What are Help to Buy ISAs good for, and why have they been making headlines?
What is a Help to Buy ISA?
In last year’s Autumn Statement then Chancellor George Osbourne announced the latest in a long line of piecemeal policies that aim to increase homeownership with demand side subsidies. The Help to Buy ISA, introduced in December 2015, aims to help first time buyers by allowing them to save £200 a month tax free into a pot, with the promise that government will match 25% of the pot if it was used to fund the deposit on a home.
This helps a lucky few more people into homeownership by making the deposit a little easier to save for – and saving for the deposit is the main barrier most would-be first time buyers struggle with. However, this is problematic because for those it doesn’t help, house prices will become even further out of reach.
How does the Help to Buy ISA increase house prices?
House prices, like any other prices, are determined by supply and demand. The supply side of the equation is the number of homes which are available for sale on the market. This is affected by the number of individuals who want to sell their homes in the short term, and the number of new homes being built in the longer term.
The demand side is the number of people who are willing and able to pay for a home. This has two dimensions: the psychological dimension (people’s desire to own homes) and the monetary dimension (the amount of money people have available for buying a home). The Help to Buy ISA fits neatly into this latter category.
Increasing supply would increase homeownership rates while reducing prices. Increasing demand increases homeownership rates while increasing prices. But the catch is that increasing prices also reduces homeownership, because for those who weren’t lucky enough to benefit from the demand-side policy, the increased price makes them even less able to pay.
It’s this offsetting effect which makes supply side policies far more preferable to demand side policies when it comes to making housing affordable. In fact, in the long term, reducing demand is the more sensible option, so long as it’s done with carrots and not sticks – for example, by improving the private rented sector so that fewer people are desperate to escape to another tenure.
But the government is obsessed with demand side subsidies. This is because the ludicrous perception that rising house prices are a good thing still dominates politics, even though it's becoming a little taboo to say so overtly. We need government to commit to ending rising house prices so that wage increases will allow more people to be priced into homeownership.
Help to Buy ISA “scandal”
Help to Buy ISAs were in the news last week after an “investigation”* by the Telegraph showed that the top-up promised by government in fact isn’t payable until completion of the sale. The media has jumped on this, saying that because the deposit has to be paid before completion, the top-up won’t help anyone access homeownership who wouldn’t have already.
However, PricedOut understands that this is not strictly true. The deposit for a house can usually be paid in two parts. Typically up to 10% of the value of the home is due as a deposit at exchange (before completion). Then, if there is any more deposit to pay, it can be paid on completion of the sale. So a first time buyer who saves 8% of the house price and planned to use the government top-up to fund the rest of a 10% deposit would just need to ask their conveyancer for a little flexibility around the exchange deposit.
So the policy can help you if you are an aspiring first time buyer who can afford to save money each month. But many people can’t. We need polices that make buying a home more affordable for everyone, and the best ways of doing that are 1) managing demand by making alternative tenures more realistic or attractive, and 2) increasing supply by building more homes.
The government’s strategy of fuelling demand and only thinking about supply as an afterthought isn’t working. We need an overhaul of current housing policy, with the aim of building the homes we need and stabilising house prices so that the dream of owning a home doesn't drift further and further out of reach for would-be first time buyers.
*As far as I can see, their “investigation” was simply reading the policy…