Starter Homes: an opportunity missed

Yesterday the Prime Minister went to Poole to launch a new starter homes scheme that will deliver 100,000 homes for purchase by first time buyers at 20% below the market value. Beneath this simple consumer-friendly message there is a complex scheme involving several different interventions and changes. In short, it’s half right – and half wrong.

On the positive side, the scheme is a very welcome sign that the government recognises the urgent need to build more homes, and to make them more affordable for families on typical incomes. The idea of offering homes to first time buyers at a discount is also reasonable in principle, as it should prevent speculators and buy to let landlords hoovering up the new supply, while the proposed restrictions on resale will (if designed well) prevent the buyers from simply flipping the homes on at the full market value and pocketing the discount.

The proposals include some bold innovations that Shelter has long called for – particularly around the use of public planning powers to bring additional land forward quickly and cheaply. In this case it is done by extending the principle of “rural exception sites” to industrial land. This technical detail is in fact the heart of what makes the proposals stack up financially – and what enables the government to say that it can be done without cash subsidy.

Paying for it: uplift in land values

By proactively identifying land that would not normally receive planning permission for homes and earmarking it for residential development, planning authorities can create huge amounts of value.

Industrial land roughly triples in value when it receives residential planning permission – creating around £1.5m per hectare overnight – although the exact amount varies widely across the country.  The reason for this is quite simple. Selling homes is a far more profitable use of land (in high housing demand areas) than most industrial or commercial uses.

Industrial to residential planning gain (VOA, 2010)

Area Industrial land value(£/ Ha) Residential land value(£/ Ha) Planning Gain (£/ Ha)
East 740,000 (Cambridge) 2,900,000 2,160,000
East Midlands 500,000 (Nottingham) 1,200,000 700,000
London Outer 2,000,000 (Croydon) 4,037,500 2,037,500
North East 225,000 (Newcastle) 1,300,000 1,075,000
North West 450,000 (Liverpool) 1,500,000 1,050,000
South East 1,000,000 (Oxford) 4,000,000 3,000,000
South West 850,000 (Bristol) 2,200,000 1,350,000
West Midlands 650,000 (Birmingham) 1,200,000 550,000
    Average 1,490,300

In our current broken house building model, this ‘planning gain’ (the increase in value when you get permission to build and sell homes on land) goes to the owner of the land as a windfall profit. This windfall isn’t earned. It simply results from the enormous value of selling homes relative to anything else you can do with a piece of land in area with a housing shortage. Landowners in other similar countries like Germany and Holland don’t benefit from the same enormous pay-outs, but rather share the windfall profit more fairly with the local community in the form of investment in local infrastructure and better quality development.

Clawing some back

At the moment, we claw back some of the windfall profits to landowners by letting local councils impose some taxes on development. So called “section 106” and the Community Infrastructure Levy (CIL) are costs that developers factor in before they buy a piece of land – so they are in effect paid for through a lower uplift in the land value when it gets planning permission for homes.

The drawback of this approach is that the taxes are always up for negotiation by developers and landowners. They argue that these taxes make it harder for schemes to be “viable” as they are a cost. In fact, due to the nature of the land market these taxes are simply reflected in lower land prices. Over the last few years, the ability of councils to negotiate a better deal on behalf of their local community from these taxes has been reduced, as the legislation has been weakened.

But Starter Homes don’t do this

Starter Homes are the perfect opportunity to capture some uplift value for infrastructure or affordable housing, but they don’t do it. Some of the uplift is being used to fund a 20% discount for buyers, but with prices rising at an annual rate of over 10% in England this isn’t much of a cost on development.

Despite having rightly identified a smart way to get more public value out of the land by identifying land proactively, the government is immediately hands most of this back to landowners by scrapping the requirement to provide affordable homes and infrastructure.

This fails to really deliver for ordinary families for a variety of reasons. Firstly, it undermines the ability of local authorities to ensure development is of a high quality and is supported by the services and infrastructure communities need. Secondly it wastes a massive opportunity to increase investment in affordable housing with no cost to the taxpayer.

All that needs to happen to allow some of the uplift to go into affordable housing is for the government to give local councils the usual powers to apply an affordable housing requirement on these sites. It won’t impact on viability at all if done in a clear, upfront and consistent way as it will simply result in lower windfalls for landowners.

What is frustrating is that the policy comes so close to being what we need: a pro-active planning intervention to capture land value and get more homes built for those who need them. A small change can make that happen. We hope the government makes it.