Help to Borrow (even more)

Help to Buy schemes won't negate taxes and regulations that keep UK housing expensive.

The Sunday Times reports that Andy Burnham, soon to be appointed Prime Minister, will be presented with a plan to reinstate the Conservative policy known as ‘Help to Buy’. Or really ‘Help developers to sell’, if we are being honest.

The program was initiated by George Osborne in 2013, the same year he jacked up Stamp Duty Land Tax (SDLT) from Gordon Brown’s top slab rate of 4% for properties over £500,000 to a top ‘slab’ rate of 7%. The following year Osborne replaced SDLT with a marginal system with the top marginal rate of 12% on the value of a property over £1.5 million and 15% on enveloped buildings. Osborne’s SDLT ‘reforms’ didn’t tax the rich as much as he taxed London and the South East, where demand for housing greatly outstripped supply. Any property worth more than £937,500 paid more Stamp Duty under Osborne’s reforms than it did under the previous ‘slab’ system. While people buying cheaper properties paid less stamp duty.

At the same time as he increased the taxes on property purchases, Osborne also introduced a ‘help-to-buy’ scheme which was a boon to commercial house builders, as it was only available for new-build properties. In April 2013, the government agreed to lend buyers an interest-free 20% equity loan on a property for 5 years; the buyer had to pay a 5% deposit and obtain a mortgage for the remaining 75%. For London Property, the government lent up to 40% of the purchase price. The interest-free period only lasted for 5 years; after that, it increased annually by RPI + 1%. When the property was sold, the government took 20% or 40% of the sales price, not the original loan amount.

In general, buying a house in an inflationary economic environment enables homeowners to inflate away their debt. The help-to-buy equity scheme meant the government also benefited from house price inflation, unlike the bank putting up most of the money. So the government had little incentive to control house-price inflation which became rampant due to a decade of ultra-low interest rates. The scheme was sold to voters as ‘help’ for first-time buyers, but it was primarily intended to benefit the commercial house-building firms registered with the scheme. Although the scheme was limited to a maximum property price of £600,000.

In October 2013, Osborne also introduced a mortgage guarantee scheme in which buyers had to put in a 5% deposit, the bank provided a 95% mortgage, and the government guaranteed 15% of the mortgage to the lender. This scheme was open to purchases of existing housing but was also limited to a maximum price of £600,000.

This was a strange scheme to be run by the government because the required increase in deposit rates from 5% before the financial crisis of 2007/8 to 20% afterwards, came from international financial institutions: Basel III and the G20 Financial Stability Board guidance on bank capital requirements. These international organisations increased the risk-weights for high loan-to-value mortgages.

So while UK banks had lost money on their newer mortgages in 2007/8 and needed to rebuild their capital, it was international regulatory pressure and the UK’s Financial Services Authority, part of the Bank of England, that introduced tougher affordability rules and larger deposit requirements for mortgages. In addition, the Bank of England’s stress tests, introduced in 2014, penalised banks with large amounts of high loan-to-value mortgages on their books. So the Bank of England was trying to reduce mortgage risk while the Government was encouraging it by becoming the guarantor of some potentially risky loans.

The schemes ran from April 2013 to May 2023 and helped 387,000 property purchases. However, it also increased demand for properties below £600,000 and increased prices for new-build properties to the £600,000 threshold. It also locked up about £20 billion of government funding in housing equity loans. On the bright side, so far the majority of redemptions have been above the purchase price, although the scheme does encourage successive governments to keep house prices high, at least until all the equity loan properties have been sold and the government has recouped its money.

Stamp Duty Land Tax

But there are other ways that successive governments have made house buying more expensive. For example, the Labour government lowered the nil-rate band for Stamp Duty Land Tax (SDLT) from £250,000 to £125,000 for non-first-time buyers, while for first-time buyers it reduced the nil-rate band from £425,000 to £300,000 and the 5% band from £625,000 to £500,000. So Labour has reduced the maximum SDLT saving for first-time buyers by £3,750 from £8,750 to £5,000, while adding £2,500 to everyone else’s property purchase costs.

But the government has also increased the cost of housing by taxing building materials, increasing planning requirements and the ‘affordable’ housing schemes. Together, these taxes and programs have increase the cost of housing, causing the need for government ‘Help to Buy’ schemes. The government is literally increasing building costs with one hand while planning to hand out discounts and loan guarantees with the other.

1. Emission taxes

Almost all building materials have high carbon emissions during production, even though the housing they provide will last for decades or even centuries. If the government wants to add carbon taxes to the production of essential building materials it should at least consider their longevity and divide their production emissions by the expected life of the product.

Unfortunately, this is not how carbon taxes work and the UK still requires building material producers to buy emission allowances on the ETS market and to pay the Carbon Price Support (CPS) and Climate Change Levy (CCL), and soon importers of building materials will have to pay the Carbon Border Adjustment Mechanism (CBAM) on imported materials. Worse still the UK Government plans to join the EU’s ETS market, which is not only about 20% more expensive than the UK ETS; the EU is reducing its free allowances at a faster pace than the UK.

Cement kilns, steel blast furnaces, brick and roof tile kilns and glass furnaces have to currently pay almost £60 in tax for every tonne of CO₂e they produce under the UK ETS, as well as pay the CCL on electricity and gas of 0.8p per kWh and the CPS on gas used to produce electricity of £18 per tonne of CO₂.

• Steel from a blast furnace produces 1.8 to 2.6 tonnes of CO₂ emissions per tonne of steel produced, which adds carbon taxes of about £110 to £120 per tonne;

• Aluminium production emissions are very high and range from 4 tonnes to 22 tonnes of CO₂ per tonne, depending on the type of electricity used in smelting and casting the aluminium. The global average is about 14.4, which would add between £600 and £900 per tonne to UK production costs, but almost no aluminium is produced in the UK because of these taxes. However, imported aluminium will be charge CBAM taxes from next year;

• Cement from 0.6 to 0.9 tonnes of CO₂ per tonne of Cement so the carbon taxes add about £35 to £52 per tonne;

• Glass manufacturing emissions range from 0.6 to 1.5 tonnes of CO₂ per tonne which adds £35 to £86 in emission taxes;

• Bricks and other ceramics from 0.3 to 0.6 tonnes of CO₂ per tonnes and the various carbon taxes add £17 to £35 per tonne of bricks or roof tiles.

In total, emissions taxes add up to £ 3,000 to the cost of building per typical property unit. This will increase by almost 20% in January if the UK joins the EU ETS market. The table below shows the current UK and EU December Futures price of emissions and exchange rate.

2. Environmental taxes and fuel duties

Besides the emission taxes, there are other environmental taxes such as the aggregates levy of £2/tonne, the landfill tax, and fuel duty for vehicles and machinery. Off-road machinery, such as excavators and cranes, used to be able to use ‘red diesel’ that was taxed at 11.14p per litre rather than 52.95p, but this discount was removed in April 2022. This has increased the site machinery fuel costs by £3 to £5 per square metre of built area.

3. Planning, design requirements and financing costs

Besides the increase in material costs, the government’s planning approval process and design requirements for larger developments have also increased housing costs. Planning approvals can add between £20,000 and £70,000 per home, depending on the size and location of the development.

Developers must produce: Transport assessments, environmental impact assessments, flood risk and drainage reports, archaeology reports, ecology reports, viability assessments, design and access reports, fire strategy plans, and energy and sustainability reports. For a medium-sized scheme, these can add up to £1 million to building costs.

But the highest cost is the financing costs while the planning approval takes place. Major schemes can take two to five years to get approval, during which time the developer has capital tied up in the land and a large negative cash flow paying for consultants to produce multiple reports. This is why major construction projects can run up massive bills before the foundations are dug or a brick has been laid.

The plans of larger developments also have to include two staircases if they are more than 18 metres high. While an important safety feature, this reduces the saleable floor area by about 5%. The requirement for cross-ventilation and dual-aspect units also reduced the number of units in a development. Sunlight and daylight compliance restricts building heights. While accessibility requires step-free access to the main entrance, and M4(2) accessibility requirements include wider corridors, wider doorways, and larger bathrooms, which also reduces the number of units. In London, the GLA requites 90% of units to meet M4(2) requirements; outside London, only 20% to 30% of units need to meet these standards. The GLA also requires 10% of units to meet M4(3) requirements for wheelchair users, which must have lift access, larger rooms, fully accessible bathrooms and kitchens and parking sized for wheelchairs. While this is obviously important for wheelchair users, it both increases the costs and increases the floor area of London developments, reducing the number of units that can be built in a new development. Together both larger apartments and fewer apartments increase the price.

4. Affordable housing discounts

But the highest government-created additional cost for the average property purchaser is the affordable housing requirements under Section 106. This requires 20% to 30% of new houses to be ‘affordable’ outside London, while new developments in London must have 35% to 50% ‘affordable’ units, where ‘affordable’ means they are sold to local authorities or registered providers, such as housing associations, at 50% to 70% of the ‘market value’.

House builders are not charities, so the discounts given to the housing associations or councils must be added to the cost of the other units sold to regular buyers, including first-time buyers receiving government ‘help to buy’.

If the ‘market price’ is £400,000, and the affordable price is 60% of the market price, then a housing association will pay £240,000 for the dwelling, and the £160,000 discount will be added to the cost of the other dwellings in the development. If only 30% of the dwellings have to be ‘affordable’ i.e. sold at a discount to a housing association, then the cost added to the other 70% of units would be £68,571 per dwelling. That is, for the developer to make the same return as he would have made had he sold all of the units at the market price, instead of being forced to sell 30% of them at a 40% discount, he would have to increase the cost of the remaining market-priced units by 17%.

But if the development is in London and 50% of the units have to be sold at 60% of the market value to a housing association, then this will directly add the £160,000 discount to the price of the other so-called ‘market-priced’ units. So a £400,000 unit will cost a regular purchaser £560,000 but a housing association only £240,000. Regular purchasers in London could have to pay a 40% increase above the market price to generously subsidise a housing association’s 40% discount. These ‘discounts’ are not paid by the developers many politicians believe they are targeting but by other purchasers.

Conclusion

If the government really wants to help house buyers, maybe it should remove the taxes, duties, and regulations it has added that have increased the cost of housing, rather than by gimmicks that help developers sell their properties but drive up prices forcing buyers to take out larger mortgages.

It would be both more effective, less risky, and cheaper from a treasury perspective to reduce: the ‘affordable’ discounts given to housing associations: the planning requirements for new housing: the accessibility proportions when less than 2% of the population use wheelchairs and about 25% require M4(2) level accessibility: and the carbon taxes added to building materials that will last for at least the 30 years of the mortgage.