Government launches new “Starter Homes” scheme – but will it really help first-time buyers?

David Kingman provides an overview of the Government’s latest attempt to help first-time buyers get on the housing ladderFirst time buyer concept.

People under the age of 40 who have never been on the property ladder before are to be given a 20% discount on the market price of a new home, under the Government’s new “Starter Homes” scheme which launched on 30 February. The Coalition hopes that this policy will stimulate housebuilding, with a target of creating 100,000 new homes by 2020.

“A good design, well-built home with a 20% discount”

Would-be first-time buyers who are interested in taking advantage of this scheme were able to register their interest from Saturday 28 February. The idea is that the discount will be provided by exempting private housing developers from two effective taxes which they usually have to pay as part of building new housing: planning obligations (also known as “Section 106 payments”) and the Community Infrastructure Levy. New housing will only be eligible for this scheme if it is built on former industrial or commercial brownfield sites where housebuilding would not otherwise be viable.

In order to ensure that developers do not compromise on design quality when building these homes, the Government has also commissioned a panel of high-profile architects and designers (including Sir Terry Farrell and Sir Quinlan Terry) to produce a design guide which Starter Homes will have to adhere to.

A key principle of the Starter Homes scheme is that the initial discount will have to be retained during the first five years of home-ownership – so if buyers want to sell during the first five years they will only be allowed to do so at 20% below market prices (although they will presumably be allowed to keep the profit if market prices go up). In the words of housing minister Brandon Lewis (quoted by the BBC), Starter Homes should enable first-time buyers to get their hands on “a good design, well-built home with a 20% discount.”

A viable proposal?

Will Starter Homes really help first-time buyers? The first thing to say is that even though the number of people that the scheme will help is relatively modest – the government appears to be suggesting that around 20,000 buyers will benefit per year, which is just 2% of total housing transactions in England – any measure that intends to help first-time buyers get on the property ladder should be seen as a good thing. The fact that it is specifically aimed at buyers who are under 40 means it will have the biggest impact on the age cohort which is currently struggling the most to get on the property ladder, although whether the definition of “first-time buyer” should be restricted using an arbitrarily chosen age threshold is a reasonable question to ask.

The scheme relies upon changing the behaviour of housing developers by removing one of the potential barriers to development viability. A developer will normally evaluate whether to develop a site by assessing its viability using a financial model which is based on the following equation:

Gross Residual Value – Planning obligations/CIL = Net Residual Value

This might look baffling, but it is actually quite straightforward to explain. Developers are seeking to generate a profit from building housing. To work out whether a proposed development will be economically viable, they begin by working out their Gross Residual Value, which is the market value of all the housing they are planning to build (the Gross Development Value), minus the actual cost of building it (including site preparation) and factoring in their desired profit margin (normally around 20%).

They then work out their Net Residual Value by deducting the costs of the effective taxes they will have to pay in order to get planning permission, which are comprised of planning obligations and the Community Infrastructure Levy (CIL). These are designed to offset the costs that a development will impose on the rest of society, e.g. the need to fund extra school places at local schools, and are often the subject of fierce negotiations between the developer and the local authority involved.

The Net Residual Value indicates the amount that the developer can afford to pay for the land, having factored in all their other costs, while still being able to make a profit. In order for a development to be viable, the Net Residual Value must be higher than the so-called Existing Use Value of the site, i.e. the forecast economic returns to building housing on a piece of land must be greater than the value of whatever activity is currently performed there.

The cost of planning obligations and CIL can affect the viability of proposed sites, because the lower they are the bigger the difference will be between the value of the existing activities on a given site and the potential returns to building housing there. The Government is hoping that, by stripping out most of these costs, the Starter Homes Scheme will make sites that wouldn’t previously have been brought forward more attractive to developers.

Undesirable outcomes?

Of course, there could be downsides to all this tinkering with the development process. Although they are often regarded as a tax by developers, planning obligations and CIL do play an important role in enabling the creation of high-quality communities with adequate infrastructure provision. In its response to the Government’s consultation on the Starter Homes scheme, the Royal Town Planning Institute (RTPI) warned that, if the new homes which are being created are be supplied with the necessary infrastructure to make them attractive places to live, the source of funding that is being lost will need to be replaced from somewhere else – and the Government is yet to explain how this will happen.

The RTPI warned that, in the worst-case scenario, there is a danger that Starter Homes could just end up being low-value housing in currently undesirable locations without adequate social or physical infrastructure to make them into nice places to live – which probably isn’t, as they put it, “a realistic let alone desirable outcome”.

Looking at the bigger picture, here is another thought: Starter Homes are just the latest example of an attempt by either a government scheme (on top of “Help to Buy” and various others which have been created over recent years) or a mechanism within the planning system (Affordable Housing, intermediate housing, key worker housing, shared ownership etc.) to help a particular group to access the housing market because it is recognised that they wouldn’t be able to if they had to pay full market prices.

Shouldn’t we consider the existence of so many of these initiatives to be an indictment that the mainstream housing market is failing to provide housing at an affordable price for too many people? And therefore, surely, trying to fix the fundamental problems in the market, rather than applying these types of piecemeal, sticking-plaster solutions, would end up helping more first-time buyers in the long run? Starter Homes may help out a small number of today’s would-be first-time buyers, but the scheme offers no answers to either of these important questions.