Theresa May said over the weekend that the government will find an extra £10bn for the Help to Buy scheme to let another 135,000 people get on the property ladder.
The scheme allows buyers to be able to get a mortgage with a deposit of as little as 5% to buy newly built homes and it has been widely credited as a key reason behind housebuilders’ strong recent results.
Should underpin demand until 2025
In theory it helps to keep demand for new builds strong despite the pressures of ever-increasing house prices and stagnant wage growth.
City broker Numis reckons the new funding will underpin new housing demand for another four years through to 2025.
Analyst Chris Millington said the extension to the scheme is “material” for the housebuilding sector, with around 40% of private completions using Help to Buy.
“To put the scale of the new pledge into context, the new funding is 50% greater than the loans issued under the scheme in its first four years and it will add to unutilised funds of £5.4bn at June 2017,” Millington said in a note this morning.
“The value of equity loans granted in 2016 was £2.1bn (£1.36bn in H1 2017) and therefore at the current run-rate the additional funds should extend the scheme by a further 4/5 years through to c.2025.”
Good for housebuilders but not what is needed
Shore Capital’s Robin Hardy doesn’t share the same kind of enthusiasm, although he concedes that the news is good for the sector.
He thinks the scheme is “a major distortion” that only serves to boost the profits of the housebuilders.
“This is a demand stimulus that is naturally inflationary when what the country needs and what potential home owners want is supply stimulus,” he wrote this morning.
Hardy points to several surveys in recent years which have suggested the UK needs to be building around 240,000 new homes every year to keep up with population expansion.
“The output of the new homes industry today is less than 160,000 and the rate of expansion from the commercial sector, dominated by the nine largest quoted house builders, is only expanding very slowly.
“It is not in these large house builders’ interests to expand more rapidly as the market climate of depressed land prices, high selling prices, low levels of purchaser incentive, reducing new home specifications & quality and just about managing to cope with rising build costs as any higher rate of expansion would cause their supernormal and arguably excessive returns to decline.”
As was to be expected, housebuilders were all on the up this morning on the back of the extension news.
Barratt Developments PLC (LON:BDEV) led the way, up 3.4% to 635p, with Persimmon PLC (LON:PSN) closely behind, adding 3.3% to £26.68.