Help to buy ISAs have done more harm than good

    17 October 2019

    Governments of all colours have become so keen on propping up the housing market that it won’t be a surprise if house-buyers are offered some other novel scheme in the near future.   But for the moment any would-be homeowner who fancies a £3000 bung from the Majesty’s Government will have to move quickly – 30 November is the last date that banks will be able to accept applications for a Help to Buy ISA.    This is a savings account to which the government will add a 25 per cent bonus (from a minimum of £400 to a maximum of £3000) if, and only if, the owner of the account uses the entire proceeds to buy their first home.

    Introduced in 2015, the Help-to-Buy ISA is one of the prongs of George Osborne’s wider Help to Buy programme. There are also Help-to-Buy loans, where the government agrees to underwrite the risks so as to allow banks to advance loans of up to 95 percent of the value of a property. That part of the scheme was launched in 2013 in order, according to the then Chancellor, to rebuild confidence in the house-building industry and so get housebuilding moving again. It was originally planned to last three years, but as is the way with government subsidies, Help to Buy became addictive. At present it is due to run until 2023.

    Well thanks, George.  Help to Buy didn’t help me purchase a home – I already had one – but it has certainly done my house-building shares no harm. When Help to Buy was launched Persimmon shares, for example, were trading at around 800 pence each. They are now three times that – and with a 10 percent yield to boot.    But don’t think I’m the lucky one. Persimmon’s boss Jeff Fairburn, who took up the job in 2013 just as Help to Buy was coming in, last year received a share price-linked bonus of £110 million. After some criticism he agreed to hand some of the money to charity.

    As for homebuyers themselves, they might appreciate the a bit of free cash and an underwritten loan, but as with all subsidies it has distorted the market.   Those who took advantage of Help to Buy early on did well.   But for those who have come later to the scheme the government’s largesse has come at the price of pushing up house prices, making it even more difficult for them to get on the housing ladder.   According to a report by Shelter in 2015 – only two years into the scheme – Help to Buy had already inflated the value of the average home to the tune of £8250.   In some areas, Shelter reckoned, it was far more — £19,000 in North West Leicestershire and £13,000 in South Tyneside.

    I will take those figures with a pinch of salt, but there is little question about the inflationary power of subsidy schemes – and not just because it artificially increases some buyers’ purchasing power.   The housing market took an upwards lurch as soon as the Chancellor announced Help to Buy partly because investors took it as a signal that government would always step in to avoid falling house prices. Thanks to Help to Buy – and all the measures Gordon Brown took to prop up the market during the 2008/09 crisis – housing has effectively become a one-way bet.

    The Public Accounts Committee was equally scathing about Help to Buy when it published a report last month. By the time the scheme closes, it said, it will have cost eight times its original budget. But worse, it transpires that two thirds of the 211, 000 buyers who have taken advantage didn’t even need help to buy a home – only 37 percent of them have reported that they would have been unable to buy a property without a subsidised loan.

    The government preaches free markets, but the housing market is anything but.    For the past 40 years we have had endless schemes to subsidise home-ownership, beginning with Mortgage Interest Tax Relief.  As for prices, chancellors have been laissez-faire when house prices were on the way up – and then suddenly turn interventionist when prices are threatening to fall.    And people wonder why we have had such rampant house price inflation that the young are complaining about the unfairness of it all. They are right: it is unfair.