14 February 2018

Blog: UK Housing: A Different Question, A Different Solution?

By Scott Fulton | 14th February 2018

Reading the UK business media recently, you could be forgiven for thinking that UK house builders are possibly the root of all evil and certainly the cause of the current housing crisis.

One of the more frequent criticisms concerns the house builders’ use of and benefit from the Help to Buy programme. Those long of agenda but short of analysis have decided that this a “subsidy” from UK tax payers which has provided house builders with an unfair advantage; supporting demand while they drive prices up by restricting supply.

In our view, this is wrong or, to quote POTUS, fake news.

The Help to Buy programme is a c. £8.0bn loan book administered by the Government. It has the following terms;

• The Government will provide the buyer of a new home with 20.0% (40.0% in London) of the total cost as a deposit loan provided the buyer can support a 5.0% cash deposit;

• There is no interest to pay for the first five years. After that time, the loan attracts a rate of 1.75% per year, rising with RPI for each of the remaining 20 years of the term;

• If the property is sold within the 25-year loan period, the total amount repayable is calculated by reference to the equity percentage (e.g. 20.0%) of the sale price and not the initial loan amount;

• It is a bi-lateral agreement between lender (Government) and borrower. It does not involve the developer of the home in question.

The latest data available (Ministry of Housing, Communities & Local Government, 11th January 2018) shows that this scheme has lent £7.89bn, predominantly (81.0%) to first time buyers. It has supported the purchase of 144,286 properties between April 2013 and September 2017. While these statistics are impressive, it should be noted the scheme has accounted for less than 3.0% of all UK housing transactions since 2013.

Rather than boost housing supply, this appears to be a low-risk Government asset whose coupon and exposure to underlying asset price inflation suggests that it provides a meaningful return for the lender (UK tax payer). Aside from political considerations, we can see no basis for abandoning this scheme.

Furthermore, while we do not discount the demand benefit for new house builders’ product afforded by Help to Buy, analysis suggests that a far more significant factor in the developers’ operational and financial performance has been the reduction in competition from smaller builders, itself a function of the less widely criticised shortage of bank finance for SMEs.

In 2007, the NHBC (National House Builders Council) estimated that there was c.15,000 small house builders in the UK. In 2017, the NHBC estimated that there were less than 5,000. Anecdotally, asking for bank finance to fund smaller developments has been a fruitless task since the crisis such that many developers have exited the market and/or work for the larger house builders.

Competing with fewer developers for land, materials and labour has allowed these larger builders to contain costs and manage land more efficiently; improving both operating margins and Return on Capital Employed to historically high levels.

However, and contrary to criticism, there is little evidence that this performance has been driven by a restriction of supply. DCLG data shows that the annualised total number of new home completions in Q3 2017 returned to levels last seen in 2005 (c. 160,000). This figure is consistent with the long-term average, dating back to 1946. But total housing transactions have fallen by 30.0% from 2007’s peak. This fall may reflect mortgage availability given the new stress-testing constraints imposed by the Mortgage Market Review of 2014; another feature of the current crisis which has attracted far less criticism than Help to Buy.

Thus, as a proportion of the UK housing market, new homes accounted for 12.5% of all transactions in 2017 compared to less than 9.0% in 2007. By this measure, the larger house builders have contributed more to the UK housing stock than has been the case historically. That they have been more profitable in doing so appears to be a function of their management of the wider market and not just the provision of deposit assistance to buyers.

If we are all honest, the UK housing crisis is based on the total provision of new homes. Public building, having been a third of new homes during the 1950s and 1960s, dwindled to practically nothing from 1982 onwards and has never remotely recovered. Despite several initiatives, housing associations have yet to fill that gap and do not look likely to do so in the near term. Looking forward, and Jeremy Corbyn’s 1970s policies notwithstanding, no one sensible is advocating a return to a public or quasi-public build programme of 150,000 or more homes per year. We appear to have spent that money on two aircraft carriers which, while no doubt roomy, do little for the housing shortage.

So, Help to Buy has been beneficial to all concerned, not least the UK tax payer, but it has not been the principal factor in house builders’ recent performance. Moreover, we do concede that it has flaws. It is too focused on the demand-side of the market’s economics and has a limited impact on supply given the large house builders’ structures.

But the Help to Buy scheme may contain a possible solution. Specifically, the creation of a more “joined-up” Government approach to both demand and supply, acknowledging that HMG can unlock finance for builders to produce more homes.

Combined with a strategic initiative to release more publicly-owned land, a scheme which provides qualifying developers with support for bank funding to build more homes would be an alternative to a costly public new build programme. Based on the existing Help to Buy scheme, it would provide interest bearing loans (“deposit assistance”) whose ultimate repayment level is based on the development value of the homes built; i.e. sharing the profit. It would also allow Government to insist on reasonable proportions of affordable homes, avoiding the current situation where these can be negotiated away through “planning gain”.

There are clearly higher risks attached to development than to providing deposit assistance for buyers. However, the UK is short of new homes at reasonable prices and has a history of home ownership. We have a housing crisis because we do not build enough. If public finances do not allow a wide-ranging Government build programme, and they do not, the logical alternative is to use the weight of HMG’s balance sheet to support more private developers building more homes at the right price. This would encourage more employment, generate more taxable revenue and allow far greater control over what and where we build. Profits will be generated but this seems a small price to pay for more homes when the alternative is higher taxes or limited supply.


To paraphrase Einstein, the definition of insanity is to ask the same question repeatedly but to expect a different answer. For too long this appears to have been the basis of UK Government housing policy and accompanying media comment. If we as a country cannot afford to build more homes but we can support those who can, it is time to ask a different question to arrive at a better answer.