A summary of the main issues this article will address are:
- how will the discounts granted by First Homes be protected in perpetuity?
- if 25% of affordable housing is ring fenced to be used for First Homes, what effect will this have on other tenures of affordable housing?
- will First Homes have a positive or negative impact on the wider housing market?
What is First Homes?
First Homes is a new government initiative that is intended to help first time buyers make it onto the property ladder, with exceptions made in limited circumstances for non first time buyers who fall within a government exceptions list.
A First Home will be sold with a minimum discount of 30% of the open market value which will run with the property in perpetuity, so where an individual purchases a home with a 30% discount, the same discount must be applied when the property is sold onto someone else. The First Home must be bought with some mortgage finance which ties into the eligibility criteria to ensure they are purchased by those who truly need it.
Where affordability is challenging within certain regions, the 30% discount may be increased up to 40% or 50% at the discretion of local authorities. If the discount decided by the local authority is higher than 30%, that same discount will run with the property in perpetuity, so a First Home bought with a 40% discount will be sold with a 40% discount.
First Homes will be sold by developers, and will make up 25% of the affordable housing being sold on a development. This could have far reaching consequences on the wider housing market, which this article will discuss in more detail.
Who is eligible for a First Home?
Eligibility criteria will be up to the local authorities to decide who will set specific local connection restrictions. To ensure that First Homes don’t remain unsold local connection restrictions only need to last for a period of three months from the date the property goes on sale giving those buyers without local connections the opportunity to benefit from the discount, with armed forces veterans being excluded from these restrictions.
The proposal is that local people should get first refusal on First Homes to ensure that the benefit is obtained by those who work and live within the community and who would otherwise be priced out of the market. With only a three month window to purchase the properties before buyers from outside the community can compete, does this provision protect the interests of the local community enough? When comparing these provisions to eligibility criteria set for shared ownership properties in a number of local authorities, they seem to be quite light touch. This is one of a number of provisions of First Homes that will require some more detail.
Further eligibility criteria in the way of income caps is also proposed to ensure First Homes remains an affordable product and these will be set at £80,000 of household incomes across England and £90,000 in London. Given the huge variant in incomes across different regions these price caps are unlikely to reflect the needs of households in all areas of the country, although the government has tried to mitigate this by allowing local authorities to lower the income cap for the first three months of sale.
How will it work?
The intention is that a First Home will be purchased in the usual way, with a minimum discount of 30% that will be decided by the local authority. When the property is sold, the home will be independently valued and the discount the original purchaser benefited from will be deducted from the price ascertained by the independent valuation. It’s unclear at this stage how the valuation process will work as it seems reasonable that some level of control will need to be retained by the local authority to ensure that valuations are fair.
To protect the discount, the proposal is that the First Home will have a restrictive covenant placed on the title that will require that any future sale will include a discount at the original discounted price.
How will First Homes be delivered?
The scheme will be delivered through two main routes within the planning system, the first being through section 106 developer contributions and the second through a new infrastructure levy that was recently put forward in the government white paper on planning reforms.
To enable First Homes to be rolled out quickly, First Homes will initially be secured through section 106 contributions before transitioning into the new approach through planning reforms proposed in the white paper.
Are First Homes ‘genuinely’ affordable?
As with shared ownership, questions will be raised as to its affordability given the cost to the purchaser. The Government's approach to this is to set regional price caps similar to the affordability criteria with help to buy. The proposal is that there will be two regional price caps which will apply after the discount has been applied to initial sales which will be set at £250,000 across England and £420,000 in London.
Responses on this issue in the government consultation varied greatly, giving an indication as to how difficult it will be to get the pricing right given the differences in property values throughout the country.
Mortgage lending availability
Like a lot of new products that enter the market it may take some time for lenders to get comfortable with First Homes, which could limit finance available for new purchasers. An added complication is that lenders may be cautious about a scenario where a purchaser defaults on their mortgage leaving the lender with an affordable housing product that it can’t sell on the open market, so the Government is suggesting a mortgagee protection clause to mitigate this risk for lenders similar to the approach taken for shared ownership.
What effects will First Homes have on housing supply?
The Government has suggested First Homes will have a relatively small impact on any reduction in the supply of affordable rented housing and will make homeownership a more realistic possibility for many, but is homeownership the best way to tackle the housing crisis, and how will this affect other housing tenures?
The issue for housing supply is the possible decrease in more traditional and genuinely affordable housing products given that only 75% of housing designated as affordable will be available for other housing tenures. It is likely that of that 75% shared ownership will get hit the hardest as a reduction in affordable rented products could have very negative implications for those who are unable to obtain a deposit to buy a property and are unable to afford market rent, and so rely heavily on affordable rented properties.
It could be a double blow for shared ownership products if a buyer has the ability to choose between purchasing a First Home or a shared ownership property. If the option is to own a home outright, or own a share of a property with an obligation to continue paying rent on the unowned share, which will be the most popular?
Shared ownership will face further challenges in the near future with the governments proposed implementation of a new shared ownership model.
Why is First Homes required and will it help the housing crisis?
First Homes is a product that will undoubtedly offer people the opportunity to acquire a home that they would have been unable to acquire on the open market.
Homeownership has been a key policy driver for the government for a number of years and with house prices in the UK increasing from an average of £58,854 in 1996 to £235,298 in 2019, it’s easy to see how homeownership is out of reach for so many people, and First Homes is a product that will ease this burden.
However, the housing crisis can by no means be solved purely through homeownership and with over one million households on local authority waiting lists nationally in 2020, those who are most in need of housing may find little benefit in this scheme.
For further information please contact Lee Stone or another member of the Birketts’ Social Housing Team.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at February 2021.