Help to Buy blamed for UK’s soaring house prices: should it be avoided?

The government’s Help to Buy scheme has been blamed for the UK’s soaring house prices. So should you avoid it? Karl Talbot takes a look.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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House prices are (still) rising. This week, Rightmove revealed that the average asking price of a UK home coming onto the market is now £341,019. This is 7.6% higher than this time a year ago! Meanwhile, the latest ONS data reveals that the price of the average property has risen 10% in the space of a year.

So why is the government’s Help to Buy scheme being blamed for the UK’s exploding house prices? Let’s take a look. [top_pitch]

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What’s the current situation with UK house prices?

House prices in the UK are nearing all-time highs. The latest ONS data reveals that the average UK home now costs £271,000. Nationwide’s House Price Index, on the other hand, reports a slightly lower figure of £254,822. Regardless of which is the most accurate, we know house prices have risen roughly £25,000 over the past year.

New-build properties are seeing the highest rate of growth. That’s because Land Registry data suggests new-build prices have increased by a massive 21.7% over the past 12 months. This compares to 11.6% for older properties.

What is behind the UK’s soaring house prices?

Commonly cited reasons for the UK’s high house prices include the shortage of homes available, the availability of cheap mortgages and the ‘race for space’ as a result of changing buyer behaviour during the ongoing pandemic.

While all of these factors are likely to have influenced the UK’s soaring house prices, Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, places much of the blame on the government’s Help to Buy scheme.

She explains: “Government stimulus has driven wayward property prices – especially for the new-build market. In September, prices of new properties had risen by more than a fifth in the year – almost twice as fast as those for existing properties – driven to a large extent by Help to Buy loans”.

Coles goes on to highlight how the government’s Help to Buy scheme is actually harming first-time buyers. She explains: “The House of Lords recently criticised the Help to Buy equity loan scheme, saying that by helping people borrow more, it meant developers could hike their prices, artificially inflating the market. It calculated that in more expensive areas, it inflated the cost of homes more than it saved buyers through the subsidy, so was a waste of money.

“Price inflation deals a double whammy for anyone who takes advantage of the scheme, because when they eventually come to repay the government for the loan, the amount they repay depends on property prices at the time.

“If you borrow 20% to buy a house costing £200,000 and the price then rises to £300,000, you’ll have borrowed £40,000 and be repaying £60,000.”


Should the Help to Buy scheme be avoided?

As the House of Lords report shows, the Help to Buy scheme is detrimental for first-time buyers. That’s because, as Sarah Coles explains above, the scheme has been shown to inflate new-build prices. In other words, the scheme merely increases profits for builders and forces first-time buyers to take on even bigger mortgages.

While some first-time buyers may welcome the extra ‘help’ to afford a mortgage on a new-build home, if you go down this route, then it’s important to note that you are likely to pay a huge premium.

For example, it’s almost certain you won’t get the cheapest mortgage rates on the market if you use Help to Buy. That’s because you’ll need a high Loan to Value (LTV) mortgage. Plus, the government will initially own a 20% stake in your home under the terms of the scheme. This means you may have to pay back more than you borrowed if your home rises in value. 

When it comes to selling, there’s also the issue that your new-build home may not be as attractive to buyers given that it is no longer ‘new’. Aside from this, it is often reported that the quality of new-build homes isn’t up to standard.

For more information, see our article that fully explains the ins and outs of the Help to Buy: Equity Loan scheme.

Will house prices continue to head upwards?

Rising house prices makes it more difficult for first-time buyers to get on the property ladder. However, according to Sarah Coles, while house prices are unlikely to fall, the market could cool this year.

She explains “Right now, we’re not expecting prices to fall, especially while buyers continue to outnumber sellers so dramatically. The shortage of homes on the market should keep a floor under prices – so we’d expect a slowing of price rises rather than anything more dramatic.”

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