First Homes: How will new affordable housing requirements play out?

Julia Mountford and Jonathan Prince from Savills Reading look at the implications of Government’s new flagship affordable home ownership scheme in Berkshire and across the Thames Valley.

First Homes is a new type of affordable housing intended to reduce the barriers to home ownership.

The scheme will enable first time buyers to benefit from discounts of up to 50 per cent of market value – funded by developer contributions that would otherwise provide traditional affordable housing.

New development plans, including local plans and neighbourhood plans now need to take account of the new requirements, with various transitional arrangements in place for both plan-making and the determination of applications.

How will First Homes be incorporated?

A minimum of 25 per cent of affordable homes secured via section 106 agreements will be required as First Homes.  Within the remaining 75 per cent of the total amount of affordable housing, national policy requires:

• Social rent homes as per the development plan (if this requires more than 75 per cent social rent, the 25 per cent First Homes requirement will remain)
• Where other affordable housing can be secured, these tenure types should be secured in the relative proportions set out in the development plan.

What are the key requirements?

First Homes will be discounted by a minimum of 30 per cent of market value, with higher minimum discounts at 40 or 50 per cent required if local need can be evidenced. The discount will be secured in perpetuity and passed on to future purchasers of the property.

The initial sale price, after discount, must not exceed £250,000 (or £420,000 in Greater London).  Purchasers of First Homes must be first-time buyers with a household income not exceeding £80,000 (or £90,000 in Greater London).

First Homes should be the buyers’ only home and they will need to use a mortgage or home purchase plan for at least 50 per cent of the purchase price. Restrictions on letting or sub-letting will apply.  Additional criteria can be set locally, such as a lower income cap or priority for key workers.

How will this apply within Berkshire? 

There is a strong focus on the provision of social rented affordable housing for the majority of authorities within Berkshire, as highlighted below.

Table 1: Affordable housing requirements for residential developments within Berkshire in adopted Local Plans

Note: Where policy requires an increased proportion of affordable housing for larger developments/ developments on specific types of sites such as green field sites, the above table refers only to the triggers for the maximum requirement.

To what extent will First Homes benefit buyers in Berkshire?

Despite the £250,000 price cap, in affordability terms, even smaller First Homes properties could remain beyond the reach of some key workers, such as teachers and nurses. Savills research indicates that over half of households in the South East will have insufficient minimum income to buy an average two bedroom home under the scheme, compared to 32 per cent in the North East.

Given the significant disparity in property prices between UK regions, there could be an argument for introducing regional price caps, similar to those put in place under the Help to Buy scheme.

Support for local young people and key workers is a stated focus of the First Homes scheme, similar to that of the shared ownership tenure.

The First Homes model differs however, in that there is no rent to pay. With competitive mortgage products from mainstream lenders becoming available at up to 95 per cent loan to value, First Homes offer relatively low annual costs, albeit income requirements to access shared ownership are lower than for First Homes, with lower buyer deposits required.

With the discount from open market value being passed on to subsequent future buyers, sellers of First Homes won’t see the full benefit of any capital uplift, meaning less equity to invest in their next property. This could potentially act as a disincentive to undertake significant improvements.

However, the benefit of being able to purchase a property in an area that might otherwise have been unaffordable, could well outweigh any longer term disadvantage.

What are the implications for developers and local authorities?

In order to remain within the price cap, flats and small two-bedroom houses are likely to be the main route in to First Homes in Berkshire.

There are questions over whether this will mean that developers are obliged to provide more flats on suburban and greenfield housing sites or whether local authorities have any flexibility to require different unit mixes on different sites. The requirement to develop larger units would need a greater discount, adding to the viability challenge for developers.

A further consideration is that in the post-Covid environment, people are increasingly focused on the ability to work effectively from home, and have usable outside space. Accommodating these additional requirements requires more land and a greater built area, and again this has an impact on viability, due to the First Homes price cap.

With demand for flats focused more on urban areas such as Reading, discounts greater than the minimum 30 per cent may be required to bring prices within the £250,000 cap and therefore within reach of target buyers.

Savills research indicates that for an average two-bedroom, 700 sq ft property, a discount of 40 per cent would potentially be required in 18 out of 316 local authority areas, including Windsor and Maidenhead, to bring prices within the cap.

This rises to 58 out of 316 areas, including Wokingham, requiring more than a 30 per centdiscount in the case of an average three bedroom 900 sq ft property. The greater the discount required to deliver First Homes, the greater the potential impact on viability.

Viability and delivery considerations of First Homes

The First Homes scheme offers another route to home ownership and security of tenure to those who may otherwise be renting.

This must however, be balanced with the need to deliver homes across a range of types and tenures, with the flexibility to respond to local housing requirements alongside meeting other existing and emerging policy requirements, whilst ensuring developments remain viable.

First Homes are likely to be positioned in value terms between rented tenures at the lower end and shared ownership at the upper end, depending on the level of discount required.

However, with limited supply and voracious demand putting increasing upward pressure on land values in Berkshire and across the Thames Valley, it will be interesting to see how developers and local planning authorities respond.

In the short term, for example, we might find that viability appraisals accompanying planning applications put pressure on less valuable housing types, such as rented tenure, in order to deliver the minimum requirement within the overall affordable housing mix.

In the longer term, there might be changes and challenges to the overall affordable housing mix and tenure requirements in emerging policies.

Developers and local planning authorities alike will be keen that planning policy ensures development remains viable and that all tenures of affordable housing are deliverable, reflecting specific need in a particular area.

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