Successive governments in the UK have followed policies to encourage home ownership, particularly amongst younger, potential first-time buyers.
Indeed, most developed countries use tax policies, interventions in financial markets, or other methods to encourage home ownership.
Much of this support for home ownership has to do with social objectives, partly as home owners are deemed to be more responsible, invest more in their local area and engage more in community life.
Of course, another reason home ownership is promoted is because it creates an asset for individuals to invest in and accumulate their wealth.
But, recognising that home prices continually rise over the longer-term, governments have long debated providing so-called “affordable housing” by subsidising the entry cost of many first-time buyers into the property market.
Yet, with the significant increase of modern, better designed and equipped rental properties thanks to continued growth in the BtR sector, many potential first-time buyers, especially amongst the Millennial generation may no longer be potential buyers!
So, where does this leave the plans by the UK government for First Homes as outlined in the Guidance paper published on May 24th, 2021 by the Ministry of Housing Communities and Local Government?
Well, first let’s have a look at the First Homes scheme and what it’s all about.
What is a First Home?
First Homes are considered to meet the definition of “affordable housing” for planning purposes and are discounted market sale units, subject to the following conditions:
- their prices must be discounted by a minimum of 30% against the current market value. Local authorities and neighbourhood planning groups have the discretion to require a higher minimum discount of either 40% or 50% if they can demonstrate a need for this;
- only people meeting the eligibility criteria for First Homes may buy them;
- a restriction will be registered on the property title at the Land Registry to ensure this discount is passed on at each subsequent title transfer; and
- the first sale must be at a price no higher than £250,000 (or £420,000 in Greater London); local authorities cannot set price caps higher than these national caps. The price cap applies only to the first sale and not to any subsequent sales of any given First Home;
- a developer should be able to show that the homes they intend to sell as First Homes will meet the above criteria.
The UK Government will require First Homes to account for at least 25% of all affordable housing units delivered by developers through planning approval obligations and conditions.
Who is eligible to purchase a First Home?
A purchaser must be a first-time buyer as defined in paragraph 6 of schedule 6ZA of the Finance Act 2003 for the purposes of Stamp Duty Relief for first-time buyers. They should have a combined annual household income not exceeding £80,000 (£90,000 in Greater London) in the tax year immediately preceding the year of purchase. They also need to have a mortgage or home purchase plan to fund a minimum of 50% of the discounted purchase price.
These national standard criteria will also apply at all future sales of a First Home.
How is the Open Market Value of First Homes established?
Developers need to obtain a valuation from a registered valuer acting in an independent capacity. The valuation should be in accordance with the Royal Institution of Chartered Surveyors “red-book valuation guidance” for new-build homes.
If the First Home is resold in future, the seller will need to obtain a valuation in the same way in accordance with RICS guidance.
First homes should be physically indistinguishable from the equivalent market homes in terms of quality and size. It also has to be ensured that the discount is genuine and not simply a result of lower standards of construction or use of poorer quality materials.
What methods can local authorities use to establish their local requirements?
Local planning authorities have some discretion to offer a higher minimum discount, lower price or income caps, or local connection/key worker requirements in an effort to make the scheme work well in their area.
Local planning authorities are also required to establish the development requirements, but these will depend on the individual circumstances of each local planning authority. These might include publication of an interim policy statement, or updating relevant local plan policies.
But a big question is how will First Homes’ policy affect the BtR sector?
Briefly, there are two key issues to consider here:
- the better quality of the “product” being offered in BtR projects (as well as superior supporting facilities and amenities), and
- the strength of demand for rental properties due to two key demand drivers in the market.
The better quality of the “BtR product” is not in doubt and, despite the huge growth in the number of BtR projects being developed across the UK and the large supply pipeline in the coming years BtR projects are likely to be supported by two key demographic trends:
Millennials are a “disruptor” in the home rental market
“Millennials” usually refers to people born between 1981 and 1996, now aged somewhere from their mid-20s to just about 40. This generation has been involved in changing or “disrupting” many traditional ideas or ways of doing business—and the way they occupy real estate is no different.
Generally, Millennials:
- have reduced affordability to purchases property, as a result of their high levels of debt, often carried from their university days; renting may be the only option for some;
- prefer to live in urban or city areas where acquisition costs are relatively high and new home supply limited;
- have specific purchase requirements which are hard to fulfil.
- are more likely to delay getting married and having children, two significant life events typically associated with home ownership;
In short, compared to the previous generation, Millennials are less likely to buy their own home.
Increasing numbers of retirees may result in a so-called “Silver Tsunami”
A combination of a significant increase in the number of “baby boomers” retiring and of longer life expectancy means there will be more demand for rentals from this sub-set.
In 2018, 18% of the total UK population was aged 65 years and over, compared with a predicted 24.8% in 2050. Many retirees have a strong preference for renting after cashing in their real estate ownership and BtR can help meet the expected demand. Such retirees are often active adults looking for an urban environment and seeking to rent for flexibility and/or avoid the costs and hassles of home repairs.
This “silver-tsunami” is likely to spur long-term demand for urban or city-based properties, with renters mainly looking for two- and three-bedroom layouts with attractive amenities.
Final thoughts
The combination of changes in demand brought about by Millennials and retirees are changing the way many people in the UK are being forced to think about occupying housing.
BtR investors, developers and operators who are able to create projects which capture the demand from these evolving demographics should be well-positioned to enjoy long-term benefits, in spite of the government’s push to home ownership and introduction of the First Home scheme.
Subscribe
Every Friday we send an email with that weeks published posts. Subscribe to our weekly newsletter to make sure you don’t miss a thing.
