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Why First Homes will not create the additionality needed to solve the housing crisis

The government’s new flagship housing offer will have many ripple effects on the market and the consequences could differ from what ministers intend to achieve, writes Jonathan Jarvis

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The government's new flagship housing offer will have many ripple effects on the market and the consequences could differ from what ministers intend to achieve, writes Jonathan Jarvis #ukhousing

There are many reasons to think First Homes will not create the additionality needed to solve the housing crisis, writes Jonathan Jarvis #ukhousing

Everybody knows that the government sees homeowners as natural Conservative voters. So has First Homes only been designed to increase that cohort among young people, or might it be a useful tool in solving the housing crisis?

Irrespective of your political leaning, the incontrovertible point of agreement is that additionality is needed to solve the housing crisis.

Will First Homes achieve this? There are a number of reasons to think not.

There is a finite, bounded, sum available for mortgages. That means competition for those funds from First Home buyers is likely to come at the expense of other types of supply. Where might those pinch points be?

Under First Homes, you can have a new home for 70% of the cost or a second-hand one for 100%. Might you go for the cheaper one?


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If you do, the second-hand home will have to fall in price. The new home reduces in price at the same rate, too. This is not good for lender (or developer) confidence. Is this an unduly pessimistic view? History suggests otherwise.

How many First Homes will get built before this happens?

Many commentators have identified the challenge that First Homes offers to shared ownership, a product that has been particularly useful in a number of city centres where affordability is most acute.

Under First Homes, it looks as if the month-to-month costs for the buyer will be the same (or less) than if a person buys a 25% or 50% share under shared ownership. So the economically rational buyer is likely to opt for First Homes (and the policy will, for a time, be vindicated).

There is also the impact that the First Homes product may have on the capacity of developers.

It is well understood that the forward funding of affordable housing units by housing associations has enabled developers to reduce their cash commitment and thereby facilitate greater output than would otherwise be the case.

If developers lose the scope for forward funding for shared ownership properties, developers’ costs are likely to go up and, if that is the case, it is likely to reduce their capacity.

And what will First Homes mean for ‘the wall’ of private equity investment with its eyes on the income in the shared ownership product?

Questions also arise about how you value First Homes. How do you avoid the sale in a sofa-chain scenario? Price it high one day only to bring it back to a discount or true valuation the next?

Is government really willing to close off this source of private investment in affordable housing? Less money tends to mean less output and increased costs.

There are also big questions about the discount.

Who owns the discount? It exists, in part, because it is a guarantee for the mortgage lender. On a mortgage default, the lender is only likely to need 90% of the proceeds. Who gets the 10% that is left over?

Perhaps the answer should lie in the question of who creates the discount? Is it a disguised tax on the land/development value? If it is a hypothecated tax, shouldn’t the benefit go back to the landowner?

Or is it a product of the planning consent process? In which case, should it belong to the local authority?

Questions also arise about how you value First Homes? How do you avoid the sale in a sofa-chain scenario? Price it high one day only to bring it back to a discount or true valuation the next?

Who will value? The developer will set the market price on its development. If it knows it sold one at £140,000, and offers more at £140,000, selling the rest at 70% is an attractive proposition, as it gets close to £100,000.

In the past, extras have commonly been sold by the developer but their inventiveness is likely to be outstripped by the owner selling their home.

So the discount will need to be policed. Who by, and who pays? If the final arbiter of value is to be the courts, then the current sale process is likely to become even more cumbersome and uncertain. One of the results from Help to Buy was the knock-on effect on second-hand housing. Anything that adversely impacts the movement of second-hand homes is likely to effect demand and the appetite of those building to develop more.

The history of the past 50 years tells us that previous attempts to create a sub-market market in residential property have been a series of failed experiments. First Homes does not, at first sight, address any of the reasons for these failures.

One final observation: the proposition does not seem to be targeting the same market or issue as the current Help to Buy approach. There is still, therefore, a question as to what will happen if Help to Buy disappears.

In conclusion, there is plenty of food for thought in this consultation paper and the responses will be an interesting read. But the key question is, will First Homes offer additionality?

Jonathan Jarvis, partner, Devonshires

Inside Housing Development Summit 2020

Inside Housing Development Summit 2020

Inside Housing is pleased to join forces with Homes England and the LGA to introduce the Inside Housing Development Summit.

Taking place on 27-28 April 2020, the summit will gather together local authorities, housing associations, developers, fund managers and advisors for a Chatham House style event focussed on making new connections and exploring new delivery models.

The summit will take place over 28 hours, starting with an afternoon plenary on 27 April, an exclusive development site study tour to Northstowe, England's largest new town since Milton Keynes, followed by a business dinner.

The second day will provide opportunities to network with a range of senior Homes England and LGA staff including Nick Walkley, chief executive of Homes England and Mark Lloyd, chief executive of LGA.

You’ll also meet with leaders from across the development ecosystem and take part in group discussions to help you connect and explore new opportunities. All accommodation and meals will be provided within the fee.

Places for each stakeholder group are limited to ensure a balanced mix of participants and to make sure you leave with the relationships and leads you need.

Click here to book your place or for more information

 

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