How would First Homes impact the housing market?
As the government prepares to respond to the recent consultation on its proposed ‘First Homes’ policy, Helen Collins and Lawrence Bowles of Savills consider what the discounted homeownership product would mean for the housing market
Helen Collins and Lawrence Bowles
Helen Collins is head of Savills Affordable Housing Consultancy and Lawrence Bowles is a director at Savills Residential Research
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The government has proposed the First Homes policy as a new way to provide discounted homes for sale in England. In response to the recent government consultation, Savills has undertaken modelling to explore the impact of First Homes on the housing market. Here is a summary of the key findings.
What is a ‘First Home’?
First Homes is a proposed policy that will require developers to sell new homes at a discount to market value. The Conservative manifesto said that the properties would be sold with at least a one-third discount to market value, which will apply in perpetuity. The aim is to make these homes more affordable for people to buy.
Local authorities could decide who can buy First Homes. For example, key workers or former armed forces personnel could get priority.
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Who would benefit from this policy?
First Homes would have lower deposit and income requirements than buying the same home on the open market. Our analysis shows that in three-quarters of local authorities, First Homes could help between 10 and 20 per cent of households to access homeownership – people who could not have bought a home otherwise (see Figure 1). The proportion of households it would help is lower in less affordable locations such as London, the Home Counties, and many coastal districts.
Discounts far greater than one-third would be needed to make First Homes affordable to the median-income household in most locations. Two-thirds of local authorities would have to impose discounts greater than 50 per cent (see Figure 2).
Figure 1: How many households could access First Homes with a 5 per cent deposit who could not have bought without support? (Source: Savills; click to expand)
Who pays for the discount?
Discounted First Homes would be provided through Section 106 developer contributions. Currently, these contributions pay for around half of England’s affordable housing delivery – this totalled around 57,000 homes in 2018/19. If these contributions are diverted to First Homes, the number of affordable homes provided through developer contributions (Section 106) will fall. This would leave an affordable housing funding gap.
Requiring developers to provide homes at large discounts could also have a negative impact on land value, reducing site viability. If the discounts required are too large, there is a risk that this policy could reduce overall housing delivery.
It is also worth noting the present situation during the COVID-19 pandemic where the government has suggested that local authorities may decide to allow small and medium-sized developers to defer Section 106 contributions for a fixed period to help them weather pandemic-related cash flow challenges.
Figure 2: What discount allows a median-income household to afford First Homes? (Source: Savills; click to expand)
What are the alternatives?
Discounting new homes would make them more affordable. However, other affordable or supported routes into homeownership are available. For example, the deposit and income requirements for shared ownership homes are lower than for First Homes sold at a 30 per cent discount. Help to Buy also allows households to buy a new build home with government support.
Our modelling suggests that First Homes monthly costs could be lower than Help to Buy. However, unlike Help to Buy, First Homes wouldn’t allow households to staircase to 100 per cent ownership. Shared ownership requires a lower initial deposit than First Homes or Help to Buy and allows staircasing to 100 per cent, but monthly costs can be higher.
One of the main reasons monthly costs for shared ownership are higher than for Help to Buy is higher mortgage costs (see Figure 3). While competition in shared ownership mortgages has risen, there is still a limited range of options compared with Help to Buy mortgages or mainstream mortgage lending.
Figure 3: First Homes affordability versus other tenures (Source: Savills; click to expand)
Figure 4: First Homes affordability versus other tenures (Source: Savills; click to expand)
One way for the government to address higher mortgage costs for shared ownership homes could be to fully or partially underwrite mortgages. This would lower the risk profile for lenders, making these mortgages more attractive and allowing them to offer lower rates.
Once we emerge from the current COVID-19 crisis, it is clear from our research that there are a number of options open to the government to boost access to discounted housing.
Helen Collins, head of Savills Affordable Housing Consultancy, and Lawrence Bowles, director, Savills Residential Research
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