A new year begins, and the housing industry eagerly awaits for the curtains to be drawn back on the Government’s new housing initiatives. Publication of the much-anticipated white paper will bring the finer details to light - and to inevitable scrutiny.
As a parent who has teenage children, it is easy to empathise with the despair that many of this younger generation feels, concerned and worried that they will never be able to break free from the shackles of ‘Generation Rent’ and buy their own home.
Renting is becoming more and more expensive. The latest report from The Office of National Statistics on rental values in the UK highlighted a 2.2% increase in rents outside London. When coupled with a market where demand is high and supply low – as pointed out in a Royal Institute of Chartered Surveyors report from November 2016, identifying that tenant demand continues to outstrip rental property supply outside of the capital - it wouldn’t be unreasonable to expect that this trend is to continue.
Hopefully, the new starter homes initiative will offer some welcome new year cheer to those looking to put their first foot on the property ladder.
Early indications suggest that the scheme will allow people under 40 years old to buy a new property and benefit from a 20% discount. It is thought that this will apply to homes valued at under £250,000 outside London and under £450,000 within the capital. Whilst this is very good news for many and will undoubtedly provide a shot in the arm for the bottom end of the homes for sale market, there still remains the challenge of supporting the large numbers of people who, because of their own personal circumstances, will not be able to take advantage of this incentive.
It won’t help those who are unable to save for a mortgage deposit due to the high rental costs they face. It won’t help those who are on temporary contracts or are self-employed and don’t have three years of accounts and as such, can’t gain access to mortgage funds. It also won’t help individuals who are older than 40, with young families or who have experienced a relationship breakdown and are struggling to find a home of their own, on just one salary. Furthermore, it won’t help people who have previously had adverse or poor credit, either because they simply have little or no credit history or due to a variety of social and cultural reasons.
Taking this broad group of people into account, I suspect that the demand for rental homes will continue to rise in spite of the new starter homes initiative steadily. The scheme will help those who can gain access to mortgage finance, but it doesn’t offer solutions to many of the biggest obstacles that prevent young people moving from renting to buying.
The Government’s Help to Buy Shared Ownership schemes can help those with a very limited mortgage deposit. However, when you compare, side by side, the cost of renting a home with the cost of paying a mortgage and then renting the unsold equity - inclusive of housing association management fees - it can look like a very expensive option.
First-time buyers with limited means will inevitably scrutinise all of the costs associated with the options available to them, choosing the one that will leave them with the most money in their pockets to spend, once the bills have been paid each month. If they can stretch to a starter home and avoid the additional cost implications of a shared ownership property, surely that would make shared ownership a less attractive option and in turn, impact the sales rates of homes provided for this product.
Another first-time buyer incentive – The Government’s Equity Loan Help to Buy scheme – has also been incredibly popular with people who could benefit from a reduced mortgage loan to value ratio, enabling them to buy with a smaller deposit. However, it again has done little to help those with no deposit or who may not be mortgage ready.
Therefore, alongside the new starter homes initiative, I believe that the rent to buy option will become extremely popular in the years to come. When used in conjunction with the Help to Buy ISA, which contributes to boosting the funds that a first-time buyer is saving towards their mortgage deposit, it offers an option for those who simply do not qualify to buy a starter home outright.
The aim is to support the tenant in becoming mortgage ready, helping them to budget, improve their financial health and credit score and become mortgage ready - while also building up the required deposit to buy. There are two ways that this can be done.
One is a discounted rent then buy option, which uses HCA grant funding to reduce the tenants' rental costs by 20% and supports them in using the Help to Buy ISA, to invest these savings into what will eventually become their mortgage deposit.
Prince Bishops Homes offers a different model where there is no upfront discount but can provide a lump sum after four years or more, which is linked to house price valuation. Half of any increase in value over this period is gifted to the customer and can create a tidy sum to be used as a mortgage deposit – or at least part of it.
Both methods require one to one work with these would be buyers to overcome the barriers they face in obtaining a mortgage. Once these are addressed, the rent to buy model opens the option of home ownership to people that other aforementioned first-time buyer incentives, simply do not reach.
Given the detail and by its very definition as a “Starter homes initiative”, we will likely find that most of the properties constructed and allocated to the scheme, will be small two and maybe three bedroomed units as opposed to family homes. It will be interesting to see how this affects the long-term strategy of PLC developers and how this will affect the scope or property mix on large scale developments in the future.