The Government has confirmed its ambition to deliver 200,000 Starter Homes over the course of the parliament. Details of this flagship scheme, which has evolved significantly since it was first announced under the Coalition Government, are still being fleshed out by the DCLG. However, basic provision for Starter Homes is included in the Housing and Planning Bill which is expected to gain Royal Assent by summer 2016.

As it currently stands, Starter Homes will be new build homes available to first time buyers under 40 at a minimum discount of 20% to full market value. The exact process for determining the open market value is still being discussed between Government, housebuilders and lenders. However, the maximum discounted market price will be capped at £450,000 in Greater London and £250,000 elsewhere – the equivalent of £562,500 and £312,500 respectively in the open market.

To meet the delivery target for this ambitious scheme, the Government has determined that a proportion of all “reasonably-sized housing sites” are set aside to deliver Starter Homes. The precise requirement is still to be defined and could vary across the country.

Planning reforms

It appears that the bulk of the numbers are to be delivered through the reform of the planning system with Starter Homes treated as a form of Affordable Housing. This would mean developers will be obliged to deliver Starter Homes as a percentage of an overall site or a commuted sum to enable the building of Starter Homes elsewhere. Precise numbers will therefore be subject to viability assessments on a site-by-site basis.

In addition to those delivered through the reform of the planning system, the Government has allocated a £2.3 billion fund to support the delivery of 60,000 Starter Homes. From this, the first tranche of £1.2 billion is to be spent preparing 500 brownfield sites for 30,000 new homes by 2020.

A portion of these Starter Homes will be delivered as part of the Government’s plans to directly commission 13,000 new homes, up to 40% of which will be Starter Homes, on publicly owned land. The pilot will run in Connaught Barracks in Dover, Northstowe in Cambridgeshire, Lower Graylingwell in Chichester, Daedalus in Gosport and Old Oak Common in London.

There are also proposals to allow housebuilding on previously developed brownfield sites on the Green Belt, provided the properties are Starter Homes.

Market impact

Timings are tight. With so many details yet to be decided, developers are unlikely to start delivering Starter Homes much before 2017. The pressure to meet targets is likely to prompt developers to seek the most straightforward routes to delivering Starter Homes.

As a result we are likely to see the bulk of Starter Homes delivered as a replacement for other forms of Affordable Housing on sites that are already allocated, rather than via the more time-consuming and difficult route of finding exception sites.

However, unlike existing forms of affordable tenures, eligibility for Starter Homes is not linked to income but age – under 40. Furthermore, as proposals currently stand, the discount for Starter Homes is effectively passed on to the purchaser after five years which contrasts with other Affordable Housing in which the subsidy remains in the tenure in perpetuity.

Hence, there is risk that Starter Homes will distort the local market and cannibalise market sales. Schemes where there are a large number of Starter Homes for sale may have an impact on the saleability and therefore values of competing entry level homes for sale nearby.

The biggest impact is likely to be felt on sites offering new homes via Help to Buy equity loan schemes. With 80% of Help to Buy deals taken up by first time buyers, both schemes are essentially competing for the same tranche of the market. Depending on the size of the scheme, it could even have an effect on the wider second hand market.

Help to Buy Equity Loan

Help to Buy equity loan has supported more than 62,000 sales of new homes since its launch in April 2013, making it by far the most effective Government support scheme for new builds to date. Among the major housebuilders, approximately a third of sales are supported by the scheme. Across the country it has had the biggest impact in mid to lower value markets but has made little difference in most parts of London where values are either above the threshold or still too expensive, even with the Government support.

However, the latest changes to the initiative will increase accessibility to the market in London for working middle income households. As well as extending the scheme until 2021, the available equity loan under Help to Buy has been increased to 40% of property value in London.

^{Source: Savills Research using HM Land Registry}

London boroughs

Our analysis shows that the increase in the size of the loan from 20% to 40% would enable a household with an income of £50,000 and a 5% deposit to buy a lower quartile new home in 20 of London’s 33 boroughs. This compares with the previous position where the same household would only be able to access a lower quartile new home in eight boroughs with a 20% equity loan.

Since the Autumn Statement, Brandon Lewis has been quoted saying that Help to Buy Equity Loan will be available on Starter Homes, although no further details or formal confirmation is available.

Combining the two schemes would have a significant impact in London for first time buyers. After securing a 20% discount to the open market price, buyers would have access to a 40% equity loan on the remaining amount.

We expect that buyers would still need to have a deposit covering 5% of the full price, as is the case under current Help to Buy rules. However, combining both schemes means that a buyer would only require a mortgage for 44% of the value of the property.

With many of the details yet to emerge, it is difficult to gauge at this stage how the two schemes will interact, complement each other or overlap. Given that both schemes target a similar demographic, there is a strong chance that there will be stronger demand for Starter Homes, which potentially offer a better deal to the buyer assuming the quality of housing is the same.

Sub-market housing

Before the Autumn Statement, we found that there were 70,000 potential new households each year in need of some form of sub-market housing. The most affordable shared ownership products, if they can be viably delivered, will help some of the more affluent of these people. However, many will be unable to access homeownership, even with the new schemes, due to either deposit or income requirements, or both. There is provision for 10,000 rent to buy homes, but this volume will not have a significant impact.

Shared ownership

The announcement of funding for a huge expansion of shared ownership is likely to have a substantial impact on housing associations, bringing them back into the market for Section 106 land and, if all 135,000 shared ownership units announced by the Chancellor are to be delivered, bringing them back into the wider land market as well.

This is likely to reverse, at least in part, the decline in Section 106 land value that followed the Budget announcement of a 1% annual fall in social rent levels, down from a CPI +1% rise. It will also go some way to counter the fall in Affordable Housing starts seen since the Budget.

The intention is to allow shared ownership to be delivered by a range of providers, not just housing associations. There may be an incentive for housebuilders and developers to deliver shared ownership themselves, to maintain control and ensure differentiation from other products. The management responsibility is likely to be passed on, probably to a housing association. The income stream from the unsold share is relatively risk free and therefore attractive to investors. Housing associations that have developed shared ownership have rarely sold the income stream, indicating how highly they value it.

^{Source: Savills Research}

BUY-TO-LET AND RENTAL DEMAND

The private rented sector (PRS) will still expand by more than one million households over the next five years despite the Government’s drive to boost homeownership. Without policy interventions, we forecast that the PRS would grow by an average rate of 260,000 households a year in the UK.

We calculate that even if the Government were to achieve its target of building 400,000 Affordable Homes for sale, enabling 80,000 new households a year to access homeownership over the next five years, 40,000 would come out of the private rented sector with the balance shifting out of other sub-market tenures. This would reduce the growth of the PRS by 15% to 220,000 new households a year.

However, separate measures aimed at residential property investors are likely to put further pressure on the already constrained supply of rental homes. From April 2016, purchases of residential properties over £40,000 for investment will attract an additional surcharge of three percentage points above the current rate of SDLT. Hence a buy-to-let investor acquiring a property worth £500,000 would pay an additional cost of £15,000.

This stamp duty increase follows a restriction of tax relief on mortgage interest payments for buy-to-let investors with debt set against their property. Together both measures could discourage private investors. This would therefore have a knock-on effect on sales price and sales rate of development schemes that rely heavily on off-plan sales to buy-to-let investors. In London, limits on investor demand are likely to be exacerbated by changes to the tax treatment of overseas investors and exchange rate shifts.

As a result, we expect to see big opportunities for large-scale investors to provide rental stock and enable developers to de-risk schemes through forward-funding structures. (See ‘Rental Britain’, February 2016)