Since 2013 the Government has cautiously dipped one toe into the mortgage market, providing equity loans under the Help to Buy scheme – a response to the tighter lending measures introduced after the Global Financial Crisis.
From a modest start of £485 million in 2013, the amount of money loaned by the Government to first time buyers had reached £3 billion a year in 2019. By the end of 2020 a total of 257,520 equity loans had been issued. As a result of this direct stimulus, house prices which had been subdued after the crisis, began to return to the trend of growth, jumping up eight per cent in 2014 and six per cent the following year.
Under the scheme borrowers have an interest free equity loan for five years, and initially only have to repay the mortgage that they’ve borrowed from the banks. However as the date of paying interest on the equity loan edges ever closer it’s fair to assume that some borrowers may start to wonder if they can capitalise on their house price growth to move on to their next home.
Return on investment
Based on the house price growth figures, by 2020 in theory, the Government could have made £1.8billion, on the £15.5 billion of loans they issued between 2013 and 2020. To put that in context, this £1.8billion would pay for two thirds of the administration budget for the Department of Housing Communities and Local Government , or more than three quarters of the £2.2billion spent on increasing Universal Credit by £20 a week for six months, or almost half of the £4 billion affordable homes delivery programme of the Greater London Authority for 2021-2026.
Of course not every Help to Buy borrower has sold and moved on that quickly – but that £1.8billion would represent an 11 per cent return on the Government’s investment, of up to 20 per cent stake in a property (up to 40 per cent in London).
But could they have made a lot more if they’d been the funder behind the total borrowing?
American inspiration
If we look over the pond, the US has two state-run lending arms, Fannie Mae and Freddie Mac; we heard a lot about them during the GFC, and it certainly wasn’t positive, but they’re still around and they’re still providing large centrally directed liquidity to the American housing market. In 2020, Fannie Mae alone reported a net income of £11.8 billion.
The benefit of being the lender, or the guarantor as in the US, is that the Government can directly control liquidity in the housing market, which has a significant impact on the wider economy. We’ve already seen that Help to Buy was successful at stimulating the market after its introduction, as was the recent temporary change to the stamp duty charges, highlighted by a record number of completions in March 2021. In times of crises, if the Government had this direct lending arm it could drop interest rates overnight, putting pressure on the private banks to follow suit, stimulating more than one sector of the economy.
Government cannot fail
It’s also a political win-win. In general people would prefer to borrow from the Government, there’s a belief that there’s more security behind it, it cannot fail and ultimately the money would be going in a cycle back to the taxpayer, to the Government and back to the taxpayer again.
In addition the lending would then also provide support for the whole housing system, not just first-time buyers, but also those moving from flats to houses, as well as those needing to downsize. It could help to stabilise the whole housing market and support the increase in values of the product across the board.
Finally, it would help to address the costliness of homelessness. The Government is more unlikely to repossess a home, as it would increase expenditure on the resulting support services that are needed for people without a roof over their heads. It would also be bad PR. However, there could be ways to effectively manage bad debtors, without setting them on a cycle of poverty.
So tell me, why is the Government allowing our financial institutions to dictate the shape of the housing market, when they could raise more of its own money to tackle the housing crisis? Or are we too beholden on the financial institution in the City to be brave enough to make this move?
This article was originally published on React News on August 2, 2021.
About the author
Andrew White is head of the UK Residential & International Properties (Asia) Department at Colliers, leading a team of surveyors and advisers through the whole life cycle of residential development, from land acquisition, to development consultancy, Build to Rent, investment, New Homes and project marketing in the UK and Internationally.
To contact Andrew, email Andrew.White@colliers.com
