Starters’ ordersPosted: March 3, 2015 Filed under: Affordable housing, Housebuilding, Housing market, Mortgages, Starter homes | Tags: Brandon Lewis, David Cameron Leave a comment
So the national housing strategy now comes down to this ahead of the election: think of a big number and double it.
Even by recent standards, the starter home initiative plumbs new depths in allowing the politics to drive the policy. The idea of building 100,000 homes at a 20 per cent discount for first-time buyers was first proposed in David Cameron’s conference speech in October. The launch (of a website to register interest, as no homes will be built for some time) was accelerated to this month when the consultation was published in December. And in Cameron’s housing speech today it’s been doubled to 200,000 homes.
Housing minister Brandon Lewis made a written statement earlier that is an extraordinarily rapid government response to a consultation that only ended three weeks ago. However, the response (full version here) is only to the original plan for 100,000 homes, not Cameron’s doubling of it. Reading through some of the responses to the consultation today, I was especially struck by this comment from the Council of Mortgage Lenders:
‘Our overall view of the scheme as outlined is that it could provide a modest addition to the flow of lower cost housing for FTBs and we would support this main objective. But we would warn against setting over-ambitious targets for the scheme at this juncture, before the attractiveness of this particular proposition has been tested on the market.’
That’s just one of the complex issues that risk getting lost in the rush to make the scheme official before the election. We still don’t really know the details of how the even more ambitious scheme will work but between the response, Cameron’s speech and the advance briefings in some of the papers it’s possible to piece together some of the details. Here are some key issues that stand out for me:
How will the discount be paid for? This was the question that Grant Shapps repeatedly failed to answer on Sky News. The original idea was that the homes would be built on urban exceptions sites, land zoned for other uses that would not normally get planning permission for housing. That seemed like a good idea to finance affordability from the uplift in the value of the land and it already works in rural areas. However, say you’re Tescos. You have several supermarket sites that are now surplus to requirements. Will you voluntarily sell the land that could suddenly be worth a lot more for housing without the threat of compulsory purchase? Public land could be used, but public authorities still have a responsibility to get the best price and it could simply mean starter homes being built instead of affordable ones.
This suggests that the most of the discount will come from reducing the ‘red tape’ of funding affordable housing and community infrastructure and meeting environmental requirements. Yet these costs will simply be transferred elsewhere, with local taxpayers paying for roads and schools and affordable homes going unbuilt. As Duncan Stott of Priced Out points out, that could simply inflame local opposition to housebuilding. Even more alarmingly, Pete Jefferys of Shelter picks up a suggestion in a BBC report that housebuilders will be allowed to use starter homes as a substitute for their affordable housing contribution on other sites. I can’t find anything in the consultation response that suggests this but, as he says, you can’t solve an affordability crisis by cutting affordable homes. [UPDATE: Inside Housing’s story hereconfirms that starter homes will count as affordable homes in planning agreements under the expanded scheme].
Nowhere is there any suggestion of one obvious way to achieve the 20 per cent discount: that housebuilders should be expected to reduce their average 20 per cent profit margin as a quid pro quo for getting a guaranteed market and yet another cut in ‘red tape’.
Who sets the price? The real price will be very difficult to establish in areas where there are no comparable homes nearby, an issue that is a major concern for lenders.What’s to stop housebuilders artificially inflating the price before they apply the discount?Nothing, I’d suggest, unless there is greater transparency in the whole process. The government’s response to the consultation says that: ‘A Starter Home is not expected to be priced after the discount significantly more than the average price paid by a first time buyer. This would mean no more than £250,000 outside London and £450,000 in London.’
Worryingly, it does not explain how this tallies with what the ONS says is the national average price paid by a first-time buyer: £208,000. These prices sound more like the average paid by all buyers and will be well out of the reach of most first-time buyers so why use them? Brandon Lewis told Newsnight last night that starter home buyers would be able to use Help to Buy, but the CML said in its consultation response:
‘At present we do not think that any transaction under the starter homes scheme would come within Help-to-Buy or NewBuy. In any event lenders have indicated to us that they would be reluctant to combine two schemes under one loan.’
Will the sites really be additional? As the Home Builders Federation identified in its response to the consultation,this is a crucial question:the scheme should use sites that are not already earmarked for housing in local plans.However,that still does not necessarily mean the homes will be additional: why would developers sell homes at a discount anywhere near sites where they are selling them at full price? Help to Buy accounts for 30 per cent of the sales of many leading housebuilders, yet housing starts are currently the same as they where they were when the scheme was launched.
What will the homes be like? Cameron said today that: ‘We’ve shown what we expect Starter Homes to look like not rabbit hutches or shoe boxes, but decent, well-built, homes with gardens – places to start and raise a family.’ However, how does that stack up: won’t making homes bigger and giving them gardens also make them cost more?
Who benefits? On the plus side, today’s reports suggest that overseas buyers and buy-to-let landlords won’t be able to buy the homes. However, they also say buyers will be able to resell after just five years without paying back any of the 20 per cent discount. The consultation suggested five to 15 years, as a way of balancing the need to preserve the discount for future first-time buyers without making them too difficult to sell for future ones. In its response to the consultation, CML suggested tapering the discount but added that some of its members believed the discount should remain in perpetuity.
Instead the consultation response says that ‘the policy will enable Starter Homes to be sold or let [my italics] at open market value five years after first purchase’. Say the 200,000 homes have a notional value of £200,000 and sell for £160,000. You can register now to get your guaranteed notional £40,000 profit after the election. This amounts to a pre-election bribe of £8 billion that dwarfs George Osborne’s pensioner bond/bribe.
However, will the market really work that way? The higher the discount, the higher the demand will be for the starter homes. The higher the demand, the more the notional price will increase The higher the notional price, the lower the real discount will be.
Yet again the only guaranteed winners from this initiative look set to be housebuilders and landowners. Plus, the Conservatives hope, their own electoral prospects.