As the government readies itself to push forward its flagship Starter Homes policy there are growing reports of concerns over the product, its credentials as truly affordable housing and its potential impact on the UK residential market.
Whilst the majority of the 'ink' on this much trumpeted initiative is 'still in the pen', over recent months the LGA, Savills, Shelter and Lord Kerslake have all identified fundamental concerns relating to affordability and the application of what is in effect a Discounted Market Sale or "DMS" programme.
But what's so wrong with selling properties at a discount to help first time buyers into ownership?
Nothing, on the face of it. DMS schemes have been operating in certain parts of the country for years.
However, not without some challenges...
ONS statistics indicate the average income for UK tax payers under 40 years old is c.£26,000 - excluding those under 30 increases this average to c.£31,000 (with the average household income in the UK provisionally identified by the ONS for 2014/15 at £30,000).
According to the ONS the average new build property costs £297,000.
With the Starter Home discount of 20% the average new build property would still cost £238,000 and require a typical household income in excess of £50,000 - i.e. the top third of taxpayers in the UK.
This is why DMS programmes have operated significantly higher discounts than the 20% proposed by Starter Homes.
Typically DMS programmes have discounts of between 30% and 40% and are applied in areas where house prices are well below the £297,000 average pricing level.
These DMS schemes target household affordability in the £20,000 to £30,000 range - i.e. second quartile household incomes.
If these are really going to be "Starter Homes" for first time buyers with the aim of reversing the trend of ever older first time buyers and see a reduction of generation rent then they need to be affordable to "25 to 30 year olds".
On a national average basis, this would mean a doubling of the discount proposed to 40%.
Whilst this would fix affordability it would create another issue... Why buy a property at full price when you can buy a starter home at a discount?
A number of house builders are increasingly worried as to what Starter Homes will do to their private unit sales. Help to Buy has been massively successful, however, that programme did not differentiate properties or introduce 'sale' prices.
Which leads to another issue...
Stores that perpetually have items 'on sale' ultimately devalue their offering - as the sale price is seen as the normal price. How does selling an identical unit of housing at 80% of the asking price affect the full price offering?
Do you have to build differentiated properties to prevent any 'contamination' between markets?
How much are the Starter Home properties actually worth?
This last question has exercised the minds of mortgage lenders on DMS schemes for some time and the market consensus to date has been that lenders are not keen on discounted programmes (given that risk communities argue that the start price is potentially too easily manipulated upwards to ensure that the net figure is in reality much closer to what it should have been if a discount were not applied).
Mortgage availability for DMS is limited by number of lenders and also individual scheme supply. As such, funding large scale programmes of DMS have proven difficult (which is why Heylo developed a 'mortgage free' shared ownership solution).
Given this much reduced mortgage support for DMS, the government's target of 200,000 Starter Homes in light of a 'bubble' of activity with unknown relative values may prove difficult when rolled-out.
Finally, there's the subject of the discount itself...should this be 'gifted to the buyer' or 'retained for the community'?
Currently, Starter Homes envisages the 20% discount being retained in full by the customer after 5 years.
Lobby group Generation Rent estimates that the value of the 20% discounts in the 200,000 Starter Homes could be as high as £27bn in 5 years time. However, to make these homes truly affordable as DMS the discount would need to be twice this level - making this 'windfall' potentially as high as £50bn.
With this type of potential windfall after 5 years acting as a significant incentive there is no doubt that genuine buyers (and perhaps others) will be encouraged to become home owners. However, in 5 years there is a risk that everyone looks to release this value at once, the impact of this 'wall' of properties coming to market in a relatively limited time horizon would not be positive on the housing market or house prices at large (not to mention the potential secondary impact on inflation).
Given the predisposition of the UK towards home ownership, I question whether the lure of a 'kicker after 5 years' is actually required - especially if the discount offered is increased to a level to make the property truly affordable to the first time buyers of old.
On a technical point, if these properties are also to be designated as affordable housing for S106 purposes, then the value of the discount should really support them being affordable 'starter' homes for a significant period of time, say 20 years, if not in perpetuity.
This does not mean that the property should always trade at a discount (as 2 tier markets really do not work), rather that the discounted value should be returned to the Local Authority when the property is sold so that it can be recycled to provide another starter home.
Over the next few weeks and months, the 'ink will flow from the pen' and full details of Starter Homes details will emerge. Whatever happens, just like the Quantative Easing, a market intervention of this scale will have a lasting medium term impact on the UK residential market and all the players will need to adjust accordingly.
Of course, if government wanted to make these homes truly affordable they could designate 200,000 Starter Homes as part rent, part buy, shared ownership properties and all of the above issues could be avoided.
By Nicholas McAlpine-Lee
Let's Share, Heylo Housing
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