Starter Homes: where do I start?

In March 2016, we reported on the detail of the Starter Homes Regulations Technical Consultation. Since then, we have received a number of queries from clients seeking to establish the practical realities of the starter homes regime.

Whilst much of the detail remains subject to further clarification, we address below some of the FAQs arising from the consultation.

Are starter homes ‘Affordable Housing’?

Whilst debate continues about the affordability of starter homes, this question concerns the definition of ‘Affordable Housing’ in the National Planning Policy Framework and whether starter homes come within it.

Currently the answer is no. However, the government has consulted on amending the definition to include a fuller range of products, including starter homes. If made, this amendment would suggest that starter homes should:

• be considered as a form of affordable housing equivalent to more traditional products (such as affordable rent and shared ownership); and
• count towards local plan affordable housing requirements.

Are starter homes to be provided in addition to traditional affordable housing or instead of it?

This is a key area where further guidance and clarification is required. Assuming a local plan policy requirement for 30% traditional affordable housing, will the imposition of the 20% starter homes requirement mean:

• that only a further 10% of policy-compliant affordable housing will be required? This appears to be the thinking of the majority of commentators, but is not necessarily the government’s view.
• that 30% of policy-compliant affordable housing will be required in addition to the starter homes requirement? This would appear to be an unrealistic starting point which would be susceptible to viability arguments.
• that the 30% policy requirement will be reduced according to the cost of delivering 20% starter homes compared to a policy compliant affordable product? Whilst there remains some debate on the accuracy of the government’s costs analysis, it is anticipated that starter homes will be more profitable for developers. Therefore, some argue that the ratio at which starter homes should replace more traditional affordable units should not be one for one, but based on the comparative cost of delivery. Viability permitting, this would result in the overall provision of affordable housing (including starter homes) increasing.

In the absence of clear government guidance, our view is that local authorities will continue to seek as much policy-compliant traditional affordable housing as possible. These requests will be backed by evidence of need from the local plan evidence base and, as a consequence, the actual level of affordable housing provision will be determined by viability on a site-by-site basis. Whilst perhaps the fairest approach, if protracted viability arguments become commonplace, the starter homes regime is unlikely to achieve its goal of delivering 200,000 homes by 2020.

In terms of viability, the consultation also makes clear that the 20% starter homes requirement cannot be reduced unless all other affordable housing contributions have been reduced to nil. Therefore, it is evident that starter homes will take priority and other types of affordable housing will face the squeeze. This change in policy could mean that local plans, CIL charging schedules and housing market assessments all need to be reconsidered.

What is the minimum percentage of starter homes and will this vary between regions or sites?

Whilst this remains subject to the outcome of the consultation, the government’s starting point is that a 20% starter home requirement should be imposed uniformly across the country on all sites which:

• comprise 10 or more units; and/or
• consist of 0.5 hectares or more; and
• are not specifically excluded (certain types of development, such as care home development, are expected to be exempt from the starter homes requirement).

The consultation notes that a greater requirement, a lesser requirement and a varied requirement based on regional differences in viability were all considered. However, on balance, the government felt the best proposal was a single national minimum requirement of 20%. The consultation also makes clear that this requirement may only be reduced on viability grounds in tightly defined circumstances.

Whilst this is the government’s current approach, the Housing and Planning Act 2016 does provide the Secretary of State with flexibility to apply different requirements to different types of residential development and to different areas. Therefore, even if a uniform approach was adopted in the first instance, there would remain scope for change in the future. More detail on viability is also expected to be contained in the forthcoming regulations.

How does the percentage discount relate to the price cap provisions?

A starter home cannot be sold for more than the price cap – currently £450,000 in Greater London and £250,000 elsewhere. Therefore, unless and until this price cap is amended, this will be the maximum price at which a starter home can be sold regardless of how much percentage discount to market value this equates to. The required discount for a starter home is at least 20% of the market value.

The need for some flexibility is recognised by the government in the consultation (albeit briefly). Therefore, the suggestion is that where the discount will be substantially greater than 20% and this is likely to impact on viability, it may with the agreement of the local planning authority, be possible to provide a commuted sum in lieu of on-site starter home provision.

In response to these proposals, developers have raised two key points:

• that the price cap must keep pace with the market and be subject to regular (annual) review; and
• that there should be a defined point (i.e. a maximum discount) after which the starter homes requirement may be satisfied by payment in lieu of on-site provision.

Clearly, the government will need to give further consideration to these issues in order to strike a balance between delivery and the additional administrative burdens that could be placed on local authorities. If a local authority is required to agree and spend all commuted sums received toward the provision of starter homes elsewhere (and presumably within its administrative area), it may be reluctant to accept such payment if it doesn’t have a suitable alternative site in mind.

How will starter homes be valued?

A number of valuation questions continue to cause headaches for developers and mortgage lenders alike. For instance, it is not clear what people will be willing to pay for starter homes, how values will be benchmarked and how the temporary discount/restriction will be treated.

As the starter homes requirement looks sets to change the risk profile and cash-flow of residential development, with individual sales to first-time buyers replacing upfront bulk transfers to registered providers, it is crucial to the effectiveness of the starter homes regime that these concerns are addressed as soon as possible.

Please contact the Osborne Clarke planning team if you require any further guidance on this developing area of law.