Future-proofing portfolios, a new Help to Buy and takeovers: Companies and Markets show

Investors' Chronicle

This episode examines three distinct investment themes: Labour's new 'Your First Home' equity loan scheme and its potential to stimulate UK house

Key takeaways

• Andy Burnham's 'Your First Home' scheme replaces Help to Buy with a 2.5% deposit requirement and interest-free government loans specifically for new-build properties.
• UK house builder stocks surged on the announcement, with Persimmon, MJ Gleeson, and Ibstock leading gains due to mass-market focus and regional affordability advantages.

Main topics

• Labour's 'Your First Home' housing scheme
• UK house builder stock performance and market dynamics

Notable quotes

"It's almost a sort of crisis of capitalism, if you like, in the house building market."

Conclusion

The episode equips listeners with a balanced framework for navigating short-term policy catalysts and M&A

Transcript preview

Speaker 3 (0:08) This week, we begin with the return of Help to Buy or something like it, the Your First Home scheme announced by the Prime Minister, designed to give more people a chance of buying their own property. But what will the scheme actually entail? And is it likely to succeed in its goal? Or will it just prop up the housing market and the listed house builders too? Hugh Moorhead will tell us all about the potential beneficiaries shortly. Then we turn to another bid for a UK-listed company in the form of refractory materials specialist RHI Magnus Cetus attempt to acquire its rival Vesuvius. Mike Fairhey will outline what the enlarged group might look like, what its prospects are and whether the deal is likely to go through. Finally, we'll wrap up with a look at what history can teach us about asset allocation. why we need to look further back than the recent past in light of the possible structural changes that may now be emerging. James Norrington will discuss rising debt levels, trade wars and more later on in the show. We're going to kick things off, though, with the Your First Home scheme, Andy Burnham's initiative or the government's initiative announced as part of the Labour conference on the weekend. Hugh, why don't we start by talking about what it actually is and how it differs from help to buy. the old Conservative scheme of yesteryear. Speaker 2 (1:23) So the scheme is called Your First Home and it's an equity loan scheme for first-time buyers, very similar to its Tory predecessor, Help to Buy. So the way that the scheme will work is that you, as a potential first-time buyer, will put down a 2.5 % deposit for a new-build home and the home must be new-build. And then the government will top that up with a further 20 % loan, which... will be interest-free for a certain period, as yet unknown exactly how long. And then you can fund the rest of your purchase with a typical bank mortgage loan. The two advantages of this are, firstly, that it means saving for a much smaller deposit. And secondly, it means a cheaper mortgage rate. So as a general rule, the lower the mortgage is as a percentage of a property's value, the cheaper the cost of debt will be. from the mortgage provider. Now, the differences to help to buy, there are a couple. So firstly, there's a smaller upfront deposit requirement. Help to buy was 5%. Your first home is only two and a half. And then secondly, I think we're going to see a bit more nuance in terms of income caps, in terms of local price caps as well. Although again, exact details we await eagerly from the budget. And finally, developers are also going to be asked to contribute to So if you're buying a home from Taylor Wimpy, Taylor Wimpy might be asked to contribute 2 % of the value of the 20 % your first home loan that you're drawing down from the government. Speaker 3 (2:55) So what does that mean Speaker 2 (2:57) in terms of what we're still waiting for from the budget? It means details of those caps. So who's going to be allowed to apply for the scheme and what will the price cap be in each region or perhaps even each local authority? how much developers will be asked to contribute, how long that interest-free period will be, and also something that I think has been overlooked, how long the scheme will last for. Let's take a step back for a Speaker 3 (3:22) moment and talk about why the government has done this. We all know there are issues with affordability, structural issues with the housing market, but it seems to me perhaps the reason they've done this right now is twofold. One, well... They all relate to the same thing, really, which is you've really seen a bit of a step down in the housing market in recent months, both in terms of mortgage approvals on the demand side, but also in terms of house building numbers. The number of homes being built is way, way short of where the government wants it to be. So it would seem that those are the near-term catalysts for this introduction of this scheme. Speaker 2 (3:57) Exactly. So at the moment, we've got this unpleasant impasse where the cost of building houses... is still very high. The cost is going up because of materials inflation largely relating to the Iran war. But house prices are flat or in some regions down, which means that for house builders, their margins are shrinking. And allied to this, a lot of people who want to buy houses can't afford to buy them at the prices that house builders want to sell them for to make a suitable profit. So we have this almost a sort of crisis of capitalism, if you like, in the house building market. And that means that house builders are building far less. Now, there are several levers that governments and regulators can pull to address this. One is on the supply side. And we've kind of seen that already with some of the planning reforms that are coming through. Although a lot of people in the industry would protest that while these are good in isolation, there's a lot of regulatory. burden coming through as well around somewhat esoteric areas, things like nutrient neutrality, environmental regulations, things like that, you know, all worthy causes in isolation, but which together impose a big regulatory burden on house builders and make building a lot more expensive. That basically means that they need to turn to the other lever, which is the demand side, which is where you help more people be in a position to afford houses. in this case by offering them interest-free state-backed loans. Speaker 3 (5:28) The big question, do we think this will achieve its goals of getting more people on the property ladder, first of all, before we turn to the market reaction? There was a report out recently looking at the impact of help to buy the original scheme, which was perhaps more favorable than some people had assumed as to its. Speaker 3 (5:48) Yes, Speaker 2 (5:48) so yes it will in a word. More first-time buyers will buy homes and more new-build homes will get built as a result of this scheme. Its predecessor Help to Buy reports conveniently came out a few weeks ago, which concluded that that scheme was very high value for money and helped 300,000 people get on the housing ladder whilst pushing house prices up by only 2%. And in terms of cost benefit, it claims that for a cost of 3.5 billion to the government, 25 billion of social value was created. Although I think most of that was in rising land prices, which is not, I mean, it sort of doesn't... It doesn't necessarily mean a sort of fast-moving, robust economy when most of the growth is in the price of land. Yeah, it doesn't necessarily fit the bill of social value. Speaker 3 (6:40) Yeah. Well, let's talk about the reaction among listed companies because there was quite a noticeable one at the start of the week. House builders have been calling for something like this for some time. They reacted very positively and other sectors did as well. Speaker 2 (6:53) Yes. So Monday was a sort of wall of green on our stock screens. Most house builders... were up by double digit percentages. The one exception was Barclay Group because Barclay Group tends to build more expensive apartments in London and the southeast and investors are worried that the government's price cap will mean that most of these Barclay Group properties fall outside any scheme. But the rest were all performed positively. If we had to sort of rank them as beneficiaries, the biggest ones are probably Persimmon and MJ Gleeson because they make cheaper mass market homes in regions where affordability is already stronger, so north of England. And then after that, it would be sort of Belway, Barrett Red Row, Taylor Wimpey. And then alongside Barclay Group in the sort of laggards bracket would be Vistri, because it builds partnership homes predominantly rather than those in the open market. And Cress Nicholson, because it