The government’s pledge to create 200,000 starter homes by 2020 is ambitious, and must be paired with clear regulation from the off to avoid confusion and delays
Set to transform the starter homes market, the new Housing and Planning Bill has caused much debate within the housebuilding industry.
The government remains committed to delivering on its pledge to create 200,000 starter homes by 2020, but the scale of the challenge from the House of Lords has highlighted the wider challenges faced in making this ambition a reality.
I also suspect that the technical consultation on the starter homes regulations will also lead to further challenges as the policy impacts on such a widespread group of stakeholders.
As a housing developer, the prospect of delivering homes for first-time buyers at a 20% discount to the current market value should not cause apprehension. However, if the eventual regulation is not clear, the inevitable uncertainty amongst housebuilders and policy makers will put the 200,000 homes target at immediate risk.
The commercial uncertainties of the bill arise from a number of omissions in its design, including:
- The starter home value caps do not respect the very wide variance of house values across the country. In particular, in many higher value South-east boroughs, the only typologies which will fall within the cap (without excessive discounts) will be apartments
- As conceived there is to be no automatic indexation of the value caps. Even if ministers have discretion to change the caps, this does not bring any commercial certainty. This needs to be addressed as schemes are delivered over significant periods of time and need to be able to cover build cost inflation over that period
- The 20% discount is defined as “a minimum”. Should local planning authorities select homes of a scale or typology where 80% of open market value is above the cap, then the discount could need to be increased significantly. This creates scope for disagreement, raises the prospect of highly variable discounts, making land values impossible to assess and the rules of the scheme difficult to illustrate to first-time buyers (who in some areas could benefit from disproportionate levels of discount)
- The bill concludes that 20% starter homes represents a safe and deliverable level on all sites (subject to viability). When challenged, however, this assessment by the Department for Communities and Local Government has not taken into account the increased cost of finance for the developer (who will now finance delivery of these homes in lieu of pre-funding from the registered providers), the extra sales and marketing costs and the added risk of price fluctuations in the market. Taken together these items alone could account for the leakage of a further 10 to 15% of value resulting in a net receipt for a starter home nearer that of existing affordable housing products. Given these omissions, a base level of 15% would seem to be a safer level than 20% albeit this would still leave nearly a third of projects across the UK facing increased viability challenges
- By definition the residual level of traditional affordable housing will be much smaller. At a time when registered providers, in response to a separate government challenge, are consolidating into larger companies, it is questionable as to whether there will be a willing purchaser for the small number of rented and shared ownership units left in the project.
It is likely that the Housing and Planning Bill will prompt local planning authorities to reassess the extent, form and tenure of their overall affordable housing offers.
Affordable housing plans were previously assessed against housing need but will now in large part be defined by meeting the need for greater home ownership in the under 40s. This raises the real prospect of every future planning application being subject to protracted delays as complex and expensive viability discussions take place to determine the overall affordable mix. At a time when the resources of all parties within the industry are stretched, particularly those in local authorities, it is a worry that this will simply add further process delays in the planning system.
It is clear that lenders have ongoing concerns about the potential for distorted markets to emerge, especially if Help to Buy is extended on top of starter homes
Assuming the banks and building societies are willing to extend competitive mortgage offers to purchasers of starter homes, the ultimate beneficiaries of the scheme will be first-time buyers aged between 23 and 40.
It is clear that lenders have ongoing concerns about the potential for distorted markets to emerge, especially if Help to Buy is extended on top of starter homes, and it will be interesting to see how the scheme evolves to take account of these concerns.
Ultimately, in marketing these homes to inexperienced first-time buyers it is going to be very difficult to create an understandable headline proposition if faced with the potential for highly variable discount rates.
My own strong belief is that to work effectively, starter homes should have a fixed 20% discount and a 10-year taper period over which the discount settles with the purchaser at 2% per annum. This has an understandable symmetry which could be conveyed to purchasers clearly.
But in the scheme’s current form the actual discount will not be known until the point of valuation after the sale, and will potentially lead to a highly variable discount percentage being retained over the taper period. The regulations must be clearly defined now to avoid any confusion and delays in the longer term.
Chris Tinker is executive board director and regeneration chairman at Crest Nicholson