UK Government Blew Billions on “Help to Buy” Scheme that Enriched Home Builders and Drove Up Home Prices. Taxpayers on the Hook When Prices Sink, New Report Warns

But it helped high-income people buy homes.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

The UK’s government’s flagship “Help to Buy” equity loan scheme, launched ostensibly to give cash-strapped first-time buyers a leg up onto the property ladder, has dished out billions of pounds of publicly subsidized loans to relatively well heeled homeowners who were perfectly capable of buying their first property without need for outside help, asserts a new report by the National Audit Office (NAO).

The report, which used figures supplied by the Ministry of Housing, Communities and Local Government, found that only 37% of the roughly 210,000 people who have so far benefited from Help to Buy would not have been able to afford a property without it. Since the scheme is not means tested, anyone can apply and qualify for the loans, including people earning more than £100,000 a year, who reportedly account for 4% of the total borrowers.

One particularly egregious example is Conservative MP Peter Boone who, in 2016, used the scheme to buy a new constituency home, purchasing the £175,000 home in his wife’s name, with a £35,000 equity loan from the government. The first five years of that loan are interest free — hence the term “equity loan” – after which borrowers are charged 1.75% interest on the outstanding amount.

It’s a pretty sweet deal for Mr Boone and his wife, but perhaps not so much for UK taxpayers. But according to the Department for Housing, Communities and Local Government, such abuses are an “acceptable consequence” of designing the scheme to be widely available.

Here’s how the scheme works: First-time property buyers get to put down a deposit of as little as 5% on a new-build home worth as much as £600,000 ($761,000) and receive an “equity loan” from the government. The size of the loan varies depending on where borrowers live. In London, where the price of property is an order of magnitude higher than in most other places, buyers can receive as much as 40% of the property price. Across the rest of the country the upper limit is 20%. The rest of the financing is covered by a traditional mortgage.

While Help to Buy may have had a limited effect in terms of making housing affordable for first time buyers who are genuinely priced out of the market, it has proven to be effective at sustaining the UK’s all-important housing bubble by jacking up the prices of new-build houses, resulting in even less affordable housing. Since Help to Buy was first launched in 2013, average UK house prices have increased by 35%, from £167,000 to £226,000, according to the Office for National Statistics.

Through the scheme, the government has so far issued around 211,000 loans worth £11.7 billion ($14.8 billion) to home buyers. According to the NAO, this has helped increase sales of new-build properties from 61,357 a year in 2013-14 to 104,245 a year in 2017-18. That, in turn, has helped fuel a spike in profits for the UK’s biggest home builders. The nine largest builders dished out £2.3 billion in dividends in their most recent financial year, 39 times greater than the £53 million they paid out in 2012, a year before the scheme was introduced.

The NAO estimates that over the last six years, about 40% of all new-build properties have been bought by buyers using the scheme. This has not only helped to line the pockets of large home builders and banks, it has also transformed the UK government into a major player in the UK housing market. And with that comes potential rewards as well as risks, the report says:

Given that the government has entered the equity loan market place, it has put reasonable arrangements in place to benefit from increasing property prices. However, this is dependent on the performance of the housing market and property values can go down as well as up. At points when the market turns down (whether over the near, medium or longer term), the taxpayer could lose out significantly, as the government’s investment in housing capital would reduce in value.

By 2023, when Help to Buy is scheduled to end, the net amount loaned by the government through the scheme is expected to hit a peak of around £25 billion in cash terms. The government believes it will be able to claw back its investment in Help to Buy by 2032, but a downturn in the property market could hit the value of its loan book. It also means that Help to Buy borrowers looking to sell their properties in the future may have to grapple with negative equity.

Gareth Davies, head of the NAO, warned that the biggest challenge the government faces will be to wean the property market and the home builders off the scheme with as little disruption as possible while still being able to meet its goal of 300,000 new homes being built by the mid-2020s. But many home builders are by now completely hooked on the public funds, with companies such as Persimmon depending on the scheme for around half of their sales. By Don Quijones.

It was a doozie, but it shouldn’t have come as a surprise. Here’s why. Read…  About this Biggest Plunge Since 2002 in Manufacturing in the UK

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  17 comments for “UK Government Blew Billions on “Help to Buy” Scheme that Enriched Home Builders and Drove Up Home Prices. Taxpayers on the Hook When Prices Sink, New Report Warns

  1. Trinacria
    Jun 13, 2019 at 10:34 pm

    The scam seems to be worldwide, at least with regard to the industrialized countries. Said countries seem to be so desperate; in fact, the powers that be don’t want to let the natural business happen, which is painful, but ultimately healthy to the long term. This will only make things much worse. I guess “they” want it to happen on someone else’s “watch”. So, let me see if I understand how the scam works and, on steroids since 2009:
    1. Bring about artificially low, if not negative interest rates, through QE, operation twist and whatever.
    2. This harms savers….the backbone of any market/capitalistic system.
    3. In the meantime, suppress/manipulate the value of precious metals, as that is a “truth barometer” of sorts.
    4. This in turn will encourage speculation…probably the likes of which has not been seen since the roaring 20’s. Keep in mind that money needs to be fairly priced, otherwise all sorts of hair brained things happens…Tesla, Netflix, etc….which brings about moral hazard.
    5. Encourage folks to go into debt (like programs for first time home buyers) to keep the consumer economy going – which is approx. 70% of the total economy. Indeed, buying crap is the name of the game.
    6. companies will borrow at these low rates to buy back their own shares. But the debt remains on the books and all hell will break loose when economic pullback finally happens as it can’t be kept away for ever. Companies usually buy back at very high prices…so in a sense, they are very good “bag-holders”. Harms the honest shareholders.
    7. Savers are frustrated with low yields and, some will eventually go into the equity markets – eventually their head is handed to them once the economic pullback finally happens….many, especially the older ones have their lives ruined. I believe the equity markets pull in these bag holders toward the end.
    8. Once the big bath happens, the very wealthy, for the most part, will swoop in and pick up stuff at very low prices.
    9. Then the whole process starts over.
    An old saying….”is this any way to run an airline?” Thank you and take care.

    • Jonathan Vause
      Jun 13, 2019 at 11:18 pm

      but what to do if desired savings are greater than profitable investment opportunities, which is the world we’ve been in since maybe the 1970s? of course every asset (stocks, housing, artworks, antiques whatever) is in a ginormous bubble and of course plenty of investments are spectacularly unsuccessful. increasing demand requires savings flows from rich to poor countries – not much evidence of that – or decreasing inequality in rich countries – not much evidence of that. or we could decrease supply, but that pushes up unemployment and increases inequality because the rich prefer to keep their jobs. you’re right that what cannot be sustained must stop, but it can also go on for much longer than anyone expected

    • d
      Jun 14, 2019 at 11:43 am

      3. In the meantime, suppress/manipulate the value of precious metals, as that is a “truth barometer” of sorts.

      The PM sales price is Heavily manipulated but the price which you call Value.

      Has not be suppressed, the sales price has been manipulated to such level, that the peopel who need to have some, to store a small amount of wealth can not afford to purchase at the over-inflated sales price.

      PM just took another FEAR Jump to 1355.00 driven by iran, befitting iran and russia, again.

      iran is currently manipulating 2 markets to its advantage, Oil and Gold.

      It was under 1285.00 which is close to 0 margin for many russian and ccp chinese miners.

      • Gold is just..gold
        Jun 15, 2019 at 12:25 am

        “….PM just took another FEAR Jump to 1355.00…

        There have been plenty of incidents in the last several years of similar/greater significance than the tankers recently going up in flames. In those, gold opened an eye, turned over & went back to sleep.

        No, we’re at the start of a new cycle and not a very pleasant one. The increase in PM price will be more than matched by bad stuff happening – much of it unexpected.

  2. 2banana
    Jun 14, 2019 at 10:36 am

    Government scheme to “help” people buy a home actually makes homes even more unaffordable.

    With those with a connection to someone in power reaping the most benefits from the scheme.

    There is a lesson in there somewhere…

    • WT Frogg
      Jun 14, 2019 at 10:53 am

      And no ” means testing” in order to qualify for the loans. What’s wrong with this picture ?? Accidental or deliberate abuse of fiduciary duties of office or what ??
      Time to heat up the tar , sharpen the pitchforks and stockpile the feathers IMO.
      Best government money can buy !!! Ya think ??

      • MCH
        Jun 14, 2019 at 5:16 pm

        This is like the government shelling out $10k tax credit for people to buy $100k EVs. Utterly stupid, meant to jump start the market, I suppose the new term for this would be the green economy. But in reality, another hand out to the rich.

  3. ZeroBrain
    Jun 14, 2019 at 10:52 am

    In the US we had our own version of this after the housing bust, when the government offered a downpayment loan (up to 40k?). This pulled some demand forward and put taxpayers at risk, while turning many buyers into knife-catchers as the market continued to tank. Luckily for taxpayers, this was a loan and not a total freebie. My friends who took advantage got crucified.

    In related news, Andrew Yang is getting crucified in the media for suggesting that loan access is increasing the cost of education – something I thought was obvious.

    And finally, what is with subsidy-beneficiaries labeling taxpayer-funded programs as “help”. Ugh. Call it what it is – another taxpayer screwing.

  4. MC01
    Jun 14, 2019 at 10:57 am

    British authorities may ask their Italian and especially Spanish colleagues how they can avoid real estate price deflation in face of lower sales and higher stocks. That way the ‘Help to Buy’ scheme may be able to break even or even make a profit regardless of market dynamics. Problem solved.

    However there’s a small price to pay: existing home sales must be sacrificed so that new home sales may survive, and after a while they’ll hit the skids as well. But GDP will be goosed for a while and debt-loaded “developers” (of what?) will put insolvency a little bit into the future.
    This leads to the now classic paradox: I may own a house that on paper is worth a lot of money, but what good is it if there’s no market for it? I am learning it the hard way thanks to what is turning into an unwanted inheritance in Italy.

    The trend all over Western Europe is for a slow but steady and so far unstoppable reduction in home ownership rates: young professionals are driving this change as they rightly want to be able to quickly move to where better opportunities call. Owning a house with a big mortgage, no matter how cheap to service, is like trying to run a marathon while dragging a chain and ball.
    Thanks to extremely strong immigration the UK hasn’t seen the trend towards depopulation Italy and Spain started seeing in 2017 but I honestly don’t think all of those immigrants are millionaires carrying with them suitcases stuffed with cash. At the same time a steady trickle of British citizens, many of them well-off or even very wealthy move abroad every year in search of cheaper living, warmer weather or whatever their motivations may be.
    If these ex-pats, as they call themselves, cannot be replaced quickly enough by people with the same income, real estate prices will be affected. And if the trend which started with my generation continues, home ownership will become slowly but steadily a relic of the past.

    I’d love to see what financial somersaults and legislative cartwheels legislators will perform to keep their beloved real estate/construction sector bloated beyond any decency, but I fear I may burst a major blood vessel to watch such a sorry spectacle.

    • d
      Jun 14, 2019 at 11:49 am

      Its an inheritance in Italy.

      Auction it, before it turns into a heavy tax millstone.

      Rural italy and spain are full of abandoned rural proprieties abandoned due to totally UNTENABLE tax burdens.

      • MC01
        Jun 15, 2019 at 3:20 am

        With all due respect taxes are more of a nuisance than a problem (I’ve just paid them so I know a thing or two about them) compared to realtors’ mentality and especially the growing glut in “for sale” properties driven by pure speculation aimed at goosing GDP figures and keeping fly-by-night “developers” and their contractors solvent a little bit longer.

        In Hong Kong I learned how the big hong (Taikoo, Cheung Kong, Hang Lung etc) keep prices there even higher than they would be by keeping a continuous pressure on HK authorities to restrict new developments. In Germany existing homeowners often successfully resist new developments to defend their quality of living and especially their home equity.
        But in Italy and Spain? Ah! The only place I’ve been to that goes remotely close in obsession to swamp everything in concrete is Florida. Australia seems another one of those places but so far I’ve only met ex-pats with no intention to go back to that concrete jungle. ;-)

  5. Sean McKeown
    Jun 14, 2019 at 11:50 am

    The Chancellor George Osbourne was the instigator behind this corrupt “Ponzi” scheme and is close friends with the chief beneficiaries of the the HtB scheme, those being the MD’s of Barratt Developments, Persimmon,Taylor Wimpey, Bovis Homes, Bellway, Berkeley Holdings. They have seen their stock price go through the roof excuse the pun, and given George’s chums huge stock and pay bonus’s but good old George hasn’t forgotten himself, he has now parked himself onto the board of BlackRock asset management, that are in reality are asset strippers, and infamous for buying up house repossessions at bargain basement prices in the US real estate crash then goosing the market and selling at the top of the “recovered” market. So his mates make the money on the up and he makes the money on the down. This is how corrupt UK politics is at the moment.

  6. Dan
    Jun 14, 2019 at 2:18 pm

    In 2010 the government tried to rebalance the economy away from property speculation towards a more export-led model. Unfortunately it tried to do this just as it was slashing government spending in the most serious economic downturn in living memory. Obviously this meant going back to property speculation in a desperate attempt to boost the economy.

    Shouldn’t be surprised, mind you. Its long been Conservative party policy to turn people in home owners, as they are statistically more likely to vote Conservative. One of the factors leading to a housing shortage in the first place.

    Policy error compounding policy error compounding policy error. Its going to be very bad for some people (but not the government ministers that caused it) when this unwinds.

  7. Jack
    Jun 14, 2019 at 9:05 pm

    Great article Don, thank You.

    and comments here are fantastic, educational and despite most of it lamenting the current spate of bad policies in ( all major developed countries)

    it carries the seeds of the Revolution that our societies have to have ( SOON).

    The wide ranging failed programs run by shonky governments of most of Western European , and North American countries will only exacerbate the mayhem that future generations will have to deal with.

    Take the example of Don’s article here and the other examples cited by the commenters and you’ll understand the scope of ( Mal government practices) that are giving corruption a whole new meaning.

    Here is an example of how copy-cat style of stupidity in running and imposing Tax payer funded programs can quickly turn into a big hole in your forecasted budget.

    In on of Australian states the government decides to implement a huge solar energy rebate ( a generous one I might add) , in a matter of months the allotted money runs out!! Leaving a trail of destruction behind!

    First as the program is announced a multitude of ( overnight sprouted companies)! Spring up and advertise for solar panels installations ( these outfits buy cheap Chinese faulty products) and commit themselves to large investments .

    Second a huge number of customers who are fed up with their ( continuously rising energy bills ) in a deregulated market , sign up for the scheme and put deposits with installers!

    And what’s the results you ask!

    First the program run out of funds leaving a large number of customers with out of pocket deposits and No solar panels!

    Second many overexcited installers have a massive problems with having a lot of stock and no customers ( with money to complete the transactions)!

    Thirdly even as this seems utterly stupid and in the name of reviving economic activity in the state the government issues an apology to all the parties involved in the transaction and Promis even more ( tax payer funds) to continue the corrupt scheme!!!

    You might ask what could go wrong?!

    I am sure most of you have the answer to that by now.

    The budget has blown now out of water.
    and you grand child will be happily paying for that crap product!

    But let me tell you this. If a business is viable and can install a good quality product ( solar systems) in this case why on earth would you need to subsidize its operations ?!

    And if you really want a competitive market why do you have to continuously interfere in the Normal running of individual business by Mal regulations, unwarranted handouts and discrimination by subsidizing failures?

    I cannot blame these governments any more! I place the whole responsibility at the feet of the public!

    It’s there money, and someone is stealing it! How should you react?!

    Long time ago a Farmer in England called Oliver Cromwell had a simple answer to that.

    Can Britain conceive of such a son/ daughter again?

    • Gold is just..gold
      Jun 15, 2019 at 12:15 am

      The faint possibility of a new age Cromwell is why the inhabitants of most countries no longer have access to firearms. The US is an exception – and their rights are under fairly constant threat.

  8. Laughing Eagle
    Jun 16, 2019 at 5:14 am

    ZIRP and NIRP provide the rich a convenient way to steal wealth from the masses. Then Central Banks keep debasing the currency, all hidden from view of the masses.

  9. CreditGB
    Jun 17, 2019 at 11:01 am

    Government’s messing with the free market’s strict risk/reward outcomes by “Helping” sets up the next fall. Does anyone recall the US housing and mortgage mess of 2006 – 2008?

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