Covid-19 should stop the government’s house price subsidy

Before the new coronavirus pandemic, one of the main ways in which the UK’s Conservative Party boosted consumer confidence was pushing house prices up with the aid of various taxpayer-funded schemes such as Help to Buy.

But as the damage done by Covid-19 to the economy heaps pressure on the public purse, should the taxpayer still generously fund schemes that mainly serve to boost house prices and the fortunes of a few big companies and their already well-off clients?

Three things stand out about the big housebuilders in the UK. Building ever-higher tower blocks of small flats in cities and tinier and tinier houses on the outskirts of towns is the first. Rewarding shareholders with dividends and share buybacks while lavishing executives with pay and bonuses is the second. And relying on the government to be able to afford these is the third.

Since the government’s “Help to Buy” programme started in 2013, housebuilders’ profits have trebled in some cases.

The programme has been giving homebuyers equity loans worth 20% of the price of the property outside London and even 40% in London, interest-free for five years, to enable them to borrow more from banks. No wonder housebuilders were able to sell flats at higher and higher prices.

Last year, Persimmon became the first housebuilder to boast a pretax profit of more than £1.0 billion. In the year before that, its CEO had to quit after coming under fire for the hefty pay he got — almost £85 million in two years, according to the Financial Times.

But now that they have to compete with other companies to get public money, it looks like UK housebuilders are getting a bit nervous. Berkeley reported earnings last week, and its pretax profit fell by 35% to £503.7 million year on year.

The company’s statement said this was expected, as some projects in London were completed during the period. Its presentation highlights that it did not resort to the government’s furlough scheme, nor did it ask for a corporate loan to help it withstand the Covid-19 crisis.

Please, sir, I want some more

However, Berkeley warns that the government needs to prop up the housebuilding sector again, on a scale like the one after the 2007-2009 financial crisis.

According to the company’s statement, the government will need to reverse the increases in stamp duty that had been gradually taking place over the past six years, speed up planning permissions and cut their cost, and carry out “direct investment into affordable housing” – in other words, more subsidies for house prices.

Granted, this is not a direct handout to the housebuilders, but there’s no escaping the reality that without the government propping up house prices, their fortunes would be very different now.

Berkeley said the government must continue its Help to Buy programme

Despite this, instead of pouring all the money earned due to the largesse of the taxpayer back into building more homes to try to resolve at least partly the housing crisis, housebuilders have been busy rewarding their shareholders.

Since January 2017 when it first started share buybacks, Berkeley bought 14.6 million shares, worth a total of £514.3 million.

The company did say last week that it would postpone another previously proposed return of £455 million surplus capital to shareholders for up to two years because of the volatility caused by the Covid-19 outbreak.

However, Berkeley “remains committed to its programme to deliver sustainable shareholder returns of £280 million per annum up until 2025”.

It added: “Of the £140.0 million return already announced to be made by 30 September 2020, £6.0 million has been made to date through share buybacks. The amount that will be returned as dividend will be announced on 13 August 2020 taking account of any share buybacks in the intervening period.”

Other companies in the property sector have shown that they are taking care of what’s important (to their management). Persimmon, the largest housebuilder in the UK, has returned its chief executive on full pay just one month after he had taken a 20% pay cut because of the new coronavirus outbreak.

While it is true that housebuilders did not take advantage of the government’s furlough scheme like other companies, Help to Buy has been propping them up for much longer than that.

Of course they would like it to continue, but can the government still justify maintaining it in place? A report published last year showed that around 63% of those who took advantage of Help to Buy could have bought a home without it.

In other words, Help to Buy helped the already well off, while pushing house prices even further out of the reach of the poorest in society. With poverty and inequality deepening rapidly in the wake of the Covid-19 pandemic, it is time for the government to subsidise more vital areas than house prices.