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Help to Buy loans reach value of £18.9 billion since schemes release


A recent report from the Office for National Statistics illustrates that the value of Help to Buy equity loans has reached a total of £18.9 billion since the release of the scheme on 1 April 2013 up to 31 December 2020.


The Help to Buy schemes is a scheme designed to offer an opportunity to homebuyers, especially first-time buyers as 82% of all completions were said first-time homeowners, the scheme itself has been around since 2013, however, during the COVID-19 pandemic, the Help to Buy scheme has received multiple extensions.


These extensions have resulted in the scheme being brought to light by many first-time buyers during the pandemic as information provided with the Help to Buy scheme paired alongside the relief of Stamp Duty tax has led to a boost in demand for housing within the UK.


This combined with the rising confidence of economic agents has led to an increase in the price of housing of up to 8.2% in April according to the Halifax index as more and more individuals are breaking into the market and buying new properties.


Unless a worker is purchasing an extremely high-end luxury sports car, a house is likely the highest valued asset someone can possess, for this reason, many homebuyers typically require mortgages.


And these mortgages place individuals into debt, which is significant as economic agents typically avoid borrowing during a recession due to high uncertainty.


Homebuyers only buy homes if they are confident that they will be able to repay the mortgage back, in other words, people must be certain that they have job security.


Similarly, businesses only take loans if they are confident that their reinvestments will make a viable return.


So, rising house prices are one of the best ways to tell if confidence in an economy is rising, if house prices are rising, economic agents are making the biggest purchase of their lives, a purchase which they have to completely believe in and be certain it will work out in the long run for them to carry out.


Hence, despite the COVID-19 pandemic resulting in a drop in the consumer confidence index as illustrated by TradingEconomics, house prices have risen and the economy is beginning to move forward once again as in March the UK experienced a growth rate of 2.1%, thus signalling that the economy will likely bounce back and recover in Q2 of 2021.


This rising growth will lead to higher output within the UK economy, consequently, firms are busier as the increase in aggregate demand leads to higher revenue and potential profits.


These increasing profits can then be reinvested to organically expand, one company which is doing this currently is Aldi, which are building a new store every week for 2 years.


Organic expansion creates demand for labour which then leads to higher employment, in other words, higher output lowers unemployment.


This means that newly employed workers, or workers who have been previously laid off, can return back to work and begin earning a disposable income which can then be saved as they begin to work their way up to affording a mortgage.


This will then potentially lead to house prices rising even higher as demand rises, a benefit for real estate investors as they will see positive equity allowing them to make greater returns on their investments.


However, there is also a massive benefit to normal individuals and first-time homebuyers as those on fixed mortgages will be paying for a home that is higher in value for what their mortgage is valued at, meaning that once they own the property, they will experience positive equity and a massive wealth effect as the value of their assets has risen.


This will potentially allow for these individuals to experience cheaper interest in the future once their mortgages are paid off, or, alternatively, they can keep their homes and give them to their children so that they do not have the need to save for a house.


Therefore this leads to rising living standards as younger individuals have much more income which they can allocate towards holidays and relax rather than placing it aside for a mortgage.


This also reduces the marginal propensity to save consumers in the long term, increasing aggregate demand and showing the significance of the Help to Buy schemes impacts on the economy.

 

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Written by Hubert Kucharski

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