Splash down

"A crusade” - that’s how David Cameron has repeatedly described his pledge to tackle “a crisis in ownership” in England. And this time Mr Cameron’s vow to “turn Generation Rent into Generation Buy” is underpinned by a radical plan: to ditch requirements for developers to build affordable rented housing and instead build 200,000 discounted homes to buy.

Welcome to an era of Starter Homes - the new aspirational face of affordable housing. This tenure will be offered exclusively to any first-time buyer under 40 at a 20% discount on a home that is fixed for five years, after which the home can be sold at full market value.

Publicly the principle has been welcomed by most quarters of the development industry. But, behind the scenes, Inside Housing can reveal there are fundamental concerns that Starter Homes could create distortions that will be felt across the housing market. Most worryingly, lenders say that unless plans are amended, they will be reluctant to provide mortgages for Starter Homes.

Shock announcement

Many of the concerns stem from the way the policy has rapidly snowballed from when the crusade began in October last year. The original plan was to build 100,000 Starter Homes on brownfield and exception sites that otherwise wouldn’t be developed. Then, in a shock pre-election announcement, on 2 March Mr Cameron doubled the target for Starter Homes to 200,000 by 2020.

Alarm bells were ringing - especially as government’s own consultation response published a day earlier had stated that the definition of land used for Starter Homes should “not become too broad”. Six months on, it has emerged, councils will have a legal duty to promote Starter Homes, not just on brownfield and exception sites, but on all “reasonably sized sites” over and above other tenures.

“The combination of that [Help to Buy] with market uplift does pose a risk of price distortion within the market.”

Major lender

Developers will have to build a set number or proportion of Starter Homes on each site and, in order to make this viable, two planning requirements will be dropped - Section 106 and the Community Infrastructure Levy, which are used to pay for social rented, affordable rented and shared ownership housing. This means Starter Homes will be built instead, becoming theprimary affordable tenure in England.

Herein lies the most discussed problem for local authorities: Starter Homes are not as affordable as the rented homes they are to replace. Homelessness charity Shelter has warned that average earners would be priced out of Starter Homes in 58% of local authority areas. It claims buyers will require an annual income of £76,957 in London, meaning even an MP would be unable to afford to buy a Starter Home. In short, Starter Homes help a higher-earning group at the expense of lower-earning renters.

Housing minister Brandon Lewis dismisses Shelter’s assumptions as “misleading” and argues increased supply will help affordability. His solution is to extend the Help to Buy scheme to Starter Homes - a move which would enable buyers to claim an equity loan of 40% in London and 20% outside, on top of the 20% Starter Homes discount. He says this would make Starter Homes affordable to those on incomes of £20,000 and less.

Marketing distortion

However, lenders are reluctant to offer Starter Homes mortgages combined with the Help to Buy. In fact, without changes to the policy, there is significant doubt if lenders will offer mortgages for Starter Homes at all. They have a catalogue of concerns relating to the five-year discount.

According to one major lender close to discussions about the scheme, the discount on Starter Homes risks creating “market distortion”. They reason that if the 20% discount makes a Starter Home cost less, it may also make similar surrounding properties worth less too. Alternatively, in order to compete for the very attractive 20% uplift in value that can be realised after five years, buyers may pay above the market rate.

Combining the scheme with the government’s Help to Buy equity loan would increase this risk. It would enable a potential gain of 20% in value for the costs of 7.5% in mortgage finance - or, in London, just 4% - over five years. “That’s an impressive return and under those circumstances, the temptation would be to over-pay,” says one lender. “The combination of that with market uplift does pose a risk of price distortion within the market. The risk is creating a false market.” He, like other lenders, wants to replace the five-year-rule with perpetuity so the 20% discount is retained for other first time buyers, and “the heat is taken out of the scheme”.

Advertisement

Underlying these concerns is uncertainty about how to value Starter Homes.

“The question is what value it should reflect; the discounted value or the market value?” explains a spokesperson for the Council of Mortgage Lenders. “Once that is resolved, we can work out what will happen.”

Valuers say this is no easy task. Richard Petty, director at global property consultancy Jones Lang LaSalle, has warned that the 20% discount could equate to “a license to cheat”. Jeremy Blackburn, head of policy at the Royal Institute of Chartered Surveyors, is on the government’s technical working group helping officials work up a mechanism for valuing Starter Homes. He says the valuation problem is “not insurmountable” but requires localised valuation at the point of the build completion - not open market valuation. “Prices are different all over the country. Not just the price of property but also the land. The market comparables need to be considered. At the moment, there’s nothing to compare Starter Homes with. It’s problematic.”

Amendments

Housebuilders are concerned about this too. “If a solution is not found then it would scupper the whole scheme, so it makes sense to approach things slowly and carefully,” says David O’Leary, policy director at the Home Builders Federation (HBF). “A big unknown for us is what they [Starter Homes] do for the wider market. For us the biggest priority is that they don’t cannibalise existing house sales. Clearly it is a more attractive product than buying the equivalent property through Help to Buy.”

“At the moment, there’s nothing to compare Starter Homes with. It’s problematic.”

Jeremy Blackburn, head of policy at the Royal Institute of Chartered Surveyors

As a result, the HBF has suggested several amendments. Mr O’Leary says that an extension of the five-year discount period would put off those looking to make a quick buck. It also suggests restricting sales to those under an income threshold to try and mitigate the threat of “cannibalisation” to its existing pipeline of homes.

Some developers are thought to be considering neutralising this threat by differentiating Starter Homes further through design, size or specification. Some also harbour concerns that the savings from Section 106 and the Community Infrastructure Levy alone won’t cover their costs. They point to Pocket Living, which already builds homes for sale at 20% discounts that are held in perpetuity for first-time buyers who meet a criteria on earnings and local connection.

In order to be viable, Pocket builds, one-bed homes near transport hubs around London are smaller than normal, but also high spec.

Despite government insistence that Starter Homes will be no different to normal homes, figures from consultancy Hometrack suggest something may have to give: in 73 local authority areas, the £450,000 London price cap on Starter Homes - it is £250,000 outside London - means that it will not be viable to develop three-bed homes of the size (950 sq ft) and type house builders are producing. Even if they build smaller two-bed homes instead at 750 sq ft, there are still 23 council areas where this is not viable.

Perhaps the government had this in mind when, two weeks ago, it announced a £2.3bn finance package to fund 60,000 Starter Homes. Officials declined to clarify if this money will be offered as grant or debt; what it will be used for - remediation of land, or to plug a viability gap; or how State Aid issues will be avoided. Either way, the scheme now looks expensive given Starter Homes are a one-time giveaway and the housing benefit bill will increase if councils struggle to house the poor.

Ignoring technical concerns about the policy, few appear confident the industry will be able to deliver 200,000 Starter Homes by 2020. This is mostly due to the lack of skills and capacity required to ramp up to build the homes in the time constraints. Nonetheless, if government is to get even near this target, the message is clear: without making some changes to the policy, David Cameron’s ownership crusade will fail.

 

Industry concerns

Lenders: fear the 20% discount will distort housing markets and encourage buyers to over-pay. Concern over added risk and complexity of combining with Help to Buy. Call for perpetuity.

Developers: fear Starter Homes will “cannibalise” existing product; they also doubt there is sufficient time, capacity or skills to meet government’s housebuilding targets.

Councils: say the duty to promote Starter Homes contradicts localism principles; fears they will not cater for low-income housing need.

Economists: concerned the redistribution of subsidy from renters to higher-earning owners could be inequitable and increases exposure to risk of future market downturn.