Affordable home ownership

First Homes is the government’s new flagship affordable home ownership programme, offering homes at a discount of 30% to 50% of market value to first-time buyers in England.

Local authorities, housing associations and housebuilders will all need to understand the economics of their provision. Half of all homes delivered under the £11.5bn housing programme will offer 'affordable home ownership'. And a minimum of 25% of all affordable housing delivered through s106 planning obligations are to be First Homes specifically. Those economics are not straightforward, given:

1. The impact value caps of £420,000 in London and £250,000 across the rest of the country have on the discounts that will be required in some parts of the country
2. The prospect that some local authorities in other areas will want lower value caps to ensure that First Homes delivery is targeted at those who would otherwise be unable to buy their first home
3. The extent to which discounts will make these homes affordable to different parts of society in different locations
4. The affordability and accessibility of First Homes relative to other tenures
   
   

These factors will affect the nature and depth of demand for First Homes, the remaining pressure on other forms of affordable housing, and the interplay with Help to Buy and Shared Ownership.

The government’s response to the consultation on First Homes was issued at the same time as the Planning White Paper. It confirmed that properties will be sold at a discount of 30% with the potential for local authorities to increase the discount where it is required to make the product 'affordable'.

In some cases, bigger discounts will be needed simply to bring properties within the value caps set out by government. In others, local authorities will seek to apply lower value caps for the first three months of marketing to ensure the property is targeted at first-time buyers truly frozen out of the housing market.

To look at how this might play out across the country, we have looked at two case studies. One represents a 700 sq ft 2-bed flat, the other a 900 sq ft 3-bed house. In the first instance, we have discounted the open market value by 30%, 40% and 50% to establish where the resulting values fit relative to the price caps announced by government.

The effect of the value cap

In the case of the 700 sq ft 2-bed, a 30% discount would be sufficient to bring the property within the price cap in 298 of the 316 local authorities. Of the remaining 18 local authorities, a 40% discount would potentially be required in 14, including St Albans, Elmbridge, Windsor & Maidenhead, Islington, Hackney and Cambridge. Meanwhile, in Kensington & Chelsea, the City of Westminster and City of London, even a 50% discount would potentially be insufficient to bring such property within London’s £420,000 value cap.

For a 900 sq ft 3-bed, the number of locations theoretically requiring a discount of more than 30% rises from 18 to 58, bringing Wokingham, Wycombe and Winchester within the areas potentially requiring a further discount. In eight of these, a 50% discount would be insufficient to bring such a property within the value cap, while discounts of over 40% would be needed in 26 of the remaining 50.

Why is this relevant?

Put simply, the bigger the discount needed in higher-value markets of London and the South East, the less economical it will be for housebuilders to deliver First Homes.

Here bigger discounts leave less room for other more heavily discounted forms of affordable housing to be delivered without impinging on viability. This means where the value caps are an issue, there may be less appetite to use the scheme to deliver 3-bed family homes aimed at those coming to home ownership later in life.

And in some cases, it may make it difficult to deliver First Homes properties within recommended space standards.

Affordable to whom?

Of course, just because a property can be delivered below a preordained value cap does not mean that it becomes widely 'affordable' or that it will be targeted at those people otherwise unable to enter the housing market.

To look at these issues, we have considered:

• What incomes buyers would need to afford a First Home in each local authority;

• How much they would need to earn to buy the same property with no discount;

• How these two figures relate to the earnings cap of £90,000 in London and £80,000 elsewhere; and:

• Where that household income sits relative to the wider distribution.
  
  

To do this, we have assumed that, whether or not they are buying a First Home, first-time buyers will need a 15% deposit and be able to obtain a mortgage which is four times their annual household income.

Incomes needed to buy First Homes

This analysis suggests that, as an average across all of the local authorities of England, a household income of £34,125 would be needed to buy a 700 sq ft property First Home – just above the average salary for an NHS nurse of £33,384 (though some way above that for those in the early stages of their career). This compares to £47,825 to buy that same new build home in the open market.

Those buying a 700 sq ft 2-bed flat on the open market would need to have an income in the top 36% of households on average. Applying the First Homes discount would theoretically open up ownership to another 17% of households by earnings. But, on average, those households would still need to earn more than 47% of households (to be in the top 53% of earners).

The average income needed to buy a 900 sq ft First Home increases to £41,349 which, on average, sits above the median percentile of household earnings (at the 57th percentile) a little higher than the top end of the upper pay range for a teacher across England and Wales.

However, there is significant variation across the country as shown in the table, below.

In 44 local authorities across the Midlands and the North, the income needed to buy a 700 sq ft 2-bed First Home is under £20,000, while across 40 in London and its hinterland it is over £50,000.

There are only four local authorities - Pendle, Hyndburn, Burnley and Blackpool where a 700 sq ft First Home would be affordable to a household with a lower quartile income, while in 20 boroughs of London the household's income would need to be in the top quartile income. 

For a 900 sq ft 3-bed First Home, the number of local authorities where that minimum income requirement is above £50,000 rises to 66, while in 16 boroughs of London, it is above £80,000 (just £10,000 short of the First Homes income cap in the capital).

The charts below show the extent to which First Homes will open up accessibility to home ownership at a regional level (taking the average for all local authorities in each region).

They further demonstrate how First Homes has the capacity to open up home ownership to a much lower tier of earners across the Midlands and the North than London and parts of the South, though the ability to deliver modest family homes that are affordable to middle-lower income households is going to be limited across large parts of the country. This is likely to mean that smaller units are delivered as First Homes.

The London problem

The issue is most acute in London. In inner London and the more expensive outer London boroughs, there is a risk that First Homes will only make home ownership available to a relatively narrow band of relatively high earners or those with fairly sizeable deposits.

To a degree, this will be mitigated by focussing First Home delivery on 1-bed and studio apartments, though this will further restrict the types of households able to buy and, subject to the approach of the local planning authority, increase the required provision of larger homes through other forms of affordable housing.

How does that compare to other tenures?

We have then looked at how First Homes might compare to other housing options in terms of:

• The gross development value attainable

• The minimum income requirements

• The annual rental or mortgage costs

• Deposit requirements again using our example of a 700 sq ft 2-bed flat

At a 30% discount, the Gross Development Value (GDV) generated from a First Home will typically be lower than the equivalent property provided through Shared Ownership. But, it will be greater than that delivered as Affordable Rent (typically at 55% to 65% of market value). The position will be less clear cut where greater discounts are required to bring First Homes within the proposed value caps, which means the nature and scale of delivery will vary across the country.

From a consumer perspective, much depends on the ability for First Home buyers to secure competitive mortgage finance. More specifically, it depends on lenders’ response to the government’s plans to create a standard model for delivery of First Homes and a mortgage protection clause that seeks to protect their security.

At this stage, lenders are still assessing their appetite to lend in this space and the terms upon which they would make finance available. We have, therefore, looked at what might apply in two illustrative scenarios:

• One where borrowers need to find a 15% deposit on the discounted value, and the mortgage is priced at the same rate as existing 85% LTV products in the general mortgage market; and

• One where borrowers are able to borrow at somewhere between 90% to 95% of the discounted value with a rate equivalent to that payable for a shared ownership mortgage.
  
  

In the event that an 85% LTV mortgage would be needed, the deposit requirements would present a much greater barrier to ownership than Help to Buy and the Shared Ownership equivalent: especially as the initial First Homes Consultation document indicates that properties purchased under the First Homes scheme will not be eligible for further support under the Help to Buy Equity Loan Scheme. This said, the low annual housing costs would be highly attractive, not just compared to other home ownership options but, in many cases, the equivalent Affordable Rent.

At a higher loan-to-income ratio, the deposit required would be more in line Help to Buy, but the prospect of higher interest rates could quickly erode the savings in annual housing costs.

In both cases, First Homes should open up home ownership to less affluent households than Help to Buy. However, the income requirements to access Shared Ownership remain lower still. This, combined with the lower deposit requirements and higher GDVs available to housebuilders, suggests Shared Ownership will continue to play an important part in the delivery of affordable home ownership.