Help to buy: Boom or Bubble? Green Paper

Help to Buy: Boom or Bubble?Green Paper - October 2013

delivering progress through quality

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Help to Buy: Boom or Bubble? Green Paper - October 2013

Contents

Foreword Page 3

Part One - The Research Page 4

Part Two - Options for Change Page 12

Conclusion Page 15

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When it comes to discussing the long-term prosperity of the housing market, recent government initiatives such as Help to Buy have sparked a great deal of debate. Welcomed by many, the scheme is seen as a credible way of kick-starting the UK’s housebuilding sector. However, with some aspects of this complex initiative yet to be implemented, the jury is out on whether the measures will be truly effective.

The long-term implications seem to be the main concern for industry experts, with high profile figures, such as Business Secretary Vince Cable, suggesting that the initiative will create a housing bubble in the UK. In a recent well documented interview with Sky News, he said:

In many parts of the country it clearly isn’t a problem. If you are in Northern Ireland or Wales or indeed the East Midlands you would wonder what all this is about. But certainly in London and the South East, in the north-east of Scotland, in other areas, there are serious housing inflationary pressures.

As UK house prices rise at the highest annual rate since 2010 and the industry starts the long road to recovery, Dr Cable’s comments have raised the question: will Help to Buy create a new housing bubble?

We asked decision makers from some of the UK’s top housebuilders, the Homes and Communities Agency (HCA) and key trade federations for their views and opinions on the Help to Buy initiative and their thoughts on the future of the housebuilding sector. We also surveyed over two thousand members of the public to find out what they thought of the current housing market, their opinions on the Help to Buy scheme, and the buying versus renting debate.

We are very grateful to everyone who participated in the surveys and interviews. The findings from our research, together with some thoughts on how to address the concerns raised are set out here.

If you would like to discuss any aspect of this paper, please do get in touch.

We would be delighted to hear from you.

David Pridmore, Partner

Watson Burton LLP

[email protected]

0845 901 2081

Foreword

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Introduction

Our research consisted of two phases. The first was a quantitative survey of over 2,000 members of the public, designed to capture data on the general attitudes towards the current housing market. Respondents completed the survey between June and August 2013 – a time where there was much media interest in the potential impacts of Help to Buy.

This information was then combined with a second- stage in depth quantitative interview process with a small number of key players from the UK’s housebuilding industry. They were questioned with the aid of a topic guide that focused on opinions in three key areas:

• the impact of the Help to Buy scheme on the housebuilding and wider construction industries

• the significance of red tape over planning procedures and mortgage loans – is it hampering the growth of the UK’s housebuilding sector?

• renting versus buying: are we turning into a nation of renters, more in line with the European view of property ownership?

Part One - The Research

Help to Buy – The Main Challenges

During the interview process, respondents were asked to describe the main challenges they felt that Government and industry face in implementing the Help to Buy initiative. Three common themes emerged:

• unblocking restrictions on house building, such as planning regulations and lack of labour / materials

• questions over the long-term sustainability of the industry once the scheme comes to an end in three years time

• the difficulties faced by the public in qualifying for a mortgage, given high house prices and difficulties associated with saving the appropriate amount of money for a deposit

...There are some critical issues that need to be addressed - specifically how government intends to exit the mortgage market without a knock-on drop in prices; how it will minimise the risk to taxpayers and the cost to mortgage lenders of government guarantees.

But helping to meet demand is only one piece of the puzzle and we need urgent action to increase the supply of new homes. Lucy Thornycroft, Head of Construction and Manufacturing, CBI

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Views on Ownership

Housebuilders are confident that most people in the UK still aspire to buy their own home.

“Fundamentally people will still want to move, people will still want to buy new houses, people will still want to get into the property market. It doesn’t matter whether the press …. say houses are too expensive. That is what people generally want, that is their psyche, they want to own their own property. So there isn’t any lack of demand.”

10% 44% 45%

20% 55% 24%

34% 49% 17%

41% 51% 9%

54% 38% 9%

58% 31% 12%

54% 40% 6%

24% 57% 19%

Buying is better than renting

Buying a home is important part of future

Important to get on the property ladder

More acceptable now to rent permanently

Renting is more flexible than buying

Home ownership no longer = increasing wealth

Future house prices are too uncertain

Renting is better than buying

Agree (8-10) Neutral (4-7) Disagree (1-3)

Data released by the Office for National Statistics (ONS) supports this view, with this year’s statistics showing that sixty-four percent of the UK’s population are home owners. This is high in comparison to forty-nine percent in 1971 but does not match the all-time high of seventy-one percent in 2003. According to Catriona Lingwood, Chief Executive of Constructing Excellence North East “The increase will add to fears that H2B – which offers taxpayer guarantees to lower the cost of mortgages – may be inflating a new house price bubble. The surge was mostly driven by London, where prices are now 25 per cent above their pre-recession height.”

Our survey of the public also validates this view, with over half of respondents considering purchasing a house as a better option than renting, compared to ten percent of those surveyed who believe that renting is a more appropriate life choice.

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The buying versus renting debate is one that has gained momentum since the launch of the Help to Buy initiative, with many believing that we are turning into a nation of “renty-somethings”. The public response to our survey contradicts that view with more than half of the respondents citing, buying is a preferred option to renting. However, two in every five members of the public who were interviewed believe it is now more acceptable to rent permanently than in the past.

The financial crash of 2008 seems to have impacted negatively on the public’s attitudes towards home buying; with half of those surveyed thinking that it is now more difficult to get a mortgage to buy a home. Furthermore, almost half now consider themselves less likely to have any money left to enjoy life once they have paid their basic living expenses.

Despite this, it appears that people do still want to buy property – a third of those we surveyed already owned their homes outright; a further third owned their homes with a mortgage and the remainder rented.

Agree (8-10)

Neutral (4-7)

Disagree (1-3)

Buying is better than renting

54%40%

6%

Does The Nation Prefer Buying or Renting?

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Barriers to Buying

After the recent boom and bust of the housing market, members of the public who were or had considered moving or were hoping to mortgage / re-mortgage were asked for their top barriers to buying.

High property prices

Lack of mortgage deposit

Difficulty in qualifying for mortgage

Lack of confidence in sustaining payments

Lack of suitable property

Lack of mortgage availability

Risk of home value falling

Other

No barriers

22%56%

27%51%

44%

28%

23%

20%

13%

8%10%

9%9%

16%

8%

6%

3%

2%

Single barrier

Top 3 barrier

High property prices, lack of deposit and difficulty in qualifying for mortgages were the three main barriers to buying. These particularly affected those renting properties, whilst those already owning homes were more likely to find difficulty in finding a suitable property. Those with a mortgage appeared more exposed to the risk of the value of their home falling.

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Attitudes to Help to Buy

The Help to Buy initiative has received a mixed reception from industry experts and members of the public alike. Respondents who have welcomed the scheme recognise the importance of the housing sector for the wider UK economy and applaud the government for attempting to kick-start housing. Others share the thoughts of Vince Cable, stating that they believe the scheme will create a housing bubble that will have a detrimental effect on the industry in the long term.

Helped to increase funding availability

Positive response from lenders

Perceived as a better product than NewBuy and First Buy

Helped to rebuild confidence and competition in the mortgage market

Scope well designed

Helped enquiries, off-plan sales and building rates

Questions over the long-term sustainability of the market once targets have been met

Funding may run out before the end of the three years

Some are concerned over plans for the housing market once the scheme finishes

With an election due in 2015, many are concerned over changes to the scheme if a new government takes power

Positive

Negative

What does seem clear from our survey is the generally cautious response to the second element of initiative – the Mortgage Guarantee Scheme. This is a reaction echoed by the national press and financial institutions such as the International Monetary Fund (IMF) and the Bank of England who have both stated that they think the scheme will lead to a housing bubble.

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Help to Buy – Public Opinion

Secretary of State for Communities and Local Government Eric Pickles has publicly stated that the Help to Buy scheme is designed to assist “hard working people” – but are they aware of the scheme and its benefits?

To stimulate demand for housing, it is important that those targeted by the initiative are fully aware of the scheme. Responses from our survey show that over half of those who had or were actively considering buying a home have heard of Help to Buy. However, it was less well-known by eighteen to twenty-four year olds, females, social grade C2 and renters.

Customer interest in the Help to Buy scheme has been very strong as it addresses the issue of lack of mortgage finance at higher loan to values. Interest has been particularly encouraging from customers previously locked out of the market by high deposit requirements. Post the Budget announcement, compared with last year, we saw reservations step up 18% and visits to our website increase by around 30%Chief Executive, National Housebuilder

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AB

C2

Lower Awareness

Homeowners

Higher Awareness

Low

er

Hel

pfu

lnes

sH

ighe

r H

elp

fuln

ess 18 - 24 year olds

C1

DE

Those aged over fifty-five, males AB and home owners were fully aware of the scheme and its benefits for potential purchasers. These responses suggest that existing promotion may not be reaching key groups of those that do aspire to buy a home such as renters and young people.

Under a tenth of the public we surveyed who were aware of Help to Buy had applied for it – half of whom were successful. A further quarter intended to apply for Help to Buy within the next two years – especially renters and young people.

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Housebuilders and experts clearly thought that the market needed some assistance so they regard Help to Buy as a positive initiative – for housebuilders, if not taxpayers!

Helped increase funding availability

Lenders responding positively to HTB

Better than NewBuy/ First Buy

Helped to rebuild confidence and competition in the mortgage market

Enquiries, off-plan sales and building rates

Scope well designed

How sustainable is it?

Funding may run out before the end of 3 years

What happens when it finishes?

Positive

Negative

Help to Buy is considered to be easier to administer than NewBuy of First Buy and is viewed as a better product – partly due to its broader scope and partly because of the equity release on housebuilders’ balance sheets and working capital.

However, there were serious concerns expressed about the scheme’s sustainability – as one housebuilder so concisely put it “Help to Buy is fantastic as it stimulated growth but realistically it can’t go on stimulating it” Another suggested that “Help to Buy won’t be sustainable from a Treasury point of view after the first three years. It’s not just about the government; the banks have to take on responsibilities with regards to rates. They are making decisions about the size of their mortgage book and [there is] too much risk averse lending happening.”

[Help to Buy] … Definitely is stimulating house building. The equity loan ticks all the boxes for affordability of house purchases … it’s given us a much more confident position than we were pre-budget

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Attitudes to Help to Buy - Industry Opinion

The following diagram summarises housebuilders’ and expert opinions.

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Housebuilders and experts expressed varied views about the second element of the Help to Buy initiative – the mortgage guarantee scheme. Many feel that it is too soon to hold an opinion about its likely impact. This thought process is driven partly by the uncertainty surrounding the terms and conditions that are to be applied.

No, the timing and scale are wrong – there were shared equity schemes before, but if these were restricted – e.g. The type of buyer, the number of bedrooms … it was a more affordable scale

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Expected to involve a range of lenders

Lenders offering “decent rates and not restricting it through other mechanisms”

Hope offers may be designed to assist the second hand market

Controls in place to avoid boom and bust

Scope too broad?

Introduced too late

How long is the quota going to last?

May lead to increased house prices

Hiding an underlying wider market fragility?

“What happens towards the end of the scheme?”

Positive

Negative

T&Cs unknown

Too early to say

Whilst only one housebuilder expressed concerns about higher future house prices resulting from the equity loan element, this was more often considered as a potential negative aspect of the Mortgage Guarantee Scheme. Despite the recognition by some housebuilders of the controls in place, designed to avoid the potential boom and bust, others considered that the Mortgage Guarantee Scheme may have a negative impact on the market in the longer term.

Housebuilder Attitudes to Mortgage Guarantee Scheme

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Introduction

In a world where Help to Buy is set to become the predominant scheme boosting the nation’s buying potential, nervousness remains at all levels over its long term implications for the housing sector and wider economy.

Here, we set out some options for change which we believe, alone or in combination, can assist in creating a more sustainable housing market for everyone. There are tensions and synergies between the options. Some of the options need all the players in the industry to engage meaningfully together. A lot of the options require political will and political lobbying.

Part Two - Options for Change

The banking side of things could be improved. I think banks are in some cases reluctant, or not very clear about their product … the banks generally have not been great at supporting innovative mortgage products. They are getting better, and helped us better than say New Buy and First BuyAnon

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the danger of further inertia. This is something the industry and the country as a whole cannot afford. The future of the housebuilding industry is what those involved in it are prepared to make of it.

1. Streamline and re-shape the planning system

With an estimated £1.8 billion worth of housing projects currently on hold across the country, it is clear that more needs to be done to streamline and change planning policy. When speaking to developers, it is evident that the planning process is a barrier to development. Frustrations surround the timescales involved in the overall process, and the uncertainty in how planning policies will be interpreted from site to site and authority to authority. Creating clearly defined timescales and ascertained costs will enable developers to plan projects more efficiently.

Possibilities include:

• Extending the permitted development rights for certain types/sizes of schemes to avoid the need for a formal planning application in those cases

• Enforcing the timescales for determining planning applications via meaningful compensation provisions

• National model forms of planning conditions and s.106 agreements

• Limiting planning enquiries on residential development applications to written or other quick determination procedures to minimise the opportunity for delays and cost increases

• Taking the politics out of decisions by placing more power of determination in the hands of planning officers

• Incentivising local authorities to grant planning permission (e.g. by central funding increasing through the annual allocation where targets are met)

• Investing in better training and greater numbers of Planning Officers and Planning Inspectors to specialise in residential development

Unless the industry as a whole can agree on a way forward and put its combined weight behind those options requiring a political will, there remains

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2. Improve forward planning

The latest data released by the Department for Communities and Local Government (DCLG) placed the number of new house build completions at 110,530 yet, according to the charity Shelter the UK needs around 250,000 homes a year to meet demand – a figure that is generally accepted as being roughly correct. As a country we have key information every 10 years through the census. The last census revealed that the population of the UK had increased, but also that more people live alone, putting a greater strain on the housing stock. We have the data, but seem to be doing nothing about the issues it raises.


• Streamlined procedures for zoning areas of land for residential development, if necessary separate to the rest of the local development frameworks

• Longer term forward plans for housing stock

• Reassessment of green-belt status and removal of that status in certain cases

3. Incentivise residential development

Incentives can work by attracting residential development or penalising a failure to carry out residential development. The Labour Party under Ed Milliband seems to be favouring the latter through a “use it or lose it” policy.


• Tax breaks for residential development (which could be graded for different types of scheme)

• Tax breaks for landowners selling land for residential development (which could be graded for different types of scheme)

• Widen CPO powers at reduced payments for recalcitrant participants

• Reduce the 3 year period for the implementation of planning permission and couple this with better enforcement powers where a permission is implemented but not progressed

• Incentivise greener initiatives by a corresponding relaxation of other planning rules or tax incentives

4. DefinethecriteriafortheendoftheHelptoBuy Scheme now

It is a clear concern of both housebuilders and members of the public that the uncertainty of when the Help to Buy Scheme may end is affecting planning and sentiment.

Possibilities for addressing this include:

• Define specific criteria now for the end of the scheme

• Introduce tapering measures now

5. Investigate and assess the detailed impact ofthecurrentHelptoBuySchemepriortotheintroduction of the mortgage guarantee element

There is a general sense of misgiving about the second element of the Help to Buy Scheme relating to the mortgage guarantee element.

Possibilities for addressing this include:

• Better industry wide research now about the impact of the current scheme

• A postponement of the implementation of this second element until the impact of the first element is truly understood

• Improved dialogue between the Treasury and key institutions such as the Bank of England around the mechanisms that could be implemented to identify and control overheating in the housing market

6. Reduce demand for second homes

It’s clear from research that there aren’t enough homes for everyone to have one, so a way of increasing supply is to decrease demand for second homes.


• Ban on second homes

• Increased tax on second homes (which could be ring fenced for housing infrastructure)

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7. Re-examine and re-design the product

House designs and building practices haven’t changed markedly despite changes in technology and the way people live and work. All the data points to an increasingly elderly population who will live longer, but continue to be able to live on their own. Are there any obvious ways to re-engineer the product for the 21st Century which can lead to better density housing without the loss of amenity, address new ways of working and living and complete the building process quicker?


• Different designs particularly for an ageing population so there are units they can “downsize” into happily, freeing up family homes and that part of the property ladder

• Different ways of building to increase densities and speed of building (e.g. European frame/pod models)

• Tax incentives for research and design work

8. Invest in training and skills

There is a clear concern in the house building industry that there is a lack of skilled tradesmen. Without people who can build and fit out houses, demand will outstrip the resource and prices will soar.


• Wider framework agreements with suppliers to provide stability

• Reinvigoration of apprenticeships

9. Encourage savings for deposits

The research shows that the lack of a mortgage deposit is a huge barrier to first time buyers in particular. All the economic evidence is that incomes are squeezed and rental levels are increasing. The threat is that this barrier will remain and may increase.

Possibilities to address this include:

• An extension of a tax payer backed scheme to cover deposits

• Tax breaks and easy saving schemes to encourage individuals to save towards a deposit

10. Improve mortgage lending

There are clearly still problems encountered by many people in qualifying for a mortgage and this may make it impossible for them to get on or move up the property ladder.

Possibilities to address this include:

• Tax payer guarantees

• Use of tax payer owned institutions to improve lending conditions

11. Support smaller builders in administering HelptoBuy

The Federation of Master Builders (FMB) has been campaigning to help smaller builders to access the Help to Buy scheme. This reflects on-going concerns over the long term sustainability of smaller enterprises who are struggling to keep up with the administration associated with the scheme.

12. IncreasegeneralawarenessofHelptoBuy

Many respondents to our survey were unaware of Help to Buy and its benefits. That was particularly true amongst the demography comprising likely first time buyers. This raises concerns over whether the existing promotion surrounding the scheme is being targeted appropriately and a fresh targeted awareness campaign should assist in raising the number of reservations.

13. Work across organisations to overcome barriers

There are other ongoing challenges to developing certain sites which can prevent their development.

Examples include:

• sites where occupier insurance for plots could be difficult because of flooding risk and the uncertainties surrounding the availability of flood insurance in the future

• sites where organisations (typically in our experience the Church Commissioners) have registered chancel liability notices or title to mines and minerals

There needs to be a real engagement over how to deal with those issues.

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Conclusion

This paper has tried to highlight a number of complex and interconnected issues which beset government, industry experts and members of the public alike.

With so many views, opinions and options for change, some may find it difficult to see how they might make a direct impact. Our view in summary is that those working within the sector should consider two main points, both drawn from a central theme of collaboration.

At a macro level, the effectiveness of lobbying government for change could be improved through greater collaborative working between those within the sector. We also believe that at a micro level, the supply chain could work more effectively together to identify routes to fill the skills gap, combine their purchasing power and even to jointly develop sites which individually may have been out of scope financially.

14.Nationalreassessmentofsurplusbrownfieldresources owned by the public sector

It is possible for the public sector to aid land supply by making surplus land available. This is typically done on an ad hoc basis with no long term strategy. Certain public bodies seem to be particularly recalcitrant in making surplus land available or being involved in any meaningful discussion about this.

15. Central funding of locally vital infrastructure works that will open up residential development

There is an appetite for central funding of infrastructure projects, but this is typically for “trophy” projects like HS2. Is there a case that many, smaller, quicker to deliver, local projects would actually make a larger difference to the quality of most people’s life?

16. Begin a process of public re-education

New housing developments are typically seen as a “bad” thing despite the impact a lack of housing supply has on everyone. Is there a case for a more open, wider public debate to explore and perhaps begin to overcome those tensions?

We hope you have found this paper interesting and above all, helpful in planning how your business might take advantage of the opportunities presented by Help to Buy. If you would like to discuss any of the themes from this document in more detail, please contact us. We would be delighted to hear from you.

0845 901 2100watsonburton.com@WatsonBurton

watsonburton.comWB.016

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Help to buy: Boom or Bubble? Green Paper