CML responds to starter homes initiative
Published: 18 May 2016 | Author: Bernard Clarke
Our response today to the government’s consultation on its controversial starter homes initiative acknowledges that lenders have very different views on the scheme. Views across the political spectrum are also mixed, and there are a series of concerns about the scale of the scheme, the size and range of incentives available and the potential for market disruption and other unintended consequences.
At the same time, our response makes it clear that we support the broad objective of delivering an increased supply of affordable housing, and that the starter homes initiative can make an important contribution to this goal. We want the scheme to work successfully, and to avoid any potential market disruption. To that end, we are ready to work with the government as it develops and refines its proposals.
Our response emphasises that individual firms will determine their own approach to lending on newly-built and affordable housing, and may choose to support the starter homes scheme and/or other initiatives, such as shared ownership. Some firms may not decide whether to support the starter home initiative until they know more about how it will work in practice.
In our submission to the technical consultation by the Department for Communities and Local Government (DCLG), submitted today, we set out our views on a range of issues, including:
- the scale of the starter homes initiative, the size of the discount, and the potential for market distortion;
- the extent to which consumers are able to understand the scheme and its restrictions – not just at the point of sale, but over the lifetime of the initiative;
- the challenges of ensuring that there is robust valuation of property;
- how the scheme will be managed and monitored;
- its effects on the housing market; and
- how the scheme will work in combination with other government initiatives to promote home-ownership.
The scale of the scheme
We believe that the target of delivering 200,000 starter homes over the lifetime of this parliament is too ambitious, particularly when combined with the goal of providing 135,000 shared ownership properties over the same period.
Those joint targets amount to some 112,000 properties annually over the next three years – or more than three-quarters of all the properties we expect to be built over that period, assuming that they substitute for, rather than add to, the expected supply of homes. We believe that it is highly unlikely that such a target could be achieved.
If both targets were to be met, they would have a significant impact on the housing market, with implications not just for starter homes but further up the property chain. To a large extent, the success of the scheme will depend on the ability of first-time buyers to build enough housing equity in a starter home to move up the property ladder. That will require property prices to be sustainable over the long term.
We believe that a less ambitious target than 200,000 homes is more likely to result in a successful scheme. A more modest target would also help the government meet its other housing aspirations, such as increasing shared ownership and providing more custom-built homes.
Cumulative effects of government schemes
Lenders have mixed views about how the starter homes initiative would sit alongside other measures, like the Help to Buy equity loan scheme. One concern is that this makes it more complicated for borrowers to understand the transaction, and what their equitable interest and obligations are in the property. Some lenders believe that this would make lending more risky.
Firms are also concerned that the potential to combine incentives could deliver a larger increase in the value of the property over a relatively short period. That could boost demand and contribute to instability in property prices. Some firms may choose not to lend on starter homes if buyers are allowed to combine incentives in this way.
In order to minimise the effect of the scheme on the housing market – and target those who need help the most – we believe that there should be a period of at least three years during which starter homes would be sold at no more than 80% of their market value. This would be followed by a second period of at least five years during which a taper would apply, enabling the home to be sold at an increasing proportion of the market price, moving to 100% over time.
This would help avoid the potential for disruption to the market caused by buyers gaining a rapid uplift in equity in their homes, and wanting to sell their property to benefit from it. The longer the period at which a home is sold at less than full market value, the less likely a buyer is to benefit from rapid equity growth and the greater the likelihood therefore that individual lenders may decide to support the scheme.
There is probably a maximum period of perhaps 10 years in total, over which a property reverts to full market value – although there are some lenders who would prefer the discount to extend for longer, or even in perpetuity. We acknowledge, however, that this may not be politically acceptable.
Property valuation – and eligibility
Most lenders believe that the starter homes initiative presents challenges in valuing property, and that these are exacerbated by the proposed scale of the scheme. We propose that the scheme should only apply to sites of 20 or more homes but we are concerned that, on any given housing development, there could be strong demand for homes that are available at a discount, and a consequent lack of demand for properties being sold at the full market price.
If there is a nationally-set target for eligibility for the scheme, we would prefer it to apply as a maximum of 15% of a housing development, rather than 20%. That would help deliver a better balance of affordable housing tenures, given the DCLG’s view that a 20% target is acceptable overall, and that there is also a goal of delivering 135,000 shared ownership properties over the lifetime of this parliament.
Lenders would oversee their own arrangements for valuing property, and acknowledge that there are particular problems with valuation during the period of tapering towards full market value. Most lenders believe that any sale during the discount period should be at full market value, with sellers receiving the share to which they are entitled, and any residual amount being returned to the government. That would make valuing property more straightforward and also provide funding to help the government to continue to support and administer the scheme.
We support restrictions on buyers being able to let out properties bought under the scheme, and would like to discuss the government’s plans for supervising this. If local authorities are to be responsible for oversight of this, they could potentially be funded by the recycling of subsidy due back to the government.
Lenders broadly support the proposal that the scheme should be open to first-time buyers aged between 23 and 40. They strongly believe, however, that all eligibility criteria should be overseen by an independent administrator, in the same way as eligibility for a Help to Buy equity loan is assessed.
Monitoring the impact
Although the government proposes that local authorities should monitor how many homes are provided under the starter homes initiative, we believe that central government should take on a wider responsibility for monitoring the market impact of the scheme.
We believe the government should carefully assess the impact of the scheme over time to ensure that it delivers its intended benefits and does not produce unintended consequences, including market distortion. The government needs to have a clear understanding of the types and prices of properties sold under the scheme, and of who is using it to buy their home. It also needs to monitor carefully the effect on the availability of other types of affordable housing.