Starter Homes: the unanswered questions
Starter Homes have hit the headlines this week but there are still more questions than answers, says Neal Hudson
The Starter Homes policy emerged from the Cameron/Osborne government’s desire to increase homeownership. Selling new homes at a 20% discount to first-time buyers looked an easy way to achieve this. However, the housing market is a complex and interconnected system. Apparently simple yet untested policies can easily create unintended consequences. Starter Homes are no exception.
Some of the outstanding questions include:
How many Starter Homes can be delivered? How do you value a Starter Home? Can you get a mortgage on a Starter Home? What happens if a Starter Home is repossessed during the discount period? Is it appropriate to give ‘free’ money to first-time buyers? How many people can afford Starter Homes? How quickly will Starter Homes sell? Will Starter Homes overlap and/or replace the sale of other new homes? What is an appropriate developer’s profit margin on Starter Homes? Will developers increase the price before the discount? Will Starter Homes be the same quality and size as the equivalent ‘market value’ property?
Valuing a Starter Home is the most basic of the questions. In theory the value of a Starter Home is simply 20% less than the value of a similar property sold without a discount. However, that valuation process becomes more difficult if there are no comparable properties to value against or if the discount is greater than 20%.
In these situations there is a risk that some developers could end up increasing the undiscounted price, or building lower quality and/or smaller homes. In some cases this could be intentional but the need to deliver both a positive land value and achieve a sufficient profit margin may lead to unintentional squeezes on the size and quality of Starter Homes.
“The housing market is a complex and interconnected system.”
For buyers, deciding what to pay for a Starter Home is just as difficult. In this low interest rate environment, today’s value of receiving £100 in five or even eight years is greater than £80. With the full property value available to the owner at the end of the discount period, this may encourage some buyers to over-pay, particularly where the discount is greater than 20%.
This could further distort the true value of a Starter Home and creates complications for mortgage lenders who are already more cautious about new build properties.
All these unanswered questions create significant uncertainty in the market. The new government is committed to the 2015 manifesto and the delivery of Starter Homes. If we are to see Starter Homes delivered this year then these issues need to be dealt with in the forthcoming Housing White Paper.
The new government appears to be more flexible in its approach to housing policy than its predecessor. Increasing overall supply is now the clear priority rather than the previous tight focus on increasing homeownership. This week’s announcement was limited to the Starter Homes Land Fund, which is focused on bringing forward development on brownfield sites that would otherwise be unviable.
Ideally this would be the limit of the policy, with the Housing White Paper confirming that the discount is kept in perpetuity while allowing owners to buy out the remaining share.
Additional clear guidance on valuation and discounts alongside minimum standards on the size, quality and design of Starter Homes could also make the best of a less than perfect housing policy. Under these circumstances it might even end up delivering more new homes than would otherwise have occurred.
Neal Hudson, director, Residential Analysts