My Lords, I support Amendment 41A, spoken to so ably by the noble Lord, Lord Best. I declare my interest as chair of Peabody, president of the Local Government Association and chair of the London Housing Commission.
The focus in our debate on Tuesday was on the impact of proposals on social rented housing. As the noble Lord, Lord Best, has said, there is a price to be paid in the current model for that sort of housing. We also spent considerable time debating the one-size-fits-all approach to planning that is envisaged to support starter homes. Today we have focused on starter homes as a product in itself; indeed, we might say that we have spent most of this morning on what might be described as product design, and the Committee might agree that this has been a rather unsatisfactory process. The reason why this is the case is quite clear: with starter homes we are going from a prototype to full production by missing out the stages in between, so it is hardly surprising that we are struggling to make sense of something that, in truth, has not been fully designed.
If we ourselves are confused, struggling with this, frustrated or indeed concerned, it may be some consolation to the Committee that such confusion, concern and frustration are shared equally by the house builders and lenders. Before we come to the amendment, it is important to explain the context for why this issue is so difficult for them and for us. There have been products to help first-time buyers to access home ownership for 30 years now. It is not a new concept; it has been around under both Governments as something that they aspired to achieve. The aims have been twofold. The first has been to help people with the deposit. People often have the income to enable them to pay the mortgage but not essentially the wherewithal to pay the deposit on the property. That was one key element of helping people into home ownership. The second reason why we went down the road of promoting home ownership products was to sustain demand, particularly following the financial crash in 2007. So there were two reasons why, as I say, Labour Governments as much as Conservative ones have gone down this route.
Up to 2013, the cost of these products came essentially from departmental budgets—in this case CLG and, before that, the ODPM. Because budgets were tight, accessibility to these products was constrained and in fact linked to income, as was talked about earlier. That was our basic model prior to 2013. In 2013, though, it was established by the Treasury, and there was some very clever thinking on this, that in fact these forms of support, in the shape of equity loans, could be regarded essentially as financial instruments and held against a third-party asset. As a financial instrument, they scored as debt but not as deficit. The Chancellor therefore thought that he could expand them in a pretty unconstrained way, so income requirements came off and the size and value of the property that you could buy went up substantially.
That was a crucial shift to making these schemes much more widely available. In fact, in 2013 a large sum was assigned—it was expanded to £10 billion later on—to take this through to 2020. In addition to that, there was £12 billion to support an additional product, Mortgage Guarantee, which underpinned mortgages. So there were two products that effectively
helped people to get over the deposit problem, Help to Buy and Mortgage Guarantee. Since 2013 there have been something like 126,000 purchases using one or other of those products, and £3.8 billion of government money has been put alongside that. I cannot say how many of those people who bought are under 40 because I do not think those data are held, but I am willing to bet that a large number were in that age category.
3.15 pm
I say all this because it raises the question: what market gap are we trying to fill here? We have an existing product that helps people to access the market. If there is an issue of home ownership, it is essentially because of the wider issue of supply and house prices rather than the absence of what has been a pretty effective product that has worked very well for those who have purchased. This is a crucial point in our debate and in how we think about the amendment.
That set of products, Help to Buy and Mortgage Guarantee, was introduced very quickly and very well, partly through the skills of the department and the Homes and Communities Agency but also because they were building on existing products that involved equity loans. Starter homes is an entirely different product because it does not give people a loan linked to the value of the property; essentially, as the noble Lord, Lord Best, has said, it gives them a significant cash benefit. When you give people cash benefits of such generosity in this form, you are likely to see distortions of the market and issues of fraud. That is a logical consequence. The reason why we could be confident about equity loans not creating the same problem was that they were a loan that the individual would ultimately pay off, rather than getting a cash gain. This should drive and inform all our thinking on this product.
I have talked here about the issue of what this product is and why there are concerns about it, but we should also work harder on the issue of who benefits from this product. I am very fortunate to have had some advance information from a forthcoming publication from Shelter on this, which I think will become the definitive publication on the question of who can access this product. I shall give the House the numbers for London. In terms of market sale properties, the estimated annual household income that you would need in order to purchase a market property in London now is £83,000. That makes a market sale property inaccessible to 90% of private renters; on Shelter’s calculation, 90% of private renters in London could not access market purchase properties. For London Help to Buy the figure becomes an income of £68,000, but it is still inaccessible to 80% of private renters. Starter homes, at the medium price for houses in London, not at the cap that has been talked about, requires an estimated annual household income of £62,000 and in fact is inaccessible to 70% to 80% of private renters. Shared ownership scores better but is still an issue because of difficulties in accessing mortgages, and you have to pay the rent on the bit that you do not own. You would still have to have an annual household income of £38,000, and in London it would still be inaccessible to 68% of the population.
I give noble Lords all these figures to put it beyond doubt that, at least in London, those who will benefit from this gift are a very small proportion of private renters. As we have heard, outside London the position is much more complex but, in summary, in the areas where there is high demand, such as the south-east, the east and the south-west, it would be reliably available only for those who were high earners—that is, in the 70th percentile. It would be out of reach in those high-demand areas for people on average incomes; and, in fact, for virtually the whole of the country, those who are on low incomes will not be able to access the starter homes product. It is crucial to have this sense of how big the gift is and who will be able to benefit from it.
We should be clear that, unlike Help to Buy, which could be funded through financial instruments, this effectively requires direct cash from government—either in the form of a direct grant to housebuilders or of benefits forgone in relation to affordable housing. Effectively, as taxpayers, we are directly paying for the full cost of this subsidy.
This amendment does not wholly address all the issues that I have raised. It is arguable that a better route for the Government to have gone down would have been to improve and tweak Help to Buy, as they are now doing in London, rather than to introduce a wholly new product that requires direct government funding to make it work. However, we are where we are; it is in the manifesto and we have to accept it.
The amendment does address quite a few of the problems. First, as my noble friend Lord Best said, it can address dead weight. You are not giving people something; they only have to wait five years to get the full benefit from it. It will prolong the period in which they would have to wait to get that benefit. Potentially, going for in perpetuity would mean they would not gain it at all.
Secondly, it creates a genuinely differentiated product. This is a big issue for the housebuilders because they say, “On one site over here we have built no starter homes; on another site over there we have built starter homes. Which are people likely to go for”? It is absolutely clear. So you can create a genuinely differentiated product. It is a lot fairer. You do not simply give a huge amount of money to people already on higher incomes. As my noble friend Lord Best said, you can hold the affordability for a much longer period—potentially in perpetuity.
It creates what I would call a tradeable product. If somebody chooses to leave after 10 years—according to the amendment we have tabled—then they would effectively give up or pay over half of the 20%, based on the market value at that point. That money could go into the local authority and could provide it with an incentive—which the Government are seeking—to support starter homes. It creates a direct financial link and it repays at least some of the money that the Government have put in to making this scheme work.
Given we are where we are with starter homes, in my view this is a massively better way of delivering them. It is fairer, a more distinct offer and could genuinely address a need that might be out there. I want to ask the Minister why we have not done a
proper options appraisal on the option of 20 years tapered over the period, or indeed in perpetuity. It would help the Committee if noble Lords could see a proper cost-benefit appraisal of these alternatives.