Posted on 5 February 2017 by
Gavin Barwell toured the TV studios this morning, appearing on ITV, Sky and the BBC, prior to publication of the delayed Housing White Paper on Tuesday. It appears from his comments the White Paper will focus strongly on rental plus part buy, part rent, i.e. shared ownership, and also build to rent, which some institutions, including Legal & General, are already engaged in.
I was particularly listening for any comments on the Starter Home Initiative, which was first announced by the Government well over 2 years ago in a classic case of timing an announcing for political expediency, without thinking through the details or engaging in any meaningful consultation with interested parties.
Apart from agreeing with Robert Peston that the previously announced target of building 200,000 starter homes by 2020 was no longer achievable, the Housing Minister seemed keen to avoid talking about Starter Homes and certainly said nothing to indicate the many complex issues around this policy have been resolved.
What has previously been announced is that Starter Homes will only be available to FTBs between 23 and 40, with a maximum price of £250,000 outside London and £450,000 in London and at a discount of 20% off market value. It is not yet clear whether a 23 year old buying jointly with a 22 year old would qualify.
Since the policy was announced there have been more questions than answers and unless the White Paper addresses at least the issues set out below I can only conclude that construction of the first Starter Home is still some way off:
1. Who determines the market price from which 20% is deducted and what information will be provided to prospective buyers to substantiate the “market price?”
a. It is worth noting that it would appear a large part of the 20% subsidy will in practice be met by the public sector as developers will be excused various obligations that would normally be part of the planning permission, i.e. Community Infrastructure Payments, Section 106 obligations.
2. In what circumstances will some or all of the 20% discount have to be repaid?
a. Initially the Government said this would be if the property was not owned for at least 5 years and it was considering whether the repayment of the discount should be tapered or cliff edge. The latter never looked sensible; full repayment of the discount on a sale after, say, 4 years and 364 days and no repayment if sold a day later is as illogical as a 5 year fixed rate mortgage with a 5% ERC right up to the day before the end of the fixed rate!
b. Whilst a taper seems the obvious route to go the question of how long the taper period should be is much more challenging. The shorter the period the greater the risk of distorting the local housing market and so a much longer period would make sense from an economic perspective. However, many FTBs are likely to sell within the discount clawback period, especially if it is longer than 5 years.
c. What happens if the property is sold at a loss during this period and the homeowner doesn’t have enough equity and/or savings to repay the required proportion of the discount, and would the amount to be repaid be based on the purchase price or the lower sale price?
3. Will the property have to be sold at full market value or at a price reflecting the balance remaining of the tapered discount repayment period; can it only be sold to another FTB buyer?
4. Will the Government allow dovetailing with other incentives, e.g. the Help to Buy Equity Share Second Charge scheme, which is also only available on new build properties?
5. Likewise, can the Help to Buy ISA and Lifetime ISA be used for the deposit?
6. Will lenders offer a 95% LTV mortgage on Starter Homes? Although many lenders now offer 95% LTV mortgages nearly all have a lower maximum LTV for new build properties, and in some cases an even lower maximum LTV on flats than on houses. This very limited availability of 95% LTV mortgages on new build properties is not a major problem at the moment because the Help to Buy Equity Share Second Charge scheme offers such good value that a substantial majority of new build buyers with only a 5% deposit use this scheme. However, the scheme is due to end in 2021, which presents a separate problem for housing developers. Halifax is one of the few lenders offering 95% LTV on new build properties but it will not want to be the only major player in the high LTV Starter Homes market and so this is major problem for the Government. There is no point in launching a scheme limited to FTBs without ensuring an adequate supply of 95% LTV mortgages. Schoolboy stuff!
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