The Housing Bill: fresh start

Originally posted on April 12 on Inside Edge 2, my blog for Inside Housing

Otto von Bismarck famously said that laws are like sausages: it is better not to see how they are made.

One exception to the Iron Chancellor’s dictum could be the way that the UK House of Lords takes the distasteful raw ingredients of legislation and improves it with new recipes.

That was certainly the case on the first day of the report stage of the Housing and Planning Bill on Monday, which saw the government twice suffer major defeats and also make a significant concession on starter homes.

As the Bill now stands, this ‘cuckoo in the nest’ of affordable housing (as Lord Best memorably called it at the committee stage) has been cut down to size a bit: the discount will be repayable over 20 years rather than eight; and local authorities will have the flexibility to decide on local needs rather than targeting virtually all section 106 contributions as starter homes. The government also accepted another amendment that will exempt rural exceptions sites from the starter home requirement.

Ministers had already moved slightly on the discount period: the Bill originally said that starter home buyers would be able to sell without repaying any of the 20% discount after five years but a consultation proposes extending that to eight years with the discount tapering away over that period.

However, Lord Best said this got to the heart of ‘the fundamental problem with the Bill’: the introduction of generous subsidies for home ownership schemes through the transfer of resources from low-cost homes for rent. In the case of the 200,000 starter homes, that subsidy could total £8.6 billion (a 20% discount on the average first-time buyer being worth £43,000).

His amendment means buyers will see the requirement to repay the 20% discount reduced by 1/20^th for each year of occupation. He explained:

‘It would mean the funds being returned proportionately if and when the purchasers sold up, as they almost certainly will, within the next 20 years. Since most first-time buyers move on after five to eight years, the amendment would recycle up to three-quarters of the initial support.’

The ‘starter homes requirement’ set out in a consultation paper would mean that local authorities would be forced to insist that developers provide 20% starter homes on most sites of 10 units or more or larger than half a hectare. On the assumptions made in the consultation, that would mean 90% of homes provided through the planning system would be starter homes.

Lord Kerslake said his two successful amendments would allow local authorities to decide what is right for their own areas rather than be forced to prioritise starter homes. He said:

‘It is hard to think of a more overbearing and centralising action that the Government could have taken on something that should so clearly be a matter for local decision. So far as I am aware, it is also completely without precedent. I cannot establish any previous Government who have sought to specify the types and tenures of housing in individual planning applications in this way.’

The defeats raise three big questions. First, and most obviously, how far will the government go to try to reverse them in the Commons and the parliamentary ping-pong that follows? We’ve seen that happen with other Bills many times before and many of the same arguments were made to no effect up until 2am during the Commons report stage in January. But this time around parliamentary time may be limited and attention focussed on the European referendum.

On the discount, communities minister Baroness Williams said that ‘we consider that restrictions beyond eight years would unreasonably limit young people’s ability to move on’. She added that lenders ‘are not supportive of a 20-year taper in the Bill’. However, given they weren’t that supportive of the whole idea in any case, that doesn’t sound like a ‘die in the ditch objection’.

As Inside Housing reports this morning, Brandon Lewis sounds much firmer: proclaiming the government’s ‘unwavering’ commitment to starter homes and arguing that the 20-year taper is ‘wrong’.

The objection by Baroness Williams to Lord Kerslake’s amendment sounded more fundamental: ‘Starter homes are a manifesto commitment and a national priority, so all local authorities must play their part in delivery.’ She added that: ‘This amendment would bring considerable delay to starter home delivery.’

By convention, the Lords do not interfere with legislation implementing manifesto commitments. The government could argue that the amendment scuppers the chances of achieving the 200,000 starter homes at a 20% discount they promised in the election campaign:

However, look at the bit in the very next sentence of the manifesto that I’ve highlighted: there is pretty strong argument that the requirement breaks the promise to ensure that local people are in charge.

Could one way out, given there’s not much chance of delivering 200,000 anyway, be to eat some humble pie and extend the definition of starter homes to include other forms of affordable housing? Homes for sub-market rent could, for example, be presented as a chance to save for a deposit.

The second question is what will happen when the Lords gets to the rest of the Bill on Wednesday and on Monday and Wednesday next week (maybe even extending into the week after too).

Ominously for the government, Lord Best put the extension of the right to buy in the same category as starter homes as policies that suck subsidy out of other forms of affordable housing. And Lord Kerslake said his amendments form part of a series ‘intended to make the Bill fairer, more localist and more workable, while respecting the manifesto commitments made by the Conservative Party during the general election last May’. Many more battles clearly lie ahead on issues including forced council house sales and security of tenure and there seems no obvious reason why the Lords will be any more supportive of the government position on those.

The third question is what the Bill as amended would mean for starter homes. Lord Best’s amendment would ensure that at least some of the discount money could be recycled into other homes. That would also address one fundamental problem with the idea: the government’s framework means only one generation of buyers will benefit. Lord Kerslake’s amendment let councils decide how best to meet housing need.

However, there are still fundamental flaws in the policy despite the improvements. Starter homes will still remain unaffordable to the almost every new social housing tenant and analysis by Shelter suggests that at least 60% of private renters will be excluded as well.

Lord Best summarised five flaws:

• The subsidy could just inflate house prices, as buyers with a discount are willing to pay more, especially when the scheme is combined with Help to Buy loans. As he explained: ‘The position gets quite out of hand in London, where Help to Buy can cut the initial price by 40%, meaning the combination with the starter-home subsidy could enable purchasers to get a 60% reduction in the initial price, which would have obvious inflationary consequences. I can hardly believe it is a serious proposition that a buyer of a property costing £500,000 in London would actually pay only £200,000, getting the other £300,000 from government schemes.’
• Some of the subsidy will go to people who can afford to buy anyway, a classic example of the ‘dead weight’ that the Treasury normally deplores.
• Starter homes could crowd out demand for other products like Build to Rent.
• The policy hands a £43,000 discount to 50,000 lucky buyers a year but leaves the majority with nothing as there are around 400,000 first-time buyers a year.
• Lenders and housebuilders worry that the policy will distort the market, pushing up the prices of starter homes while depressing those being sold at full market value.

I’d add one more point to that: what will happen in a housing market downturn? The risk remains that housebuilders will ramp up their prices knowing that buyers have a 20% discount. There is already a ‘new build premium’ on new homes that disappears once they become secondhand (one reason lenders are worried). If house prices rise, that’s not necessarily a problem, although starter homes become less attractive to buyers because there is less ‘free money’ involved. But if prices fall there is a risk of buyers being left with negative equity despite buying with a discount. This risk could increase under Lord Best’s amendment because anyone trying to sell in a falling market would have less equity to fall back on.

If making laws really is like making sausages, Monday’s amendments will make the Housing Bill a tastier proposition. If only you could forget the mixture of gristle, sawdust and other sweepings from the factory floor that went into starter homes in the first place.