Can we force developers to sell homes at a discount?

Nov 26, 2019

Photo Credit: Images Money

The Conservative and Labour manifestos make significant pledges on housing policy. The focus of the Conservatives is supporting people into home-ownership, while the centrepiece of Labour’s manifesto is the pledge that local authorities build many more homes per year.

Whichever party leads the country after December’s election will face immediate pressures to start delivering on these pledges. How can they do this and what issues will they face?

In the second of two blogs, Policy Exchange’s Head of Housing Jack Airey considers the feasibility of the both parties’ pledge to offer first-time buyers discounted homes.

The pledge: discounted home ownership

One of the most significant features of the planning system is Affordable Housing requirements. To gain permission from the state to build, developers must, as a matter of course, provide a proportion of homes (normally around 30 per cent) at below-market rates for eligible households to either rent or buy. These are secured through Section 106 agreements that are negotiated between the local authority and developer. Homes delivered this way must be within the parameters of what the Government defines as Affordable Housing.

In their manifestos, the Conservatives and Labour have pledged that, as part of Affordable Housing requirements, developers will be required to provide homes for discounted sale to local first-time buyers. Both parties have put a particular focus on supporting low earning Key Workers into home ownership – this is welcome and something that Policy Exchange called for a few weeks ago in our report Revitalising Key Worker Housing.

The policy could help create a new generation of younger homeowners that had previously been kept off the housing ladder because of high prices. But there a number of issues that need to be addressed for that to happen.

How new is the policy?

To some extent, this policy already exists. Discounted Market Sale is a form of Affordable Housing that is recognised in national planning policy. It is defined as housing “sold at a discount of at least 20% below local market value” available to local people that are struggling to buy a home. As part of Section 106 negotiations, local planning authorities can require developers to provide discounted homes of this kind. The size of discount on offer to local people is decided in the negotiations and will be made in relation to local incomes and house prices – in general, the lower the discount the more discounted homes provided (and vice versa).

The Conservatives pledge is to increase this discount to a minimum of 30 per cent while Labour’s is to keep the minimum discount at 20 per cent. Labour’s proposal also includes a pledge that mortgage payments on the discounted homes won’t exceed a third of the average local income. Both parties’ proposals, however, are more or less similar to the Discounted Market Scale that already exists.

The key difference will be the number of homes for Discounted Market Sale built each year. Currently only a small number are built each year – in the low thousands. This is partly because there is limited awareness of the scheme but also because of issues relating to the scheme’s practicality, including its administration, transparency and the involvement of mortgage lenders.

To increase the number of homes for Discounted Market Sale built each year – the Conservatives have pledged 29,000 homes and Labour 50,000 over five years – each of these issues will need to be addressed.

The policy requires the support of local planning authorities

Despite both parties putting numbers on how many low-cost homes will be built by their government if in power, neither would have much control over the rate at which they are built. Instead, the number of discounted homes built will be determined by the willingness of local planning authorities to require discounted market sale homes ahead of homes available at discounted rent or for shared ownership. And it will be determined by the number of homes that market sale developers build each year – which is effected by a number of other factors, not least the supply of land, labour and capital.

Policy makers could find a way round this issue by changing national planning policy. It could be required that Discounted Market Sale is the only type of Affordable Housing that can be provided through Section 106 agreements. This, however, would mean local planning authorities cannot ask developers to provide affordable rental homes.

How will developers react?

Affordable Housing requirements impact the bottom line of developments. The more homes developers must provide at a discount, the less the potential receipts of the development. As long as their overall contribution does not change, developers generally will not mind how the Affordable Housing they build is used.

Nonetheless, if developers are required to provide more homes for discount sale rather than discount rent, this will affect their ‘build and sell’ model. Instead of selling affordable homes onto housing associations – who then rent and manage the properties – developers will have more of a direct role in helping people access the Affordable Housing. They will have to work closely with the local authority, perhaps through an agent, who will decide whether someone is local enough to be eligible for the discounted home.

Developers will also have to bear more sales risk. They will no longer receive the upfront receipts from housing associations purchasing Affordable Housing units that ease cash flow on a development project. Their sales receipts will also be dependent on whether there are enough local people who qualify for the discount and are in a position to buy a home. If there isn’t local demand for discounted homes, developers might be left with homes they cannot sell. Understandably, they will want clear rules for the time period after which discounted homes can be converted to normal homes for market sale.

How will lenders react?

Anyone buying a discounted home will not be able to keep the discount when they choose to sell up and move on. Instead, the discount will be retained locally and available only to local people who meet the local planning authority’s eligibility criteria. This is secured through a clause in the S106 agreement.

The resale clause is right, but it also causes problems for mortgage lenders who will be concerned by the resale value of the property – will there be enough local buyers who qualify for the discount in five, ten years time? Lenders will also be wary of Labour’s pledge to cap mortgage payments on discounted homes at a third of the average local income.

Conclusion

Given the significant differences between median house prices and median incomes in some parts of the country, more discounted homes for sale will be an attractive proposition to first-time buyers who are fed up with renting. Focused housing support for Key Workers will also help struggling public servants like police officers, nurses and teachers to live closer to their work, making staff recruitment and retention easier in those public services.

Yet, whoever leads the next government, the number of first-time buyers and local Key Workers that eventually benefit from this policy will depend on whether it can be made practical enough to work.

Stay Up To Date

Latest Tweets

While the UK is comfortably above the OECD average, it remains well behind top performers such as Singapore, Hong Kong or the new European front-runner, Estonia. #PISA #education #schools #educationreform policyexchange.org.u…