The case for new housebuilding stimulus

What can the government do to turn around the UK’s residential development market? Housing output remains weak across the board – in cities like London, it is at crisis levels – despite a series of supply-side policy interventions since this government was elected in 2024.

Affordability remains the missing piece of the puzzle – it's improved markedly over the past year, but not enough to bring homes within reach of the average buyer. Seven in ten local authorities saw improvements in affordability during 2025, according to Nationwide, with many of the largest gains recorded in London (see table). But there is little cause for celebration – the average first-time buyer house price to earnings ratio (HPER) in Hackney, for example, fell from 10 to 9, while in Barnet it declined from 9.4 to 8.3.

There were good reasons to expect this trend to continue, with wage growth outpacing house prices and mortgage rates easing. However, the conflict in the Middle East triggered a spike in mortgage rates, and a return to the pre-conflict trajectory is likely to take several months. If buyers cannot afford homes, developers will not build them.

Out of reach

Many in the industry are calling for some demand-side stimulus that would make new homes more affordable, unlocking development. The Help to Buy Equity Loan scheme, introduced in 2013, offered shared equity loans of up to 20% (or 40% in London) on new build homes, enabling buyers to access mortgage deals with a deposit as low as 5%. The mortgage guarantee scheme, released a year later, applied to both new and existing homes and gave a government guarantee to lenders offering loans at 95% LTV.

The Help to Buy Equity Loan scheme, alongside a series of supply-side reforms that included the introduction of the National Planning Policy Framework (NPPF) enabled net housing output to rise from around 124,000 homes per year in 2012/13 to about 250,000 by 2019/20.

The Help to Buy scheme was far from perfect. Research from the Institute for Fiscal Studies, published today, suggests that – contrary to popular belief – incomes were a bigger barrier to homeownership when Help to Buy was launched, rather than the challenge of raising a deposit. For a £200,000 home, the mortgage guarantee scheme would, in theory, reduce the minimum deposit from 10% of the property value (£20,000) to 5% (£10,000).

However, a £10,000 deposit still leaves a £190,000 mortgage requirement. Assuming lenders cap borrowing at 4.5 times income, the property would remain out of reach for anyone earning less than £42,200. An individual on a £30,000 salary, for example, could typically borrow up to £135,000 – well short of what is required.

Policy interventions

The conclusion of the IFS study is that the affordability gains from the equity loan schemes were concentrated among higher-income households. As these buyers would typically be expected to save for a deposit relatively quickly even without Help to Buy, the schemes appear to have brought forward purchases by a few years rather than determining whether they became homeowners at all.

The group also points out that schemes offering more generous subsidies to those with lower incomes could help extend the benefits of Help to Buy to the less well-off, but would involve a difficult trade-off: "It could reduce inequalities when getting on the housing ladder, but would also increase the exposure of both the government and potential new borrowers to housing market downturns."

The good news is that higher loan-to-income lending is already on the rise. The Bank of England caps individual lenders at 15% of new mortgages at or above 4.5× LTI, but it temporarily relaxed those rules last year. Since then, both the share of high LTI advances and the availability of 6× LTI products have increased – many of the larger lenders now offer products at 6x income, or even 6.5x in some cases, though granted these are often restricted to higher earners. Some lenders do have targeted schemes: Nationwide's Helping Hand lets eligible first time buyers borrow up to 6× income on a 5–10 year fixed rate mortgage, up to 95% LTV.

The slow but steady uplift in higher LTI lending, combined with the policy interventions already set out by the government with the addition of a targeted demand-side stimulus, would represent a patchwork and imperfect solution to the government’s housebuilding woes. In the absence of a more fundamental reset in affordability, it may be the most pragmatic route available – one that at least restores some momentum to a market that otherwise risks remaining stuck in a prolonged period of stasis.

Out of gas

The UK's reliance on imported gas leaves it particularly vulnerable to the US/Iran conflict, according to new IMF forecasts. Growth is forecast to be 0.8% in 2026, 0.5 percentage points slower than the fund’s January prediction of 1.3% growth and the largest downgrade of any G7 nation - you can see the IMF outlook here and the Times write up here.

Inflation is expected to average 3.2% in 2026 and rise towards 4%, placing the UK alongside the United States as the fastest rate of inflation in the G7. The IMF does not anticipate a return to the Bank of England’s 2% target until late next year.

This is clearly bad for mortgage rates, but lenders repriced aggressively at the outset of the conflict and swap rates have since come down – particularly since Iran and the US indicated that a ceasefire may be possible. Santander announced it would make cuts to its range of fixed rates later this week, and others are likely to follow. 

In other news...

Mortgage borrowers seek shorter-term deals as market volatility saps confidence (FT).