Lenders have cast significant doubts on the Government’s controversial starter home initiative, saying it could easily distort the whole property market.
A total of 200,000 starter homes are to be built over the lifetime of this Parliament and made available at a 20% discount to first-time buyers under the age of 40.
These new homes must be sold at 80% of market value capped at £450,000 in London and £250,000 elsewhere, and cannot be sold on at full market rate for five years.
But the Council of Mortgage Lenders says the scheme is too ambitious, especially when combined with the goal of providing 135,000 shared ownership homes over the same period.
The CML says the combined total would amount to some 112,000 homes per year over the next three years – or more than half the homes expected to be built over that period.
The CML says that it is “highly unlikely” that such a target could be achieved, but if it were, there would be a significant impact further up the property chain.
Buyers of starter homes would need to build up enough equity in their home in order to be able to move up the housing ladder.
The CML, responding to a technical consultation on starter homes that ends this week, said some lenders found the concept too risky.
It also called for a longer period than the five years the Government is suggesting before the home can be sold on at full market value..
The CML said: “We believe that there should be a period of at least three years during which starter homes would be sold at no more than 80% of their market value. This would be followed by a second period of at least five years during which a taper would apply, enabling the home to be sold at an increasing proportion of the market price, moving to 100% over time.
“This would help avoid the potential for disruption to the market caused by buyers gaining a rapid uplift in equity in their homes, and wanting to sell their property to benefit from it. The longer the period at which a home is sold at less than full market value, the less likely a buyer is to benefit from rapid equity growth and the greater the likelihood therefore that individual lenders may decide to support the scheme.
“There is probably a maximum period of perhaps ten years in total, over which a property reverts to full market value – although there are some lenders who would prefer the discount to extend for longer, or even in perpetuity. We acknowledge, however, that this may not be politically acceptable.”
The CML also said the starter homes initiative presents “challenges in valuing property’ which is exacerbated by the sheer scale of the scheme. It calls for the scheme only to apply to sites of 20 or more homes, and should not apply to more than 15% of a housing development.
Even so, it cautions: “On any given housing development, there could be strong demand for homes that are available at a discount, and a consequent lack of demand for properties being sold at the full market price.”
The CML says it is crucial that the scheme is properly monitored.