The government’s crusade to build more homes, which aims to turn “generation rent” into “generation buy”, is driving its approach to housing. But the biggest changes in the Housing and Planning Bill, now with royal ascent, are actually those relating to tenure – how we own and live in the homes we have built.
Home ownership is the tenure of choice for the current government, and while it is perhaps a little unfair to say that the pursuit of home ownership is at the expense of all other tenures, it is not too far from the truth. The government wants industry to build significantly more homes, but it wants as many of those homes to be owned by those that live in them as possible.
This presents problems, risks and opportunity for developers.
One of the headline proposals in the Housing Bill is the starter homes scheme – a new tenure of sorts, where first-time buyers under 40 will be able to buy newly built homes at a 20% discount.
Given that we are meant to be building more than 200,000 starter homes by 2020, practical details are not as abundant as one might like. However, the consensus seems to be that starter homes will at least take the place of homes that might otherwise have been allocated to different tenures, particularly social housing and shared ownership.
It seems inevitable that, if planning authorities have a responsibility to deliver a quantum of starter homes in the context of a finite amount of development land, they will be built where other tenures could have been.
This all adds up to a larger proportion of new-build homes on any given site being subject to the whims of market trends. Add to that efforts to dissuade investors from buying more homes, in the form of the extra 3% stamp duty charge and tapering off of tax relief on mortgage interest, and there are implications for builders’ exposure to sales market risk.
How exactly landlords’ buying habits will change in response to less friendly government policy we have yet to see, but investors are an important source of demand for new homes. We estimate that about 700,000 of the homes built since 2005 are owned by landlords today.
So any change in sentiment and behaviour will be felt by the sector. Their role in buying off-plan and thus reducing sales risk is particularly important for helping smaller developers fund schemes. Development finance can often be tied to getting a certain proportion of homes sold in advance.
If starter homes replace other tenures that might have been sold to a housing association or investor, the result is more homes to sell to individuals. That could cause problems because starter homes do little to address the biggest barrier for first-time buyers – raising a deposit.
For the average couple, our Time to Save Index shows it will take more than six years to raise a deposit to buy their first home; the starter homes scheme would reduce this to only five years.
Given that most developments attract a premium, the 20% discount is likely to put starter homes broadly in line with the local secondhand market. The net result will be that, without some creative thinking from builders, we will see a large increase in the number of homes that rely on the sales market to get built. Given how cyclical the housing market is, this does not bode well for long-term supply.
The conventional solutions to this increase in market risk could see more rented homes rather than owned ones. The nascent build-to-rent sector seems to be creating a rapacious appetite for stock – so too are the more commercial housing associations, which are looking to expand their holdings. Both routes offer opportunities to forward sell, or partner to reduce sales risk.
There are likely to be some inventive solutions posed too. If government policy wants to support both first-time buyers and housebuilding, perhaps there are ways to create an off-plan sales market for first-time buyers.
Or, with increased investment activity in the sector, maybe there are more low-cost home ownership tenures on the horizon, or even tie-ups with crowdfunding investment platforms.
Understanding just how the regulation will be applied will ultimately shape the impact and industry reaction. But builders will need to think carefully about how to reduce their exposure to market risk, regardless of the detail.
Johnny Morris is research director at Countrywide
