By Colin Wiles, housing consultant.

The end of the Help to Buy equity loan scheme after nine years (the final application deadline was last Monday) coincides with the first significant drop in house prices for years, a dramatic increase in interest rates and a spike in living costs. The impact could be calamitous for the thousands of households who have bought using this flawed scheme.

I have written about Help to Buy several times in the past, most recently here, describing how Homes England had a “staggering” £14bn of Help to Buy equity loans sitting on its asset sheet, amounting to around 80% of its net assets.

Since the scheme began in 2013, 361,075 households have bought homes using Help to Buy and the total value of the equity loans provided by the government amounts to £22.5bn against a total value of the homes bought of £100.8bn. What this means in reality is that roughly one fifth of the total value of the homes bought under the scheme is, or has been, owned by the government.

So when house prices rise the government makes a tidy profit on its investment, but now that house prices are falling the government’s investment will also fall. The Homes England accounts speculated that the loan book of £14bn could drop in value dramatically if the housing market falls off a cliff. The Nationwide estimates that prices have already fallen by almost 1%, with more to follow.

As I said previously, “the government has taken a giant punt on the housing market, effectively with our money!”.

Just to recap, the equity loan scheme allowed people to buy a new home with a 5% deposit with the government giving you 20% of the value of the property (40% in London). In 2020 the scheme was changed to cover only newbuild properties and regional price caps were put in place. Eight in 10 transactions since 2013 have been for houses rather than flats.

There has been a great deal of past criticism of Help to Buy because there is evidence that it inflated house prices and that most buyers could have bought without the scheme (so they ended up buying more space/value than they needed). Both the National Audit Office and the Commons’ Public Accounts Committee have made these points, as well as numerous commentators.

The NAO also found that the price of new-built homes rose faster than existing properties – the so-called “new-build premium”.

Help to Buy owners are now set to see the value of their equity fall but they will also face considerably higher mortgage payments if they are on variable rate mortgages, or when their fixed-term mortgages come to an end. According to the Resolution Foundation, over five million families will see their annual mortgage payments rise on average by £5,100 between now and the end of 2024.

That is a huge chunk of money for any existing mortgage holder and will also prevent many aspiring homeowners from entering the market. The years of easy mortgage money are over.

With the scheme ending and transactions having to be completed by the end of March 2023 it means that new first-time buyers will have to look elsewhere for support. Crashing house prices will ease their dilemma if they are cash rich, but for most buyers rising interest rates and rising living costs mean that hundreds of thousands of mostly young buyers will stand little chance of buying a new home.

According to Rightmove, demand from first-time buyers is already down by 30% compared to the first two weeks of 2021. That spells a gloomy future for thousands if not millions of people who were hoping to step onto the housing ladder over the next few years.

Where will they turn? The private rented sector is experiencing a three-pronged crisis with rising rents, an exodus of landlords, and problems of poor conditions and poor heat efficiency. In London, rents are up at least 16% over the past year. As a result, low-income renters can expect to pay up to 40% of their income to live in a modestly-priced rental property.

The social rented sector speaks for itself – nothing available for almost anyone. The only solution is obviously a massive programme of social housebuilding, something that is as likely as England winning the World Cup.

But the demise of Help to Buy also means a big shock for the housebuilders who have been reliant on Help to Buy for a huge chunk of their sales and profits. 50% of Persimmon’s sales have been down to Help to Buy. Poor them.

At the moment we do not know what might replace Help to Buy. The government’s website says, “There are no current plans to extend or replace Help to Buy: Equity Loan”.

I am old enough to remember the Housing Market Package of 1992/3, when Chancellor Lamont threw over 500 millions of pounds at housing associations to buy up new homes from housebuilders as a way of stimulating the housing market. That would be preferable to a Help to Buy Mark 2 but I doubt it will happen again (threats of political donations being withdrawn by the housebuilders might do the trick).

Given the government’s historic obsession with supporting both the housebuilders and first-time buyers I am sure another scheme will be coming along soon. Events and political pressure to “do something” could soon see to that.