Your First Home: housebuilders rally on the return of the government loan

A new government-backed equity loan for first-time buyers of new-build homes sent the housebuilders up by 11% to 15% in a single session.

It's been a dramatic day for the housebuilding sector. Over the weekend Prime Minister Andy Burnham announced a new scheme to help first-time buyers onto the housing ladder, and the market's reaction this morning was immediate.

The scheme will be called Your First Home, as reported by the BBC in "Burnham announces scheme to help first-time buyers onto housing ladder". It's intended to be open to first-time buyers in England with a deposit of 2.5% or more, and provides a loan worth 20% of the property's value. Specifically, it applies to new builds, which is obviously good news for the housebuilders.

On an average first home of £230,000, a buyer would put down £5,750 and could borrow up to £46,000 through the equity loan, leaving a mortgage of 77.5% of the value to arrange.

The structure is close to Help to Buy, which ran from 2013 to 2023 and helped around 380,000 people buy a first home. That scheme asked for a 5% deposit, with the same 20% equity loan interest-free for the first five years. Your First Home halves the deposit and narrows eligibility through the income and price caps.

How the sector reacted

The housebuilders saw some large rises today. Crest Nicholson ended the day up +11.11%, Barratt Redrow up +12% and Bellway up +11%.

Persimmon led the group, up +15%. Taylor Wimpey and Vistry both closed up +11%.

Further out we have companies such as Paragon, the buy-to-let focused lender, which didn't do quite so well. It was flat on the day, up just +0.4%. Mortgage Advice Bureau, which should see more first-time buyer business come through its advisers, closed up +5.94%.

The charts

My view

I've been a bit surprised that governments in recent times haven't been more in favour of this kind of incentive.

You could argue it isn't great for existing participants in the housing market, since it risks pushing prices up further. Critics of Help to Buy made the same point. What it is good for is first-time buyers, because it enables them to get on the property ladder.

The real issue has been that the housebuilders don't have enough incentive to build new homes. This scheme helps that situation, providing liquidity to the new-build market at a time when the government itself describes the market as facing headwinds from rising construction costs. The Housing Secretary has already admitted there's only a slim chance of reaching the 1.5 million homes target by the next election.

I also don't think it's a particularly risky strategy, especially in a lacklustre housing market, and coming from governments that can take a very long-term view on the risk at these deposit levels.

The detail at the Budget on 28 October will also matter. Where the income and price caps are set, and how large the developer fee is, will decide how much of today's move sticks. But I see some further potential in the coming months for housebuilders on the back of this announcement even with these sharp rises in prices!