longer.”

The Home Builders Federation is highly dismissive of the analysis by OkayLah.

A spokesman says: “Simply comparing two data sets with no analysis of the type, size or location of property is meaningless.

“While there is a premium on new builds, due to the fact that all fixtures and fittings are brand new and buyers do not have to spend tens of thousands upgrading the property, it has not increased, and new build and second-hand prices have risen at the same rate for many years. The introduction of HTB London in 2016, and its increasing popularity since, has had an obvious impact on the scheme’s average selling price.”

A spokeswoman for the Ministry of Housing, Communities and Local Government adds: “We are committed to helping more people get on the housing ladder as we push to deliver 300,000 homes a year by the mid-2020s. Our HTB equity loan scheme has helped over 195,000 households buy their home, making home ownership a reality for a new generation.”

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