Help To Buy: More Houses Or Just Higher Prices For Uk Households?

By Author: Chris Westerman
Total Articles: 133
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The Government’s scheme to help homebuyers is working, but some worry it’s working too well. It serves the investor to take into account opinions from all sides.


There is an undeniable rise in the prices of homes for sale in the UK, with the largest concentration of those increases in central London. Critics have weighed in on whether this represents a return to the price bubble of the mid-2000s, and there seems to be evidence to support that. But is it really happening - and might it be due to the Government’s Help to Buy programme?


Note there is counter evidence to suggest the bubble in fact is just a natural rise in prices, reflective instead of a strong economy. What absolutely must be acknowledged up front, bubble or no bubble, is that home sales are up, that the majority of sales are to first time buyers, and that development investors (e.g., residential land investment participants) and homebuilders have ramped up their activity, building more homes at a rate that exceeds all activity in the past seven years. Given the critical shortage of housing in the UK, this last point cannot be ignored. The country is short of as many as one million residences for young families.


So what are the theories? Here is a sampling:


Yes, Help to Buy is fuelling a property bubble (in London) - A columnist writing for The Daily Telegraph responded to a speech in June 2014 by the UK Chancellor of the Exchequer as he denied that London price inflation was driven by Help to Buy. The columnist basically said ‘balderdash’, that international investors are keenly aware of the scheme and that their purchasing of London properties was because they anticipated a price run-up. The columnist acknowledges that most use of Help to Buy is for purchases well below £600,000, the programme limit, and that foreigners are buying properties at lower price points (with cash, outside the scheme) because they expect a good return upon selling in the near future.


Actually, landlords are fuelling a property bubble - Another columnist writing for AOL Money/UK also acknowledges the programme’s success. But she says, "New stats by Intermediary Mortgage Lenders Association (IMLA) shows that while house prices are increasing to 2007 levels, mortgage activity remains well below that peak. The reason for this mismatch is because of the increasing number of cash buyers in the market. We know exactly where these cash buyers are coming from, there is hardly anyone who wants to buy a residential property to actually live in that can pay in cash - the people flooding the market are landlords or speculators hoping to make money."


Property bubble? What property bubble? - The Institute for Fiscal Studies looked at Help to Buy in exhaustive detail in early 2014. In its report, "Housing market trends and recent policies" (Daniel Chandler and Richard Disney), the researchers point out that an upturn in prices is not the same thing as a bubble - and they believe the speculative buying characteristic of bubbles is not appreciably present to deem it as such. "On balance, the data currently available do not provide clear evidence of a housing bubble, even in London - though the likelihood of a bubble is greatest there," say the study authors in summary.


Chandler and Disney go on to say the Help to Buy will likely cause a price rise, but that the effect this has on first-time buyers is a function of increased supply. Hence, the pressure is on the developers and homebuilders - and their financing, be it through banks, institutional investors or real asset funds - to build more homes.


Investors within the UK and elsewhere see the clear opportunity that the million-home deficit in the country presents. But individuals should always speak first with an independent financial advisor before taking a position in such an investment.