The share price of Persimmon, one of the UK’s largest housebuilders, plunged 6% this morning as markets opened, with only a slight recovery since. It is currently sitting 5.59% down on Friday’s close after weekend reports that the company could be stripped of its Help to Buy contract with the government.
The Help to Buy scheme allows first time buyers to apply for a government loan for up to 20% of the value of a property. The loan is interest free for the first five years and means buyers only need an upfront deposit of as little as 5% in cash to buy their home.
Persimmon, which is expected to be confirmed as the UK’s most profitable housebuilder when it posts profits forecast to reach as much as £1 billion later this week, sold half of its new-build homes under the Help to Buy scheme in 2018. With a total of 16,000 new homes completed last year that means 8000 were purchased through the scheme.
However, a growing list of complaints from buyers over poor construction standards and hefty hidden charges has led to James Brokenshire, the housing secretary, to announce a review of Persimmon’s continuing participation in the scheme. Losing its contract would be expected to have a potentially devastating impact on future sales.
If, as expected, Persimmon’s full year results for 2018 show it has realised a profit of around £1 billion, it will become the first UK housebuilder to ever do so. The company’s average profit margin per property has almost tripled from £22, 114 to £60,219 since Help to Buy was introduced in 2012. Critics of the scheme say it has artificially inflated property prices. That accusation was supported by a Sunday Times investigation last year which found that the average price per square metre of homes that qualified for the Help to Buy scheme was 15% higher than for comparable properties that didn’t.
The biggest criticism of Persimmon’s sales practises is that it regularly sells new build properties under a leasehold contract. That means buyers subsequently have to pay annual ground rent fees which, over the years, add up to a significant increase in the income the company realises from each sale. Poor construction quality has also been reported by numerous buyers of Persimmon homes.
Help to Buy contracts come up for renewal in 2021, when the scheme will be extended for another 2 years. However, more limitations are to be introduced, such as qualifying homes having to be sold at a price that falls within 20% of average prices in the region.
Supporters of Help to Buy argue that incentivising builders was necessary to boost the supply line of new properties being built across the UK. Mortgage lending to first time buyers has also hit its highest level since 2006. However, there is serious concern that housebuilders are putting greed ahead of the best interests of their buyers and are exploiting the scheme to their own gain.
Other housebuilders have also felt the Persimmon backlash today with share prices falling across the sector. Taylor Wimpey started the morning down 2.6%, Barratt Developments 2.1% and Berkeley Group 1.1%.