Morgan Stanley Research, Help to Buy: More beneficial than the market thinks

Banks & Economics
Help to Buy: More beneficial
than the market thinks
The controversial ‘Help to Buy’ scheme may prove
one of the more beneficial unconventional policies
to reach ‘escape velocity’, we think. It could help lift
housing starts 30-40% higher by 2015 vs 2012,
provided ‘exit’/retention is addressed well. It could
also add a powerful macro-prudential tool
We think Help to Buy (HtB) could stimulate far more
house building than many believe. As in the 1930s,
we see house building, still 25% below long-term
averages, as crucial for a broader economic recovery.
We estimate a 30-40% increase in housing starts by
2015 vs 2012 (or up 15-25% on H1 13). We think the
market underestimates how new bank regulations
disincentivise UK banks to offer even 80-90%
mortgages for affordable homes. Our global review of
similar schemes suggests that HtB can address a real
gap for affordable homes and work well in practice.
Two-thirds of all mortgages in Canada and one-third in
Australia are insured.
But for maximum effect, the ‘exit’ or retention
strategy needs to be clear within 18 months. To
maximise HtB’s potentially positive effect on building,
the ‘exit’ or retention strategy needs to be clear within 18
months, not three years. Lead times to bring new builds
to sale average ~12-18 months. Our global review leads
us to believe that over time the private sector could take
on much, or all, of this role, reducing policy error fears.
HtB has the makings of a powerful macro-prudential
tool. Banks on average would no longer have new
mortgages with effective LTVs >80%. The BoE and FPC
could control / move parameters of loan indemnification,
even if privatised, helping medium-term stability.
Implications: Economics – Supply outlook and a
potential long-term future for HtB adds conviction to our
UK GDP forecasts of 1.4% 2013, 2.4% 2014. Banks –
This adds to our above-consensus view on Lloyds’ loan
growth. We are 18% ahead of 2015 consensus EPS

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Key Debates
DEBATE MARKET VIEW OUR BASE CASE VIEW
1. How effective will the
Help to Buy scheme be?
The Help to Buy mortgage
guarantee scheme has come in for
heavy criticism from many
quarters. Critics argue that the
government has designed a policy that
could simply create a new house price
bubble. In addition, higher house
prices could mean households having
to raise higher deposits, eroding much
of the original benefit of the scheme.
Help to Buy will prompt a reasonable supply side
response and not just translate into price increases. We
think that there is material upside for a supply response to
greater credit availability and that we could potentially see a
30-40% increase in new housing starts by 2015 on 2012
levels (or incremental 15-25% over H1 13).
For context, housing starts and completions in England are
running ~25% below the 20-year average prior to the crisis.
This said, many of the features that will determine the
effectiveness of the scheme are not yet finalised. For
example: the three bands of commercial fees that we
believe the government will charge the banks; the regulatory
treatment of the loans; and what happens after the first three
years, which is critical for its impact on housing supply. Our
economists’ central case is for an 11% house price increase
between 4Q 2012 and 4Q 2014.
2. What’s the right exit
strategy? Or should it be
retained?
Many would like the scheme to end
after three years. Indeed many
opponents of the scheme have stated
that they would rather see the
guarantee segment of the scheme
abandoned entirely for fears that it will
only stoke a housing bubble.
We think the scheme has enough merit to be retained,
albeit probably in the private sector – our global review
shows various models for passing much of the risk to the
private sector at commercial rates. Design and execution of
the government’s exit strategy is critical. With a significant
“cliff risk” (i.e. that it comes to a halt in three years’ time), a
significant ramp-up in housing supply may fail to materialise
as house builders fear a lack of buyers by the time the
properties actually come to market. One dimension of a
government exit could be privatisation, and there are
several examples where a state-run guarantee scheme has
successfully morphed into a private sector Mortgage
Insurance (MI) company (Australia), or where private sector
competition has been introduced (Canada).
3. Can this scheme be used
as a counter-cyclical macro
prudential tool?
Policy makers and many have
feared this is a pro-cyclical tool.
Help to Buy has the makings of a very powerful
macro-prudential tool. Even if the scheme eventually
becomes a permanent private sector mortgage indemnity, it
would be desirable to give the FPC or BoE oversight over
the parameters, or ‘grid’, being applied, to introduce (and
maintain) a guard against financial stability risks emanating
from the housing market. Again, experience in other
markets, including Canada, is helpful.


We think ‘Help to Buy’ may prove one of the more beneficial
unconventional policies to get the economy to ‘escape
velocity’. Moreover, we believe house building – as in the
1930s – is critical to a broader economic recovery. We argue
that HtB could lift housing starts by 15-25% on top of the 15%
increase in 1H 2013, as long as the ‘exit’ or retention strategy is
addressed. It also adds a potentially powerful macro-prudential
tool.
Four reasons why we see Help to Buy as UK positive:
• It will help address a gap in the market for affordable
housing.
• Supply-side dynamics should respond from
historically low levels to stimulus if house builders
have confidence in its duration.
• The private sector could take over some or all of this
role after year 3: by privatisation of the nascent mortgage
indemnity insurer, by introducing private competition, or
via re-insurance.
• It could be used as a powerful macro-prudential tool.
Regardless of whether it remains a government vehicle,
we think the FPC should retain control over the key
parameters – and the Canadian experience shows a
possible role for tweaking terms.
The exit / retention strategy and how it dovetails with
planning need to be spelled out early to maximise the
multiplier to the real economy. We think policy makers need
to manage the scheme’s cliff risks and execute its smooth
transition into the private sector. The lead-time to bring a new
build to sale completion is 12 months, plus some time for
planning, so maximum supply side impact from the scheme will
require a view within 18 months. As always, the devil is in the
detail of the scheme and we are keen to see full parameters.
Analysis of the supply outlook and potentially a long-term
future for HtB adds conviction to our GDP upgrade. We
now forecast UK GDP growth of 1.4% in 2013, 2.4% in 2014.
On the banks side, we see Lloyds as the biggest corporate
beneficiary of an improvement in UK housing. We also
raise our 2015e EPS, which are some 18% ahead of the street.
This is alongside more benign asset quality and mortgage
spread compression as competition returns