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Help to buy price caps

Help to Buy, the government Equity Loan scheme that covers new-build homes in England, is to be restricted this year, ahead of its planned abolition in 2023. But we are forecasting that this may not limit the popularity of this aid package which was launched in 2013.

From April 1, Help to Buy will only be available to first-time buyers. Regional price caps will also be introduced, set at 1.5 times the average price paid by first-time buyers in that region. As a consequence of this measure, as many as 45% of new homes that were marketed in 2020 would no longer be eligible for the scheme because their values were above the caps. Our calculations show that 93% of five-bedroom homes and 82% of four bedroom homes marketed would not qualify, although, of course, fewer such properties are bought with Help to Buy.

But some of the smaller properties, popular with first-time buyers, would also be excluded, with 40% of three bedroom homes, 26% of two-bedroom homes and 11% of one-bedroom homes being priced above the cap. As our graph illustrates, some of the cheaper northern markets seem set to be hard hit by these changes.

Yet, although many homes will be above the price caps, we expect that Help to Buy will still be in demand, attracting more first-time buyers than in 2020.

Why do we reach this conclusion? Lenders will still be severely rationing the supply of the 90% loan-to-value (LTV) deals that many first-time buyers require. This means that, for many, Help to Buy may be the only way to climb onto the ladder. Under the terms of the scheme, applicants must have a 5% deposit. But since they can secure a 20% government loan (40% in London) which is interest-free for five years, they have access to a wider choice of mortgages.

As a result of the price caps, we forecast that a two-tier new-build market will emerge this year, with 50-80% of one and two-bedroom homes in every region being sold with Help to Buy. Just 10-20% of properties with more than three bedrooms will be sold using the scheme.

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Market Insight Winter 2021

Market Insight Winter 2021
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