The ‘New’ Scheme to help you buy your first home

On the 26th of September, the UK Government released an announcement saying that they are going to make a change to how home ownership will be done in England. The new scheme, titled ‘Your First Home’, is expected to allow first time buyers to get onto the property ladder with only a 2.5% deposit when purchasing a new-build property from a developer signed up to the scheme. The scheme aims to lower the bar for home ownership within England which with rising costs of living, sky rocketing student debt and stagnant wage growth has felt like a mammoth task for many first time buyers. But will the scheme work? Or will the government fail to learn from the past and actually make the situation worse?

The New proposal

The announced scheme, which is expected to be confirmed at the Budget, does two key points that we need to discuss. First, the deposit the buyer is expected to provide is 2.5% of the agreed sale price of the home. On average, first time buyers contribute around a 20% deposit for their first home. Halifax data for 2024 found that first-time buyer deposits across the UK averaged 20% of the purchase price. Technically, it is possible to secure mortgages with 10% and even 5% deposits, however these can be associated with higher interest rates, so buyers tend to save up for much longer so the cost of borrowing is much lower. With the proposed scheme however, this is less of a concern. Whilst the buyer only contributes 2.5%, the government will reach down their pockets and provide a further 20% through a government-backed equity loan! This means that a buyer could benefit from the low interest rates of a lower loan-to-value purchase, whilst only contributing a very small amount themselves. The drawback to this is that the 20% is an equity loan rather than a grant, with further details around how this will work to be finalised.

The law of unintended consequence

This sounds like a great idea with great intentions. First time buyers can get on the property ladder with lower deposits, whilst still benefiting from the lower interest rates and therefore lower monthly repayments associated with higher deposits. Yet there is one important detail that is missing from this, and that is that a very similar policy has already been tried before! So, rather than being political, let’s have a look at the economics on what happened with the Help to Buy Scheme in England (2013-2023).

The major concern associated with these schemes is that they will artificially inflate house prices. This is a real concern. The greater demand can put pressure on prices causing them to rise disturbing market forces, although Help to Buy was also found to have increased the supply of new housing. Whilst you effectively help individuals get on the housing ladder today, you can also make some buyers pay more for houses than they might otherwise have paid. This has additional issues such as making switching homes more expensive as people who are off the scheme could also face higher prices in areas where the scheme pushes prices up compared to if the scheme wasn’t introduced.

So the question now becomes, does this actually affect house prices? Well the answer is the evidence suggests yes, but the exact size of the effect is difficult to measure. Researchers working on the government-commissioned Help to Buy evaluation investigated this problem by comparing house prices of homes across the England Wales border. England introduced Help to Buy in April 2013, while Wales introduced a similar scheme in January 2014, although the Welsh scheme initially had a much lower property price cap. Because homes close to either side of the border are likely to have similar housing markets, the researchers could compare how prices changed under the different levels of support. Under the assumption that price trends on either side of the border would otherwise have moved in parallel, differences that emerged after the introduction of the scheme can be attributed to the differences in the schemes. This is called a difference in discontinuities regression analysis.

The results showed that there was an attributable increase in house prices in England compared to Wales by around 2% for homes in the areas analysed along the border, which is the equivalent of several thousand pounds per home.

Whilst this evidence is strong, we can only say this is true for those areas close to the border. The national analysis found that house prices in England followed a trajectory around 10% higher than comparable prices in Wales after the introduction of Help to Buy, yet it would be unwise to attribute all of that increase over to the policy, as house-price trends in England and Wales were already diverging before the scheme began, and comparing the two countries as a whole gives a less reliable counterfactual than comparing similar areas directly either side of the border.

So what does this mean?

So where does that leave ‘Your First Home’? The scheme will almost certainly help some first time buyers who are currently struggling to save a large enough deposit. For those individuals, getting onto the property ladder years earlier could make a genuine difference. But that does not necessarily mean that the policy makes housing more affordable overall.

The problem is that helping buyers borrow more money does not create more houses. If the supply of homes does not increase alongside the additional demand created by the scheme, then at least some of that extra purchasing power is likely to find its way into higher house prices. In other words, the government may be helping people afford today’s prices, whilst at the same time putting upward pressure on the prices faced by tomorrow’s buyers.

That does not mean the scheme is destined to fail. The previous Help to Buy scheme was also associated with an increase in new-build housing supply, meaning the effect is more complicated than simply saying that government support pushes prices higher. The success of ‘Your First Home’ will therefore depend not only on how many people use it, but also on whether the supply of new homes can respond to the extra demand.

So will ‘Your First Home’ work? For some buyers, probably yes. But if the ultimate goal is to make home ownership more affordable across England, a smaller deposit may only solve one part of a much bigger problem.

Written by George Chant

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