Whether the Help to Buy scheme will be a vote-winner – or indeed this week’s resurrection of Right to Buy – only time will tell. What we can say now is that the scheme creates a risk for those involved in valuing property.
Under Help to Buy, applicants can apply to the government for a loan of up to 20% of the cost of a new-build home. The applicant needs to contribute only a 5% deposit, with the 75% balance being covered by a mortgage. The government does not charge any fees on the loan for the first five years after purchase.
The scheme, which is available only in England, applies to any new-build property with a value of up to £600,000. The applicant cannot sublet the property, or, if they are already a homeowner, enter into a part-exchange deal on their original property, and the loan cannot be used to purchase a second property.
Encouraging development
Effectively, the purpose of the scheme is to encourage the development of new housing stock by making it easier for buyers to get together the money they need for a deposit.
In last month’s Budget, the government announced the introduction of the Help to Buy ISA, which is designed to assist people who are saving up to buy their first home. From autumn this year, first-time buyers who choose to save for their deposit through the scheme will receive a bonus, representing 25% of the amount saved. For example, if the would-be homeowner saves £200 a month, the government will contribute £50, up to a maximum of £3,000 on £12,000 of savings. The bonus is calculated and paid when the saver buys their first home, so long as the property is valued at no more than £450,000 in London or £250,000 in the rest of England.
Both measures should be great news for first-time buyers. According to the government, since the introduction of Help to Buy in 2013, some 83,000 people have used the scheme to help purchase their homes, and that number is likely to increase with the introduction of the Help to Buy ISA.
However, the schemes also create a risk for anyone valuing a property, particularly where that property has been purchased in the scheme. Any increase in the volume of transactions will put pressure on valuers at a time when there is already a shortage of qualified practitioners.
Historical precedent
Anyone involved in valuation at the height of the market will recall the issues that arose where developers were offering incentives in order to sell new developments. This prompted the RICS to produce a guidance note to address specifically the issues of valuing new-build properties, including how to deal with incentives.
By making loans available at no cost for five years, and by providing cash incentives to those saving for a deposit, the scheme gives first-time buyers more purchasing power, which means that a purchaser under Help to Buy may be able to pay more than an ordinary purchaser. Property prices, and therefore the bank of comparable evidence to which valuers will be looking to value similar properties, may become distorted.
Furthermore, with restrictions on use and resale, it will be important for any valuer to know whether the property he or she is valuing has been bought under the scheme. But that information may not be readily available.
The best course of action for any valuer would be not only to follow the RICS guidance on new-build valuation but to also make it clear when advising on the value of a property that it is assumed that the property has been purchased by an ordinary purchaser, so that there are no restrictions on the use and sale of the property.
If, on the other hand, the valuer is made aware that the property has been purchased with the benefit of the scheme, it will be important to make reference to that fact and to consider what adjustments need to be made to reflect this.
Taking such action should ensure that the Help to Buy scheme does not become yet another catalyst for claims against valuers.
Alexandra Anderson is a partner at RPC
