Government Homebuying Subsidy Is Worth £1.75B, According To Market Panic

Last week saw a rare example of the kind of "natural experiment" economists would love to run in financial markets but rarely get the chance.

And it highlighted just how reliant the U.K.'s housebuilders have become on a major government subsidy.

Real estate trade journal Property Week ran a story around 8 a.m. on 4 August saying the government was considering ending its Help to Buy scheme — which gives homebuyers access to higher loan to value and cheaper mortgages for new-build properties — before the proposed finish date of 2021.

Markets freaked. Shares in U.K. housebuilders dropped by an average of 4%, and £1.75B was wiped from the sector's market capitalisation.

The biggest faller was Persimmon, which has the biggest reliance on Help to Buy — 50% of its sales are conducted using the scheme, according to UBS.

Then, just before 9 a.m. on 4 August, the government unofficially rebutted the story, saying it had no plans to end the scheme early, was committed to it until 2021 and was looking at how it would progress after that date. It officially rebutted the story on 7 August.

Shares in the sector recovered, although not quite to previous levels. And so for about an hour we got a view of what markets think Help to Buy is worth for U.K. housebuilders.

Help to Buy was launched in 2013 and the government said it has been responsible for the purchase of more than 120,000 homes. Investment bank Libernum reckons about 38% of U.K. new-build homes are bought using Help to Buy.

Critics of the scheme argue that rather than improving supply of new homes, as the program intended to promote, homebuilders have simply ridden the rise in demand it has created and paid out huge bonuses to directors and dividends to shareholders.

The sector has always played it pretty cool over the impact of the policy. The representative body for the sector, the Home Builders Federation, the government and the companies themselves have always said Help to Buy does not play that big a part in their business.

But some experts (and, we now see, the markets) believe it is a significant driver of activity.

“Assuming around 40% of private volumes use Help to Buy and these have not incurred a 400-500 basis point incentive cost, we estimate [the scheme ending early] would result in a 2% margin impact or 10% of earnings,” UBS head of European building and construction research Gregor Kuglitsch told Property Week. “Volumes could also be impacted. Industry estimates suggest this scheme has resulted in around a 15% boost to volumes.”

The most famous example of a natural experiment on the stock market is when the 2004 U.S. presidential election was wrongly called early in favour of John Kerry and U.S. markets fell sharply, before recovering on news that the report was false.

Now we also know what financial markets think will happen to housebuilders when Help to Buy ends.