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Starter Homes Project Struggling
George Osborne’s boast to his party conference last October and subsequently to parliament when delivering his spending review that “we are the builders” appears to be some way from delivery.
Under plans unveiled during the spending review to build 200,000 ‘starter homes’ before the end of the parliament , which is based on the US model of discounted properties, developers will sell homes at a minimum 20% discount to the market value to first-time buyers aged under 40. The value of the homes will be capped at £450,000 in London and £250,000 outside the capital.
The government billed the £2.3bn programme as “a revolution” that would “help open up home ownership to ‘generation rent’”. But within three months of the announcement, critics are posing serious questions about whether the scheme can deliver on its aims, while housebuilders are bemoaning a lack of detail and warning that the target of delivering 200,000 homes by 2020 “will not happen”.
The biggest concern is cost – critics say a 20% discount will not make the homes affordable to the vast majority of first-time buyers.
Shelter for example has calculated that under current lending averages, first-time buyers in England would need an income of £50,000 and a £40,000 deposit to buy a starter home – and this jumps to an income of £77,000 and a deposit of £98,000 in London.
The government has tried to assist by allowing first time buyers to benefit from their “Help to Buy” scheme under which the deposit may be reduced, but the income required is still well above the UK average.
Out of Reach
Further criticism has followed from the Local Government Association (LGA), which represents England’s councils, who calculate that in 67% of local authority areas starter homes would be out of reach for people classified as in need of affordable housing – those who would have to spend more than 30% of their income to rent or buy a home.
Because starter homes are defined as affordable, this will in effect prevent the construction of between 56,000 and 71,000 homes currently defined as social and affordable, critics argue. In short, rather than addressing the affordability crisis, starter homes will exacerbate it.
Distorting the Market
Earlier this month, the Lyons Commission, a group of housing experts headed by former BBCTrust chairman Sir Michael Lyons raised further concerns about how starter homes will affect the housing market over time and potentially significantly distort the market. They called for the government to amend the policy so a covenant is applied that ensures they are resold at a discount. Under current plans, the owners will be able to sell the homes at full market value after five years.
“If the government is going to invest in these properties, it should be in perpetuity,” Lyons says. “Instead of giving a very limited number of people a windfall gain, this should be spread more evenly.”
Picking up on this theme, Neal Hudson, Savills associate director, says the promise of a potential windfall after five years could also influence how the homes are valued from the outset. “With the potential to realise a 20% profit after five years, the value of a starter home to a new buyer could be much higher than just 80% of market value,” he says. “Depending on the buyer’s appetite for risk, the price they are prepared to pay could be closer to 100% than the intended 80% of open-market value. That creates the risk of buyers overpaying for starter homes.”
Hudson believes this could worry mortgage lenders. “What happens if a starter home is sold or repossessed at some point during the five-year discount period? Is it then sold at 100% of market value with 20% payback to some other party, or is it sold at a discount?”
Keeping the discount in perpetuity could resolve this problem, Hudson suggests, but this would bring the scheme closer to the existing shared-ownership model than the government had originally envisaged.
Amongst others voicing concerns about how starter homes could distort the market at a local level is David Ritchie, chief executive of Bovis Homes who said “We support the policy but we are still awaiting a lot of detail. Our biggest concern is about what it does to the wider housing market in a locality where there is a big cohort of these discounted homes.”
The government has promised a consultation on the plans, in which more detail is expected. But critics say this should have been published before the Housing and Planning Bill reached the committee stage in the House of Lords, where it currently lies.
200,000 target “unattainable”
Meanwhile, housebuilders are already warning that the government’s 200,000 target is unrealistic. Ritchie says starter homes will not form part of sites currently in the planning process, which means it will be 2018 before they begin to be factored into development plans. “Politicians always want immediacy,” he says. “But it takes time to build things up.”
Pete Redfern, Taylor Wimpey chief executive, is more forthright: “The targets are highly unlikely to be achieved,” he says.
Doomed to fail?
Time will tell whether Osborne’s grandiose plans to “get Britain building” will eventually be achieved but current evidence suggests not. As far as the starter home scheme is concerned it appears that work hasn’t even yet started on clearing the site let alone laying the foundations.