How the Help to Buy scheme has boosted the construction industry
Since the financial crisis in 2007, the housing industry has struggled. House prices fell because suddenly; no-one could afford to buy a home. This was due to the fact banks became very restricted in terms of to whom they would lend and so most people were not eligible for a loan or were unable to save up enough money for a deposit. As a result, the construction industry slowed and profits plummeted.
The Help to Buy scheme, which was announced by the chancellor as part of the Budget in March 2013, aims to solve this problem by helping buyers get on to property market and therefore provide a boost to the construction industry. Since its implementation, it has had a huge impact on mortgages, house prices and the construction industry.
Just how big is that impact though? Here’s an in-depth look at the Help to Buy scheme and how it has affected the construction industry…
What is the Help to Buy scheme?
The Help to Buy scheme is an extension of FirstBuy. Similar to Help to Buy, FirstBuy aimed to get more first-time buyers on the market by providing them with a 20 per cent equity loan, meaning buyers only had to pay a five per cent deposit. Although this scheme had some success, it was very limited as only first time buyers earning under £60,000 a year were eligible. In addition, the house could only be worth up to £280,000. The construction industry did see a boost in activity but it wasn’t enough to radically change the housing market.
As a result, the government decided to extend the scheme to everyone and Help to Buy came into effect in April 2013. Not only can anyone apply for the scheme, but the house can now be worth up to £600,000. Help to Buy is currently only available on new builds, which has encouraged growth in the construction industry, as many housebuilders have been building more new homes to meet demand.
The government funding for the Help to Buy scheme is also much higher, as the government has set aside a £3.5 billion package, which aims to provide help for around 80,000 house buyers.
Unlike previous schemes, housebuilders don’t need to contribute any money towards the scheme, as the equity loan is provided by the Homes & Communities Agency (HCA). This means that there is absolutely no risk for them. In fact, there are a number of benefits Help to Buy provides to housebuilders, which is probably to encourage as many firms to sign up as possible. In order to be part of scheme, housebuilders register by filling out a form and sending the completed document to the HCA via email. Once a builder is registered, they can provide as many or as little new builds through the scheme as they want.
Buyers pay their five per cent deposit directly to the housebuilder, meaning it’s beneficial to the builder to provide as many houses as possible. The inevitable rise in new builds also means firms who provide building materials, such as EPDM roofing, should also see their profits soar.
The scheme will run up until March 2016, or until the funding runs out. The only real restriction is that builders cannot sell to their friends or family, nor can they take part in part-exchange deals.
Help to Buy’s success
In the few short months it has been available, Help to Buy has had a huge impact on the industry. As more buyers have flooded the market, housing demand has risen, resulting in house prices increasing. This means that housebuilders can charge more for their new homes and therefore make bigger profits. Persimmon and Bovis Homes, for example, has reported that it has seen its profits soar by 33 per cent and 20 per cent respectively since Help to Buy came into effect.
It’s no wonder that housebuilders are reporting profits when house prices have continued to rise over the past few months. Official figures released in September 2013 show that the average price of a three-bedroom semi is now £245,000 and the average house price in June was up £11,000 compared to the same period last year. The continuing positive figures have led industry experts to believe that the housing industry will see a full recovery from the financial crisis.
The demand for new homes is not slowing down either, the construction industry is currently providing around 100,000 new homes a year but the UK actually needs more than double that. Over 240,000 new homes are needed per annum according to the Town and County Planning Association (TCPA). London Councils also revealed recently that the capital needs over 800,000 new homes by 2021 in order to meet demand.
Although this high demand puts a lot of pressure on the construction industry, it means that new homes will be in high demand for the foreseeable future. It also means that building material providers should continue to see rising profits, as materials will always be needed to be able to construct new homes. EPDM roofing could particularly see high demand, as it is becoming increasingly popular to install on new homes due to the fact it’s cost effective and easy to install.
Construction activity is currently at the highest level it has been in three years, according to the Markit/CIPS Construction Purchasing Managers’ Index (PMI) and it seems to be mostly thanks to housing schemes like Help to Buy.