Your First Home: More purchasing power, or more affordable homes?

The government is preparing to introduce Your First Home. This will allow first-time buyers to purchase a newly built home with a deposit of only 2.5%, supported by a 20% government-backed equity loan. The government’s stated aims are to tackle the deposit barrier facing first-time buyers and to stimulate supply and the new-build market.

It is not presented as a solution to the wider housing affordability crisis, which requires policies that go beyond supply and demand-side subsidies. But its effects on affordability matter, because the additional purchasing power can push up house prices in an already unaffordable housing market.

If the government is intent on introducing the scheme, how could the policy be designed to limit this effect, while ensuring that the subsidy creates lasting affordability benefits beyond the first buyer?

What can we learn from Help to Buy?

Evidence suggests that Help to Buy contributed to higher house prices, particularly in already unaffordable areas, and that its benefits were concentrated among higher-income households. Over half of its recipients are estimated to have been able to purchase a home without the scheme, and developers captured a substantial share of the financial benefits. 

The point is not that demand-side policies cannot help households buy, but that helping individual households buy is not the same as making housing more affordable overall. 

In a housing market where homes are also financial assets, the risk is that the policy may reinforce the same dynamic that contributed to the affordability crisis in the first place. If it leads to higher prices, then this raises expectations of future gains and increases the housing wealth that existing owners can draw on to finance additional purchases. In turn, this can make property more attractive to investors and allow existing owners to expand their portfolios, creating further demand for property. This reinforces the original rise in prices and creates a housing-finance feedback loop.

What is different about Your First Home?

Your First Home is not identical to Help to Buy. The government says the new scheme will be more targeted through income and local property-price caps, while developers will contribute to its costs. 

These features may reduce some risks, but do not remove the underlying effect on prices. Income and price caps determine who can access the scheme and which homes qualify, but they do not prevent the additional purchasing power from feeding into higher prices. Similarly, since the policy is restricted to new-builds only, the developer contributions may be passed on to buyers in the form of higher prices. 

Reduce investor demand

If the government adds purchasing power for first-time buyers, one option is to offset some of its effect on prices by reducing investor demand elsewhere in the market. The Bank of England’s Financial Policy Committee already has the power to limit how much investors can borrow relative to the property’s value or its rental income. These rules could be tightened alongside the new scheme to reduce demand from buy-to-let landlords. 

Because tighter buy-to-let restrictions would not affect cash buyers, the government could also strengthen taxation on additional property purchases to reduce demand from investors who don’t rely on mortgage finance.

Build in lasting affordability conditions

Instead of allowing the subsidy to become a one-off increase in private housing wealth, the scheme could attach affordability conditions to the home itself.

Catalonia recently introduced such a scheme. The government provides first-time buyers with an interest-free loan covering up to 20% of the value of their first home, and it is available for any property rather than just new-builds. But in return, homes purchased through the scheme become permanently protected affordable housing. Resale prices are subject to an inflation-linked cap, while renting requires authorisation and is subject to regulated affordable rents. It therefore creates a home whose affordability is protected beyond the first buyer.

Such a principle could be built into Your First Home, with government-backed equity finance available only for homes that become subject to permanent affordability conditions. This would mean that some of the public subsidy creates a lasting affordability benefit rather than simply becoming private wealth when the first owner sells.

However, even with permanent affordability conditions attached, the homes supported by the scheme should be additional to existing affordable housing commitments. Demand-side support for first-time buyers should not substitute for homes that would otherwise be delivered for social rent. 

Don’t let public support simply become higher house prices

None of this changes the underlying point: expanding mortgage credit is not a solution to the housing affordability crisis. But if the government insists on introducing Your First Home, its design matters.

The scheme can simply add purchasing power to the housing market, increasing upward pressure on prices. Or it can reduce investor demand at the same time, while attaching lasting affordability conditions to homes purchased through the scheme. The latter option would not solve the housing crisis, but it would make a fundamentally flawed policy less damaging and ensure that the public subsidy creates some lasting affordability benefits. 

Tackling the root causes of the affordability crisis requires a much wider policy package that reduces investor demand, brings back rent controls, and directs more finance towards new social housing.