Help To Buy Equity Loan Scheme Progress Review

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A picture of the National Audit Office logoReportby the Comptrollerand Auditor GeneralMinistry of Housing, Communities & Local GovernmentHelp to Buy: Equity Loanscheme – progress reviewHC 2216 SESSION 2017–201913 JUNE 2019

Our vision is to help the nation spend wisely.Our public audit perspective helps Parliament holdgovernment to account and improve public services.The National Audit Office (NAO) helps Parliament hold government to accountfor the way it spends public money. It is independent of government and the civilservice. The Comptroller and Auditor General (C&AG), Gareth Davies, is an Officerof the House of Commons and leads the NAO. The C&AG certifies the accounts ofall government departments and many other public sector bodies. He has statutoryauthority to examine and report to Parliament on whether government is deliveringvalue for money on behalf of the public, concluding on whether resources havebeen used efficiently, effectively and with economy. The NAO identifies waysthat government can make better use of public money to improve people’s lives.It measures this impact annually. In 2018 the NAO’s work led to a positive financialimpact through reduced costs, improved service delivery, or other benefits tocitizens, of 539 million.

Ministry of Housing, Communities & Local GovernmentHelp to Buy: Equity Loanscheme – progress reviewReport by the Comptroller and Auditor GeneralOrdered by the House of Commonsto be printed on 11 June 2019This report has been prepared under Section 6 of theNational Audit Act 1983 for presentation to the House ofCommons in accordance with Section 9 of the ActGareth DaviesComptroller and Auditor GeneralNational Audit Office10 June 2019HC 2216 10.00

This report assesses whether the Help to Buy:Equity Loan scheme has been value for money to date,and whether it is likely to be so in the future. National Audit Office 2019The material featured in this document is subject toNational Audit Office (NAO) copyright. The materialmay be copied or reproduced for non-commercialpurposes only, namely reproduction for research,private study or for limited internal circulation withinan organisation for the purpose of review.Copying for non-commercial purposes is subjectto the material being accompanied by a sufficientacknowledgement, reproduced accurately, and notbeing used in a misleading context. To reproduceNAO copyright material for any other use, you mustcontact copyright@nao.org.uk. Please tell us who youare, the organisation you represent (if any) and howand why you wish to use our material. Please includeyour full contact details: name, address, telephonenumber and email.Please note that the material featured in thisdocument may not be reproduced for commercialgain without the NAO’s express and directpermission and that the NAO reserves its right topursue copyright infringement proceedings againstindividuals or companies who reproduce material forcommercial gain without our permission.Links to external websites were valid at the time ofpublication of this report. The National Audit Officeis not responsible for the future validity of the links.00633606/19NAO

ContentsKey facts 4Summary 5Part OneAbout the Help to Buy:Equity Loan scheme 14Part TwoThe impact of the scheme 22Part ThreeManaging the Department’sinvestment 37Part FourThe future of the scheme 42Appendix OneOur audit approach 47Appendix TwoOur evidence base 49Appendix ThreeRegression analysis 51The National Audit Office study teamconsisted of:Andy Whittingham, Alison Taylor,Oliver Sheppard and John Anderson,under the direction of Aileen Murphie.This report can be found on theNational Audit Office website atwww.nao.org.ukFor further information about theNational Audit Office please contact:National Audit OfficePress Office157–197 Buckingham Palace RoadVictoriaLondonSW1W 9SPTel: 020 7798 7400Enquiries: www.nao.org.uk/contact-usWebsite: www.nao.org.ukTwitter: @NAOorgukIf you are reading this document with a screen reader you may wish to use the bookmarks option to navigate through the parts.

4 Key facts Help to Buy: Equity Loan scheme – progress reviewKey facts211,000 11.7bn 14.5%equity loans made tobuyers in England byDecember 2018loaned in total in Englandby December 2018is the Ministry ofHousing, Communities& Local Government’s(the Department’s) estimateof the increase in new-buildhousing supply in Englandas a result of the scheme352,000is the Department’s forecast of the number of home purchasesto be supported by Help to Buy equity loans in England byMarch 202137%is the proportion of buyers in England who said they could not havebought without the support of the scheme (measured betweenJune 2015 and March 2017)31%is the proportion of buyers in England who said they could havebought a property they wanted without the support of the scheme(measured between June 2015 and March 2017)38%is the proportion of new-build properties which have been sold withthe scheme in England between April 2013 and September 20184%is the proportion of all property sales which have been sold with thescheme in England between April 2013 and September 201881%is the proportion of Help to Buy loans provided to first-time buyersin England, at December 20185%is the proportion of buyers in arrears who bought in the firsteleven months of the scheme in England, at February 20192031-32is the year by which the Department estimates it will haverecouped its investment in full

Help to Buy: Equity Loan scheme – progress review Summary 5SummaryOur report1The Help to Buy: Equity Loan scheme (the scheme) aims to support the deliveryof the Ministry of Housing, Communities & Local Government’s (the Department’s)strategic objective to “deliver the homes the country needs”, through increasinghome ownership and increasing housing supply. It is the Department’s largesthousing initiative by value.2The government introduced the Help to Buy: Equity Loan scheme to addressa fall in property sales following the financial crash of 2008 and the consequenttightening of regulations by the regulatory authorities over the availability of highloan‑to‑value and high loan-to-income mortgages. The scheme has two principalaims: to help prospective homeowners obtain mortgages and buy new-buildproperties; and, through the increased demand for new-build properties, toincrease the rate of house building in England.3Homes England, an executive non-departmental public body sponsored bythe Department, launched the scheme in April 2013 on behalf of the Department.The current scheme will run to March 2021. Through the scheme, home buyers receivean equity loan of up to 20% (40% in London since February 2016) of the market value ofan eligible new‑build property, interest free for five years. The value of the loan changesin proportion to changes in the property’s value. The loan must be paid back in full onsale of the property, within 25 years, or in line with the buyer’s main mortgage if thisis extended beyond 25 years. The scheme enables buyers to purchase a new-buildproperty with a mortgage of 75% of the value of the property. The scheme, whichis not means-tested, is open to both first-time buyers and those who have owned aproperty previously. Buyers can purchase properties valued up to 600,000.4The scheme is demand-led, meaning all eligible applications would be accepted,with funding provided to meet demand. The scheme does not therefore havetargets either for the number of households supported to buy or for the additionalnumber of new homes built. The Department expects the scheme to support around352,000 property purchases by March 2021, via loans totalling around 22 billion incash terms. A new scheme, to follow on immediately from the current scheme fortwo years to March 2023, will be restricted to first-time buyers and will introduce lowerregional caps on the maximum property value, while remaining at 600,000 in London.Homes England expect to have loaned around 29 billion in total in cash terms byMarch 2023, supporting 462,000 property purchases.

6 Summary Help to Buy: Equity Loan scheme – progress reviewScope of our report5This report follows up on our March 2014 report The Help to Buy equity loanscheme. It continues a series of reports we have published on housing in England,which have included Housing in England: overview (January 2017), Homelessness(September 2017) and Planning for new homes (February 2019).6In our 2014 report, we examined the performance of the Department forCommunities & Local Government (now the Ministry of Housing, Communities & LocalGovernment) and the Homes and Communities Agency (now Homes England) indesigning and implementing the scheme. We found that they had started the schemewell, early demand for the scheme was strong, and that the scheme was improvingbuyers’ access to mortgages.7Since our first report, the scheme has increased considerably in size and value.This report assesses how the scheme has performed against its objectives, howeffectively the Department and Homes England have managed the Help to Buy: EquityLoan scheme to date, and how they are planning the future of the scheme and its end.This report does not examine whether quality standards for new-build properties areeither adequate or have been met.Key findingsThe scheme’s performance8The Department’s independent evaluations of the Help to Buy: EquityLoan scheme show it has increased home ownership and housing supply.Homes England had made around 211,000 loans by December 2018, amountingto 11.7 billion. The Department commissioned two independent evaluations ofthe scheme, which included sample surveys of households that had bought usingthe scheme, and interviews with developers and lenders. Around two-fifths ofhouseholds said they would not have been able to buy any property without the supportof the scheme. The Department did not set quantified objectives for the scheme,but expected that between 25% and 50% of sales would result in new homes beingbuilt. The second evaluation, covering loans made between June 2015 and March 2017,concluded that the rate of building had increased by 14.5% because of the scheme(paragraphs 1.3 and 2.2 to 2.6).

Help to Buy: Equity Loan scheme – progress review Summary 79The scheme has helped increase the number of new-build properties beingsold. Between the start of the scheme and September 2018, 38% of all new‑buildproperty sales have been supported by loans through the scheme, equating toaround 4% of all housing purchases. Since the scheme was introduced in 2013, thenumber of new-build property sales has increased from 61,357 per year in 2012-13 to104,245 per year in 2017-18. Sales of new-build properties have also increased fromaround 9% of all property sales in 2014 to over 12% in 2017. From 2013, the schemecontributed to a general increase in transactions throughout the housing market andplanning system, although the Department acknowledges that the rate of transactionswas picking up before the start of the scheme and the housing market is sensitive toa range of economic factors (paragraph 2.7).10 The scheme has helped fewer people to buy new-build properties in areaswhere less housing is available for sale below 600,000. Excluding London,between the start of the scheme and December 2015, the proportion of new-buildproperties bought with the support of the scheme ranged from 29% in the south eastto 42% in the north east. Over the same period the proportion was only 12% in London,where the ratio of median house prices to median earnings is greatest (less affordableareas as defined by the Office for National Statistics) and where there are fewernew‑build properties below the cap. In February 2016, the government decidedthat it needed to improve the take up of the scheme in London, while accepting thevariation across other regions of England. It increased the maximum loan in Londonto 40% of the property value. The change improved the scheme’s take-up in London,to 26% of new-build sales between January 2016 and September 2018, although thisis still lower than the rest of England (46% of new-build sales over the same period)(paragraphs 2.8 to 2.9).

8 Summary Help to Buy: Equity Loan scheme – progress reviewBuyers11 The Department’s second evaluation found that around three-fifths of buyerscould have bought a property without the support of Help to Buy. The Departmentintentionally set broad eligibility criteria for the scheme to enable as many households aspossible to benefit, not just first-time buyers. There are no limits on household incomeand no restrictions on the number of scheme beneficiaries. As at December 2018 around81% of all buyers supported by the scheme have been first-time buyers. The Department’ssecond evaluation, covering loans made between June 2015 and March 2017, found that: 37% of buyers stated that they could not have bought without the support of thescheme. We estimate this to be around 78,000 additional sales of new-build propertiessince the scheme started. 63% of first-time buyers were aged 34 and under.However, the evaluation also found that: 19% of buyers have previously owned a property and are using the scheme to buy,on average, more expensive properties than first-time buyers using the scheme. Weestimate that this equates to nearly 40,000 households (paragraphs 2.5 and 2.10 to 2.12). 31% of buyers could have purchased a property they wanted without the scheme.Extrapolating this proportion over the whole of the scheme suggests that around65,000 households could have purchased a property they wanted without the scheme.12 Some 4% of the 211,000 buyers who had used the scheme by December 2018had household incomes over 100,000. The proportion has increased each year, from3% in 2013 to 5% in 2018. Over the whole scheme, 10% of buyers had household incomesover 80,000 (or over 90,000 in London), the thresholds above which they would not beeligible for the Department’s shared ownership housing scheme (also designed to helpwith home ownership). The Department regards these transactions as an acceptableconsequence of designing the scheme to be widely available. The Department also intendedto keep the scheme simple to administer and easy for applicants to access (paragraph 2.14).Help to Buy properties13 The scheme has enabled buyers to purchase properties with more bedrooms,or to buy a property more quickly, than they would otherwise have been able to.Buyers have been able to borrow more through taking out both a mortgage and anequity loan than they could have borrowed through a mortgage alone. Around four-fifthsof buyers reported, through the evaluations, that the scheme had enabled them to buy aproperty sooner. Buyers took out mortgages and equity loans that together were typicallyaround four and a half times their annual income (increasing to over six times in London).In contrast, first-time buyers generally took out mortgages that were three and a half timestheir annual income over the same period. The increased spending power of buyers usingthe scheme has contributed towards developers building properties with more bedrooms.Though not a stated objective, the Department regards the scheme’s support to buyersto move up the property ladder more quickly as a positive outcome, as it brings moreproperties onto the market for other buyers (paragraphs 2.5, 2.12 and 2.13).

Help to Buy: Equity Loan scheme – progress review Summary 914 Buyers who want to sell their property soon after they purchase it might findthey are in negative equity. New-build properties typically cost around 15%–20% morethan an equivalent ‘second-hand’ property, termed the ‘new-build premium’, whichreflects that these properties have yet to be lived in. The new-build premium fell awayfollowing the financial crash of 2008 but has since recovered to pre-crash levels, aswider economic and housing market conditions have changed, and sales of new-buildproperties have increased (paragraphs 2.15 and 2.16).15 Our analysis indicates that buyers who used the scheme have paid lessthan 1% more than they might have paid for a similar new-build property boughtwithout an equity loan. By comparing prices paid for similar new-build properties inthe same area with and without the scheme, we estimate that buyers supported by thescheme have paid less than 1% more. Our estimate is significantly less than others inthe public domain, which range between 5% and 20%. We found that these estimatesdo not compare similar properties and so do not accurately assess any additionalpremium paid by those using the scheme on top of the new-build premium. We havenot, however, quantified other financial incentives that buyers of properties without thescheme might receive. Incentives on properties sold with the support of the schemeare restricted to 5% of the total purchase price, but there is no restriction on incentiveson new-build sales generally (paragraphs 2.17 and 2.18).Developers16 The scheme has supported five of the six largest developers in Englandto increase the overall number of properties they sell year on year, therebycontributing to increases in their annual profits. Five of the six developers in Englandthat build most properties account for over half of all loans through the scheme. They sella greater proportion of properties with the support of the scheme than other developers.Between 36% and 48% of properties sold by these five were sold with the support ofthe scheme in 2018. The profits of all five developers have increased since the start ofthe scheme. Over the same period, total combined housing completions for these fivedevelopers have increased by over a half. It is not possible to determine what proportionof a developer’s profits directly relates to sales through the scheme because thisinformation is not publicly available (paragraphs 2.19 to 2.21).17 Some small and medium-sized developers have required more help thananticipated from Help to Buy agents to engage with the scheme. The Departmentdesigned the scheme so that it is easier for smaller firms to access. More small andmedium-sized developers have joined the scheme than joined previous schemes withsimilar aims. By December 2018, 2,000 developers were registered with the scheme,the majority of whom are small and medium-sized developers. However, some smalland medium-sized developers have struggled with the administration required to jointhe scheme and sell properties with its support (paragraphs 2.19 and 2.20).

10 Summary Help to Buy: Equity Loan scheme – progress reviewThe government’s investment in the scheme18 By 2023, the government will have invested up to 29 billion in the scheme,tying up cash which cannot be used elsewhere. Homes England had loaned around 11.7 billion by December 2018 and estimates it will have loaned around 22 billion incash terms by the close of the current scheme in 2021, rising to around 29 billion incash terms by the close of the new scheme in 2023. Factoring in the estimated rate ofredemptions, the net amount loaned is forecast to peak at around 25 billion in 2023in cash terms. There is an opportunity cost in tying up this money in the scheme for aconsiderable period, rendering it unavailable for other housing schemes or departmentalpriorities (paragraphs 3.2 to 3.5).19 The Department expects to recover its investment in the medium term andmake a positive return overall, although it recognises the investment is exposed tosignificant market risk. By December 2018, Homes England had received 1.3 billionin redemptions, around 11% of the amount loaned. Based on current estimates ofthe long-term performance of the housing market, Homes England expects totalredemptions to equal the amount loaned by 2031-32, and to have made a positivereturn on investment by the time all loans are repaid by 2048. However, both thepayback period and the return on investment are sensitive to house price changes andthe timing of buyers repaying loans. Recent housing market data indicate that houseprice growth is slowing down, and that there has been a recent fall in prices in someregions, notably London (paragraphs 3.6 to 3.11).Interest repayments20 Homes England has recognised the need to improve processes forrecovering interest. The first homeowners in the scheme started paying interest inMay 2018, five years after the first loans were issued. At December 2018, around 7%of homeowners using the scheme were paying interest; most homeowners are still withinthe five-year interest-free period. At February 2019 around 5% of homeowners werein arrears, and the proportion of interest due that had not been received was around4%. In almost all cases, homeowners have fallen into arrears because processes tocollect interest were not set up when the loan was issued, and they have not respondedto contact from Target (the organisation administering the loans on behalf of HomesEngland). From September 2016, Homes England has required all homeowners toset up a direct debit on issue of the loan, in anticipation of the interest payments.In May 2019, the Department approved an improved interest-recoupment policy(paragraphs 3.12, 3.13 and 3.17).

Help to Buy: Equity Loan scheme – progress review Summary 11Contract management21 Target was not prepared for the volume and complexity of queries fromhomeowners once they started redeeming their loans and paying interest.In May 2018, Target faced an expected increase in enquiries as the first homeowners tohave bought with the support of the scheme came to the end of the interest-free period.Target had planned on the basis of Homes England’s forecast, but the overall number oftelephone queries received was over 75% higher than the forecast for the previous year.In addition, the queries received were more complex than predicted, requiring more andlonger interactions with customers. Target experienced problems in dealing with thishigher-than-expected level of engagement. Homes England and Target worked togetherto address this, for example Target tripled the number of staff dedicated to administeringthe scheme to 75. Homes England is undertaking a digital transformation programmeto speed up and streamline the administration of the scheme and to improve theexperience for buyers (paragraphs 3.14 and 3.16).22 Homes England’s oversight of its mortgage administrator Target and the Helpto Buy agents needs to improve. In February 2019, Homes England’s internal auditorgave only a limited assurance opinion for Target’s administration of the Help to Buyportfolio due to control weaknesses in several areas of Target’s operations, making anumber of recommendations for further improvement. A second internal audit report,in March 2019, identified problems with the arrangements at the Help to Buy agentsfor securing documentation to support loans, and Homes England’s limited oversightof information security arrangements at the agents. Homes England has accepted therecommendations of the internal audit report and has a number of actions in place tostrengthen its monitoring and oversight for these key contracts (paragraphs 3.15 and 3.16).The future of the scheme23 In October 2018, the Autumn Budget included an announcement that, fromApril 2021, the new scheme would be targeted towards those who need morehelp into home ownership. The new scheme will be restricted to first-time buyers.Outside of London, lower regional limits on the maximum purchase price will restrictthe scheme to buyers purchasing cheaper properties, who are likely to be peopleon lower incomes. The Department also intends these changes to reduce overalldemand for the scheme in its final two years, preparing the housing sector for itsend (paragraphs 4.4 to 4.10).

12 Summary Help to Buy: Equity Loan scheme – progress review24 The Department accepts there is less need for the scheme now that higherloan-to-value mortgages are more available, and plans to end the scheme in2023. The scheme was introduced in 2013 to address the difficulties that buyers wereexperiencing with the availability of high loan-to-value mortgages. Lenders are nowoffering high loan-to-value mortgages more widely, but eligibility is more restricted thanbefore the financial crash of 2008. The Department believes the scheme is thereforestill needed. It has announced the end of the scheme, giving developers and lendersfour and a half years to devise other ways for buyers to raise the necessary financeto purchase new-build properties. Nevertheless, there is concern across the housingsector that the end of the scheme will still result in a drop in new developments andsales (paragraphs 4.2 to 4.4, and 4.11).Conclusion on value for money25 The Department’s independent evaluations of the Help to Buy: Equity Loan schemeshow it has increased home ownership and housing supply. It seems likely to continueto do so as long as the scheme remains open, provided there is no significant changein the housing market. The scheme is therefore delivering value so far against its ownobjectives. The Department is currently forecasting a positive return on its investmentand redemptions are running ahead of expectations.26 Given that the government has entered the equity loan market place, it has putreasonable arrangements in place to benefit from increasing property prices. However, thisis dependent on the performance of the housing market and property values can go downas well as up. At points when the market turns down (whether over the near, medium orlonger term), the taxpayer could lose out significantly, as the government’s investmentin housing capital would reduce in value. Furthermore, property owners could face thetrap of negative equity, exacerbated by the new-build premium. The scheme also has anopportunity cost in tying up a great deal of financial capacity, and its broad participationcriteria have allowed some people who did not need financial help to buy a property tobenefit from the scheme.27 The government has indicated that it will wean the property market off thescheme. It will need to ensure that developers continue to build new properties at therates currently achieved, or better, if it is to meet its challenging ambition of creating300,000 new homes per year of sufficient quality from the mid-2020s. The schememay have achieved the short-term benefits it set out to, but its overall value for moneywill only be known when we can observe its longer-term effects on the property marketand the net return, or cost, to the taxpayer when the very substantial portfolio of loanshas been repaid.

Help to Buy: Equity Loan scheme – progress review Summary 13Recommendations28 The Department’s greatest challenge is to wind down the scheme to minimisenegative effects on the housing market. It should also seek to maximise, as far as it can,the return on its investment. Our recommendations aim to support the Department toachieve these goals.aHousing market conditions have changed since the start of the scheme.The Department should assess the existing scheme against current marketconditions and determine whether any changes to how it operates and criteriafor eligibility would increase its impact.bThe Department should consider further changes to the new scheme from 2021to achieve other housing policy goals, for example to enact the government’scommitment to addressing the practice of developers selling new housesas leasehold.cThe Department should plan a further evaluation of the scheme, either soonto inform the new scheme from 2021, or after the end of the current schemeto inform potential new initiatives to support home ownership and housingsupply after 2023.dThe Department should support Homes England to take appropriate enforcementaction to recover money due from homeowners who have fallen into arrears.eHomes England should continue to improve its oversight of the Help to Buy agentsand its mortgage administrator Target.fThe Department should review the information given by the Help to Buy agents anddevelopers to potential buyers, to confirm that it fully explains the financial risks ofbuying a new-build property through the scheme.gThe Department has not undertaken a detailed assessment of the impact of thescheme on the wider housing market. It should expand the scope of its nextevaluation to examine such wider effects, including a potential influence on thenew-build premium, and identify lessons learned for any future interventions.

14 Part One Help to Buy: Equity Loan scheme – progress reviewPart OneAbout the Help to Buy: Equity Loan schemeBackground1.1 The Ministry of Housing, Communities & Local Government (the Department)aims to support the building of a million new homes in England between April 2015 andDecember 2020, and thereafter deliver 300,000 new homes per year by the mid-2020s.1.2 Housebuilding declined sharply after the financial crash in 2008. The number ofnew homes built in England fell from a peak of 160,000 in 2007 to 65,000 in 2009,before slowly rising again. In response to the financial crash, the regulatory authoritiestightened the rules on mortgage lending to curtail mortgages where the loan exceeds90% of the property value and is greater than three and a half times the borrower’sincome (two and three-quarter times for joint borrowers). For example, the proportionof 95% mortgages dropped from a peak of around 6% in 2007 to less than 1% in 2009.However, this meant some prospective homeowners were not able to obtain mortgagesand buy properties as they needed larger deposits. The government introduced theHelp to Buy: Equity Loan scheme (the scheme) in 2013 to enable more people to obtainmortgages and buy new-build properties, thereby stimulating developers to build moreproperties to meet the increased demand.The Help to Buy: Equity Loan scheme1.3 The scheme is demand-led and does not have targets either for the number ofhouseholds supported to buy or for the additional number of new homes built. It wasintroduced in April 2013 with an

The current scheme will run to March 2021. Through the scheme, home buyers receive an equity loan of up to 20% (40% in London since February 2016) of the market value of an eligible new-build property, interest free for five years. The value of the loan changes in proportion to changes in the property's value. The loan must be paid back in .

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