A common nightmare for London millennials is getting a letter from their landlord out of the blue, telling them to get out (officially called a Section 21 notice which is 100% legal and does not require any reason to serve).
The Help to Buy (HTB) scheme, introduced by the Government in 2013, was supposed to help London renters get away from this. The Government provides equity loans of up to 40 percent of a new-build property in London so that Londoners can afford to buy with only a 5 percent deposit.
Since the launch of HTB, developers have been accused of abusing the scheme. It’s not hard to see why: developer profits have reached record highs since 2013, and the CEO of a major housebuilder resigned recently when he found himself in the media spotlight after being paid a £75m bonus.
District 34’s research into Land Registry data shows strong evidence that London developers have artificially inflating the prices of their properties to match the additional money provided by the Government.
Ironically, the biggest loser is the homebuyer, who is saddled with a property that they may not be able to sell at the same price that they paid, and thus may not get back the deposit that they put in.
Disconnected from reality
In recent years, new-builds in London have detached from the rest of the property market, operating in a tier of their own. We analysed all flat sales in London over the last ten years (574,789 in total), and compared the average prices of new-build versus existing flats.
Figure 1 shows how the HTB scheme has created a two-tier market: one for new-builds, and one for existing properties. The timing of the distortions match perfectly with the changes made by the HTB scheme, in 2013 both when it was introduced and in 2016 when the loan limits were doubled from 20 percent to 40 percent for London properties.
Our analysis of the percentage of the developer mark-up further reinforced the view that the price increases for new-builds were a calculated abuse of the HTB scheme, as the price increases matched closely with the HTB loan limits.
The new-build margin rose to 21 percent in 2015 when HTB loan limits were 20 percent, from 2 percent in 2013 before HTB was introduced. Tellingly, following the new 40 percent loan limit introduced in February 2016, the property markup increased and reached 37 percent in 2018.
This means that on average, buyers were overpaying by 37 percent for their new-build London property. For comparison, the average deposit for a London first time buyer is less than 33 percent.
Helping London renters get on the housing ladder
All 33 Districts of London are now unaffordable, both for new-build and existing properties. At District 34, we believe the way to deal with a cut-throat property market is with cutting-edge data science. We are passionate about helping Generation Rent escape the rent trap and buy the right homes, at the right prices, in the right locations.
Our home ownership accelerator scheme is designed to help Londoners on a normal salary get on the housing ladder and own 100% of their home, by saving as little as £11 a day.
Find out more on our website: www.district34.com
