Has Help to Buy run its course with builders?

(c) Sky News 2019: <a href="http://news.sky.com/story/has-help-to-buy-run-its-course-with-builders-11649991">Has Help to Buy run its course with builders?</a>
 

Help to Buy gets a bad press these days.

First-time buyers may love it but the scheme, launched in 2013 by former Chancellor George Osborne, has been accused of inflating house prices by stoking up demand, while doing nothing to boost the supply of new homes.

Among those uneasy at its launch was Mervyn King, then Governor of the Bank of England, who said it resembled the kind of government-guaranteed mortgage market seen in the United States.

That system, which dated back to the Great Depression of the 1930s, was tested almost to destruction during the financial crisis when Fannie Mae and Freddie Mac, the big US mortgage securitisation firms, required multi-billion dollar bail-outs by American taxpayers.

More recently, Help to Buy has also been blamed for some of the more egregious payouts and bonuses received by executives of housebuilding companies, being dubbed 'Help to Buy Yachts' by one Financial Times columnist.

That is because it is widely perceived as having pumped up the profitability of the house-builders since its launch.

So it was instructive to hear the thoughts of Pete Redfern, chief executive of Taylor Wimpey, the UK's third largest housebuilder by market capitalisation, on the subject today.

Taylor Wimpey reported a 19% rise in full year pre-tax profits, to a record £811m, with some 36% of transactions during the year backed by Help to Buy.

Yet Mr Redfern pointed out that, on a year-on-year basis, that was actually lower than the 43% of sales backed by Help to Buy a year ago.

He told Sky News: "The year-on-year movement [in sales and profits] is nothing to do with Help to Buy.

"But there's no doubt that, over the last few years, it's played a key part in keeping the market solid and particularly in that comparison between the new housing market and the second-hand market, when the second-hand market has been flat."

But is the Help to Buy scheme really necessary in view of buoyant demand for new-build homes from customers, low interest rates and a highly competitive mortgage market?

Mr Redfern's take is an interesting one compared with some of his peers: "My view on this hasn't really changed.

"From when the scheme was first introduced, we have argued - and we've never lobbied for it to be extended - it shouldn't be there forever.

"It's a good scheme in the short term, when the market is depressed, particularly when mortgage lending is depressed, to bridge a gap and to try and make sure that supply stays solid.

"And actually, if it's underpinning supply at a low point in the market, then it does add an extra house and it is incremental.

"If the market is stronger, there is less of an argument for it.

"You've got to be careful of the exit, but there's less of a long-term argument."

That exit is looming.

The equity loan element of the Help To Buy scheme, enabling first-time buyers to get onto the property ladder with a deposit of as little as 5%, was originally only supposed to run until the end of 2016 but was extended by Mr Osborne in 2014 to run to the end of 2020.

It was further extended last year by his successor, Philip Hammond, who in his autumn budget said it would now run until March 2023 - but, from March 2021 onwards, only first-time buyers will be able to access the scheme.

That has led concerns in the City that the strong run enjoyed by housebuilders during the last six years is set to come to an end and especially with Brexit seemingly depressing consumer sentiment.

Yet Mr Redfern feels that there have been no signs, so far this year, of a loss of appetite among homebuyers.

He noted today that sales rates are currently 10% ahead of this time last year - a period in which itself sentiment and sales were buoyant - with Taylor Wimpey's forward order book standing at £2.17bn compared with £1.96bn a year ago.

That represents 9,622 homes, or 47% of the homes the company anticipates selling this year, with "significant growth" coming from affordable homes.

Mr Redfern also noted that customers have also, in the main, been happy to complete on their house purchases.

He pointed out that there is a lot of pent-up demand for new-build homes, as reflected in the recent strong mortgage approvals data, helping mask the flat state of the second-hand market and the depressed state of the housing market in central London.

The housebuilding market is no stranger to boom and bust.

The peak of the last cycle was more or less signalled when, in February 2007, Barratt Developments paid £2.2bn for Wilson Bowden and, a month later, Taylor Woodrow and George Wimpey announced they were merging to create a £5bn giant.

The financial crisis erupted shortly afterwards and, in spring 2009, the enlarged Barratt Developments and Taylor Wimpey were both obliged to launch rescue rights issues.

So the hope must be that the sector is future-proofing itself for the time when, as it surely will, the housing market suffers a further downturn.

That raises questions about how the exceptional profits currently being generated are being spent.

Are they all just going back to shareholders and housebuilding executives?

Mr Redfern argues: "We finished the end of 2018 with £645m of cash on the balance sheet - the business is generating cash, we are investing a significant amount in land and we're actually also paying nearly £500m in social contributions on affordable housing and schools and the like.

"So we're actually putting cash into a lot of areas and one of those, perfectly reasonably, is to shareholders."

He also points out that the company is spending more than ever on training and apprenticeships although, to date, insists he has not seen any exodus of staff - as some housebuilders have warned - due to Brexit.

But there have been no blockbuster mergers or acquisitions in the sector for years.

What deals there have been recently - the £135m acquisition last April of Westleigh Group by Countryside Properties and Legal & General's £315m deal to take full control of Cala Homes - have not been of the same magnitude.

That may be because housebuilders, rightly, remain scarred by the memory of the crisis years.

However, if the housebuilders continue to throw off the levels of cash that they currently are, it would be no surprise to see bankers egging them on to do deals.