My Lords, it is time for the Cross Benches to join in. Amendment 41A is in the names of the noble Lords, Lord Kerslake, Lord Cameron of Dillington and Lord Beecham, as well as my name. It also relates to this key component of the Bill—the Government’s flagship policy of starter homes—and is all about reducing demand for this new product so that starter homes are not such a cuckoo in the nest. Just to reiterate, these are homes for first-time buyers under 40 sold at a 20% discount, with the costs borne by housebuilders, who in return are now excused the normal requirements to provide a percentage of affordable rented or shared-ownership homes and to pay a community infrastructure levy.
I preface my remarks with an overarching comment on where we have got to in relation to the starter homes initiative. If only starter homes were all additional to the affordable rented homes that would otherwise be provided, I am sure there would be far less concern. However, they would then of course need to be funded separately, instead of replacing accommodation for those on lower incomes. What would that cost? If the average discount was something around £40,000, the total cost over five years for 200,000 of these homes would be £8 billion. The Government have already pledged something over £2 billion to assist with the programme, leaving under £6 billion—rather more than £1 billion a year—to be found if only the scheme was intended to add starter homes while serving the same number of people. However, this is not where we are.
On Tuesday we talked a lot in Committee about the losers from this policy: the people who would have obtained those rented or shared-ownership homes that will not now be built. Today we are talking more about the winners from the starter homes policy and whether this scheme is rather more generous than it needs to be. Who are these winners, and does the nation get value for money from rewarding them in this way? A big group of beneficiaries will be those of my generation. This is not because I am under 40, but because the starter homes initiative will benefit parents of buyers, since the bank of mum and dad will not need to be drawn upon so heavily. Over a quarter of first-time buyers have been dependent on this source of funds, so a lot of parents can now draw a sigh of relief that government will pay instead.
Secondly, of course, the main gainers from the policy will be those lucky buyers who can receive up to £112,000 towards their purchase in London and up to £62,500 elsewhere. These discounts take the form of grants after five years; the purchaser can then keep all the money alongside keeping 100% of the increase in the property’s value, of course. That is great for these buyers.
Owner-occupation does indeed provide a level of security, a source of pride, an encouragement to maintain and improve the home, and a degree of freedom that renting does not. But because these discounts represent a hefty subsidy to the buyer at the expense of a relatively worse-off household, who will not now get the affordable rented home which starter homes have replaced, we need to ask whether this trade-off represents good value for money for the nation.
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Now comes a rather startling additional factor, to which some reference has been made today: the Housing Minister has stated his hope that buyers will be able to combine the new 20% starter homes discount with the current 20% Help to Buy interest-free loan. In London that Help to Buy equity loan is now to be set at 40%, meaning that a London buyer with both a starter homes discount and a Help to Buy interest-free loan would get 60% off their purchase price. So the buyer of a property costing, say, £500,000, would actually pay only £200,000, getting the other £300,000 from the government schemes.
I note that I am addressing some of the questions that came to the noble Lord, Lord Campbell-Savours, at 3 am. This level of support to one young person— 60% of the cost of a London apartment—is surely over the top, sympathetic as I am to their desire to escape very high rents in London. It provokes a sentiment expressed by an American colleague: “If the cream is too rich, the cat dies”. Enabling anyone under 40 who can raise a mortgage of £200,000 to buy a property costing £500,000 sounds like a recipe for rapid inflation of property prices and some weird distortions in the market. The Help to Buy scheme’s 20% equity loan has already been criticised for increasing demand more than supply, but it has not been remotely as generous as the 40% interest-free equity loan plus the new starter homes 20% discount. I wonder whether the Bank of England has a view on this. It is that cash discount which really takes the package to absurd
lengths. Unlike the Help to Buy equity loan, which after five years attracts 1% interest, rising annually thereafter, and must be repaid at its new value whenever the home is sold, the 20% starter homes discount simply converts into an outright grant. This means that it is the culprit for making the cream too rich.
In terms of value for money for the taxpayer, these hefty grants benefit just the one initial purchaser, if they stay for five years or more—and they are unlikely to move out any earlier, since they would then forfeit this huge windfall gain. The next buyer then pays 100% of market value and obtains no benefit from the initial subsidy. By contrast, if the same level of grant had been used for an affordable rented or shared-ownership home, rather than for the starter home that replaces it, the benefit of the initial grant would have gone on indefinitely, helping all future occupiers. We should bear in mind that there is a lot of dead weight here: currently, tens of thousands of households become first-time buyers without generous grants. In future no one, whatever their income or the wealth of their parents, will be advised to buy a new home without collecting a starter home grant. So the gains to society from this redistribution are short-lived and benefit only one buyer, who may, or may not, need the money.
Concern about the cost and displacement effects of the starter homes initiative comes not only from those who worry about the displacement of affordable rented accommodation. The mortgage lenders are worried by the dangers of distortion to the market. The Council of Mortgage Lenders says that the starter homes offer to potential buyers,
“is likely to stimulate excess demand including from those who may already be able to use existing schemes, and will increase the potential for driving up house prices”.
The Building Societies Association says:
“Our concern is that the 20% discount is just there for five years. We think it should be built in”.
In another words, it should be there in perpetuity to assist other buyers later on.
As others have noted, lenders also have the problem that no one knows how to value a product that comprises both a property and a large cash reward in five years’ time. Jones Lang LaSalle, a valuation expert, envisages real difficulties, as noted by the noble Lord, Lord Campbell-Savours. I have the quote from it that he was seeking:
“80% of Market Value sounds simple; but what is the Market Value of a home where conditions are attached to its purchase”?
The bonus of 20% after five years certainly ups the real value, but by how much? The housebuilders, too—who might be expected to support any measure that raises the demand for, and increases the prices of, the homes they build—are equally alarmed. They want stability and consistency; they see the dangers of people clamouring to buy because of the huge rewards from the big bonus of a non-repayable discount. This rich cream may push up prices initially but is likely to have a depressing effect on both adjacent new homes and on the second-hand market all around, where no such bonus is available. There may be a further depressing effect when the big numbers of starter homes are five years old and come back on the market with no discount. The major housebuilders developing the really large
sites will still be selling new homes in five years’ time. If they have to compete with a glut of resales by starter home buyers, this undermines their forward planning. I know that some of the big players feel they would have to move away from building anything for the first-time market except starter homes, and that might mean a decline in their overall output of new homes.
Already an impact may be beginning to emerge, as people postpone any buying decisions until the starter homes deal is available to them. Meanwhile the fact that the first timer collects all the subsidy for themselves after five years is particularly problematic for landowners wanting to make land available to help local people, as we shall hear on later amendments. A key criticism therefore, and I think it is a universal one, of the starter homes model is that if the one-off windfall is too advantageous—if the cream is too rich—the positive features of this initiative will be completely undermined.
I come to the solutions, or at least the partial solutions, to the problems which the starter homes initiative raises. There could be tough eligibility criteria, limiting access to people not able otherwise to purchase at all; and/or to people such as teachers, NHS staff or other key workers who are needed in the locality. These are ways of securing public benefit from the initiative while dampening the excess demand.
Amendment 41A seeks to get better value from the starter homes proposal by retrieving a proportion of the subsidy on a sliding scale over 20 years when the buyer sells up. I certainly commend the alternative suggestion that there should be a covenant on resales in perpetuity, to lock in the 20% discount to keep helping future buyers. That would convert the discount into an interest-free loan, to add to the support available under the Help to Buy scheme. If that approach fails to find favour, however, my amendment, supported by the noble Lords, Lord Kerslake, Lord Cameron and Lord Beecham, provides an option which I hope appeals to the Government. Under the proposition in this amendment the purchaser would repay the 20% discount less one-20th—that is, less than 1% of the original figure—for each year of occupancy. Therefore someone who left after 10 years would retain half the discount and pay back the other half. Purchasers are still helped to buy by the discount, still keep some of it and still get the capital gains on the whole of that proportion of the value; but they cannot walk off with all the subsidy after a five-year term.