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These are strange times for UK housebuilders. House prices remain stable or rising in most parts of the country, and the big listed builders 鈥� with a couple of exceptions 鈥� continue to report record results and strong demand. While official housebuilding statistics for the year to March are not due out until November, the Home Builders Federation said recently that it expects completions to have risen again 鈥� making it the sixth consecutive year of growth.

And yet the share prices of the publicly quoted firms are down on average by one-fifth since the start of the year, with the worst performer 鈥� step forward, Crest Nicholson 鈥� having seen its valuation pretty much halved. There鈥檚 no doubt that the City, for one, is spooked.

Analysts put the falls down to a combination of issues: the sluggish London market; consumer fears ahead of Brexit; and the feeling that we鈥檙e coming to the end of a property cycle. But probably the biggest drag anchor on the sector is the one issue that has lain behind its recent extraordinary profitability 鈥� the government鈥檚 Help to Buy scheme. Speculation has grown in recent months that the chancellor, Philip Hammond, will use next week鈥檚 Budget to either cancel or rein in the five-year-old scheme that by March this year had already stood behind 169,000 new-build house sales worth a cumulative 拢42.2bn.

鈥淚f you鈥檙e effectively subsidising the price of something that鈥檚 already too expensive then you鈥檙e just putting more money into the system鈥�

Matt Kilcoyne, Adam Smith Institute

Communities secretary James Brokenshire, speaking before the Conservative Party conference last month, has hinted as much, saying the government was 鈥渞eflecting carefully鈥� on the scheme鈥檚 future. But analysts say cancelling Help to Buy could see housebuilders鈥� share prices drop by up to 40% as well as a material drop in output. Housebuilders 鈥� and their shareholders 鈥� are desperate to know what Hammond is going to announce. The stakes couldn鈥檛 be higher. 

Are you worried that chancellor Philip Hammond will cancel the Help to Buy scheme in next week鈥檚 budget?

鈥� 黑洞社区 News (@黑洞社区News)

Help to build

Help to Buy was launched in 2013 by then chancellor George Osborne, making an immediate impact. Within two years, annual new-build completions had increased by one-third to more than 155,000, and they have carried on rising ever since. By bridging the gap for those buyers who could afford mortgage repayments but not necessarily the level of deposit required (see 鈥淗ow does Help to Buy work?鈥�, above), Help to Buy has effectively allowed housebuilders to take high sales rates for granted. Housebuilder Bellway last week admitted that in the year to July, 49% of its private sales were supported by Help to Buy, and Cenkos analyst Kevin Cammack says this figure is around 40% across the sector. 鈥淚t鈥檚 been the single most important government intervention in support of housebuilders for as long as I can remember,鈥� he says.

This virtual guarantee of sales has undoubtedly allowed housebuilders to build more quickly, at least in some areas, than they otherwise would have. A government-commissioned independent evaluation by the London School of Economics & Political Science (LSE) carried out in 2015 found that 43% of Help to Buy purchasers would not otherwise have been able to afford a home 鈥� meaning this proportion of Help to Buy sales are genuinely additional to what would have happened otherwise. The research found that produced a 14% uplift in build rates. And if that figure were still to hold true today, it would mean that a total of 73,000 homes have been built in the last five years as a direct result of the policy 鈥� no small beer.

A study by the Home Builders Federation (HBF) published last month concluded that the policy was 鈥渄elivering on all objectives鈥�. Stewart Baseley, executive chairman, said: 鈥淭he Help to Buy scheme has been an unmitigated success. It has led to an unprecedented increase in housebuilding activity, created tens of thousands of jobs, and boosted local economies the length and breadth of the country.鈥�

Despite these positive effects, Help to Buy has been controversial from the start. Free-market think tank the Adam Smith Institute has long called for its cancellation. Matt Kilcoyne from the institute argues that it merely stokes prices overall, and that at worst it risks creating the next 鈥渟ub-prime鈥� mortgage crisis. 鈥淚f you鈥檙e effectively subsidising the price of something that鈥檚 already too expensive then you鈥檙e just putting more money into the system,鈥� he says. Many others have weighed in with similar doubts, including Legal & General chief executive Nigel Wilson, who has said it is 鈥渢urbo-charging prices鈥� and should be scrapped.

鈥楨ffing stupid鈥�

In 2013, with the housebuilding industry still in the doldrums, these concerns could be dismissed as a price worth paying for a necessary stimulus. But by last year, with housebuilding sharply up and a new government already broadening housing policy away from an exclusive focus on home ownership, many assumed the policy鈥檚 time was up. But instead Theresa May last October shocked observers by announcing 拢10bn of further funding, guaranteeing its continuation until 2021. One source close to government says: 鈥淭he first phase was quite a hefty positive all-round. But deciding to give it an extra 拢10bn was just pretty effing stupid. It makes the industry even more reliant on it, and creates an even worse cliff-edge for everyone in 2021.鈥�

Since then concerns about housebuilders profiteering on the back of the government鈥檚 Help to Buy largesse have grown, particularly given the Persimmon bonus scandal which saw that firm鈥檚 chief executive, Jeff Fairburn, pocket 拢75m. Last year, 58% of Persimmon鈥檚 privately sold homes went to buyers using Help to Buy.

Increasing evidence has emerged of the boost to prices provided by the intervention. In 2017 construction analyst Alastair Stewart, citing a study of average sales prices, concluded in a lengthy note on the scheme that housebuilders received a boost to sales prices of 鈥渁t least 5%鈥�. In addition, he found, it had been mainly used to boost building in areas of northern England and the Midlands with lower demand. 鈥淗elp to Buy has been a major windfall for developers: it allowed them to charge more for homes than they would otherwise be able to; and it has been used disproportionately [鈥�] where housebuilders had large swathes of impaired land,鈥� the note said.

Likewise, Cenkos鈥� Cammack says his conversations with builders indicate the Help to Buy loan has in most cases replaced the standard incentives given by housebuilders to buyers, such as free carpets and appliances, generally worth 2%-3% of the sale price. Under Help to Buy this 2%-3% instead goes straight on the bottom line, boosting margins significantly.

New, as yet unpublished research by the LSE into the issue appears to support these findings. A study of sales and construction activity close to local authority boundaries where the policy鈥檚 implementation differed between authority areas has found a price premium of about 5% around London (where the scheme was expanded radically in 2016) attributable to the scheme, but no noticeable increase in build activity. In a lower-demand area, the Welsh borders (Help to Buy was introduced later in Wales than in England), build activity increased marginally, but at a minimal price premium. One of the research鈥檚 authors, Dr Felipe Carozzi, assistant professor at the LSE, says: 鈥淭he policy does seem to have some impact upon build rates 鈥� but this is unlikely to be in the South-east where the homes are most needed. Thus, the policy is unlikely to be successful in meeting its aims.鈥�

Even more politically unpalatable is the data on whom the scheme is helping. Government figures show 86% of recipient households earn more than 拢30,000 鈥� in other words, above the 拢28,400 national average household income. Even the 2015 government-commissioned evaluation found 57% of Help to Buy recipients would have bought a home anyway. Lindsay Judge, senior policy analyst at the Resolution Foundation think tank, says this 鈥渄eadweight cost鈥� is indulgent in a time of austerity. 鈥淭here鈥檚 a case for looking at whether households earning more than 拢60,000 should be eligible for support from Help to Buy. It鈥檚 probably not sensible. And longer term, the government should think hard about restricting the scheme even further,鈥� she says.

Torrid

Given these arguments, and the huge 拢52,000 cost per property of the policy, it would be understandable if Hammond were to consider other priorities 鈥� the NHS, social care, prisons, Brexit preparations, universal credit, schools 鈥� more deserving of limited government cash. But cancelling it outright from 2021 would have major repercussions. Cammack says housebuilders would both lose sales and see remaining sales become less profitable. With lower volume, company overheads would also eat into margin. His estimate is that overall cancellation could see average reported profit fall by one-third. This is a reduction in earnings that the stock market has not priced in, meaning potential share price falls of anything up to 40% initially, though this would probably correct. 鈥淚t鈥檇 be a torrid quarter or two, undoubtedly, though the industry would fight back,鈥� he says.

鈥淚鈥檇 be astonished if Hammond cancelled it. It鈥檇 lead to a national drop in output 鈥� it鈥檚 just not what the government wants鈥�

Clyde Lewis, Peel Hunt

Clyde Lewis, analyst at Peel Hunt, agrees, saying cancellation would be a 鈥渄isaster鈥� for the new-build market, sparking share price falls of anything up to 20%.

Luckily, for housebuilders, then, few think outright cancellation is likely. 鈥淚鈥檇 be astonished if Hammond cancelled it,鈥� says Peel Hunt鈥檚 Lewis. 鈥淚t鈥檇 lead to a national drop in output 鈥� it鈥檚 just not what the government wants.鈥� Stockdale Securities鈥� Alastair Stewart, agrees. 鈥淚t鈥檚 going to be extended, there鈥檚 no doubt about it. It鈥檚 just become the new norm. Housebuilders buy land on the expectation of a certain volume of buyers. It鈥檚 too big to curtail.鈥�

One source close to government deliberations on the matter said: 鈥淭he housing ministry is definitely convinced that Help to Buy has to be extended. But the Treasury is not convinced 鈥� they鈥檝e got to balance the books. It鈥檚 very much up in the air.鈥� A separate policy source said Downing Street was also raising issues and that 鈥渢he prime minister can鈥檛 stop fiddling鈥�. The prime minister鈥檚 housing adviser, former Shelter policy director Toby Lloyd, has previously gone on record branding Help to Buy 鈥渟elf-defeating and poorly targeted鈥�.

Builders鈥� heroin

But Hammond has a range of options aside from axing the policy completely (see 鈥淗ammond鈥檚 options鈥�, below), and the big question is now what particular option Hammond will choose. Housebuilders, certainly, appear resigned to this happening, with Bellway鈥檚 new chief executive, Jason Honeyman, last week backing calls to trim the scheme. A spokesperson for the HBF says: 鈥淭he certainty of demand that the scheme provides enables builders to invest in the land and people needed to deliver more homes, and that certainty is desperately needed. The industry is keen to explore all options with government for how it could be shaped moving forward.鈥�

If it鈥檚 likely Hammond will extend Help to Buy but further ration access to it, the big determinant of impact on housebuilders will be funding. Some have speculated he could extend it without giving any further funding 鈥� because by rationing it he would make the existing 拢10bn last longer.

Clearly these decisions will hit housebuilders, but the sector would recover much more quickly from that than from cancellation. 鈥淭he market would take a bit of a knock but it would adjust okay. The companies would have a long enough time to prepare for it,鈥� says Cammack.

For a government with the ambition to build 300,000 homes a year, this will clearly be a prime consideration. The Resolution Foundation鈥檚 Judge says: 鈥淪ome have called Help to Buy 鈥榯he builder鈥檚 heroin鈥� 鈥� the trick will be to wean the industry off it without any nasty shocks.鈥� Next week we can expect to find out if it鈥檚 a trick Hammond can pull off.

Will we ever solve the housing crisis? 鈥� is just one of the debates on this year鈥檚 programme at 黑洞社区 Live, with speakers including Stephen Kinsella of Homes England, Selina Mason of Lendlease and Simon Rawlinson of Arcadis. Book tickets at