The huge financial hurdle facing first-time home buyers has been with us for decades, and just keeps getting worse and worse. Everybody knows this by now. But so far, a solution has eluded us. This article will argue that we now, at last, have the basic regulations in place to create a solution.
An issue that just keeps getting worse and worse
Let’s first step back and try to understand how serious this crisis has become. The UK is a rich country. Nearly all of our essential human needs – food, water, clothing and medical care – are either free, or have been steadily getting cheaper relative to average earnings. In terms of these essential needs, we are now better off than we have ever been. Take food for example. In 1974, we spent on average 24% of our income on food. By 2016, this had gone down to 10.5%.
It should be added, of course, that we currently face a spike in the prices of energy and food, mainly due to the Ukraine crisis. But this doesn’t change the fact that the long-term trends have, for some considerable time, continued steadily downwards.
If the same were true of all of our essential needs, we could work less, and have more leisure time. Or we might choose to work just as hard, but have more disposable income available. But there is one exception that messes things up, namely the essential human need for shelter [or “housing”]. That particular essential need has, for decades, bucked the trend. Housing has been getting steadily more expensive, relative to average earnings.
In 1980, home buyers had to spend, on average, 4.4 times average earnings to buy a home. By 2012, this figure had risen to 5.6 times. Now, it has reached a staggering 9.1 times. This is the extent to which the mismatch just keeps getting worse and worse.
Look at how this has impacted deposits. In the 1990s, a first-time buyer couple on a low to middle income, saving 5% of this income each year, would have enough for the average deposit to buy their first home after three years. Now, it would take them 24 years.
The impact on the younger generation has been dramatic. In the early 1990’s, 67% of 25-to-34-year-olds owned their own home. In just twenty years, that figure has now halved, down to just 38%. By 2025, the figure is projected to be 26%.
How did we get into this absurd situation?
On the face of it, this seems totally crazy. However, the reason is simple. As a society, we have chosen to keep housing supply deliberately rationed. Since the planning laws that came in during the immediate post-war period 1947-1961, supply has not been allowed to keep up with demand. Over the decades since, this artificial “under-supply” has just got steadily worse and worse.
With food and clothing, for instance, if the demand increases, then, over time, the supply increases to match it. There are no artificial restrictions on supply. There is no artificial rationing. So, there is no steady upward trend in clothing prices relative to earnings. On the contrary, competitive markets ensure that, over the long term, steadily improving efficiencies in production and supply get passed on to consumers.
If this were also the case with housing, we could now meet all our essential needs and work fewer hours. But we don’t. Instead, we work just as many hours as before. Then, we use the extra money earned to bid up the price of the artificially rationed housing. And because of the continuing under-supply, the price just keeps getting pushed up higher and higher.
The issue is not that the cost of agricultural land has shot up hugely, relative to earnings. It has not. And the issue is not that we are short of land to build on. We are not. Only around 2% of land in England is covered with buildings. The issue is purely one of deliberate rationing.
One indicator of the impact of this deliberate rationing is that the average price of agricultural land in England, Wales & Scotland was, in 2021, around £15,000 per acre. The latest official figures for land values for land with planning permission are for 2019. Land values varied according to region, from £370,000 per acre in North Lincolnshire to over £7m per acre in Home Counties areas like Guildford and Brighton, and even higher, of course, in Greater London itself. This huge uplift in land value is entirely a measure of the artificial scarcity created by our planning system.
Imagine what it might be like if it were possible to buy a home for marginally more than it costs to buy the agricultural land needed, and then build the home on it. No more deliberate artificial scarcity. Just like with food or clothing, as the costs of construction were reduced by improved efficiencies, so long as the competitive market were left to function, then homes could actually become steadily more affordable, relative to earnings. The result could be that, if we wanted to, we could work less, and still have enough to meet our needs. Imagine that!
Why haven’t we fixed this yet?
The solution seems simple. Let’s just agree to stop the deliberate rationing of housing land. Let’s agree that it makes much more sense to allow supply to keep up with demand. Unfortunately, there is a catch. If we do that, then every household that has already chosen to invest their hard-earned cash into their own home will see the value of that home fall. They will not be happy, and will vote accordingly when they next get the chance.
That is why no government has been willing to fix this. No government has been willing to risk losing the votes of those millions of home owners who would lose out. Instead, they have opted for “sticking-plaster fixes,” mainly in the form of subsidies to first-time buyers. The problem is, of course, that the impact of these subsidies is that home buyers have even more money to keep bidding up the price of housing. So, the mismatch between house prices and earnings just keeps getting wider and wider.
At last, there is light at the end of the tunnel
Recently, the Government has come up with yet another initiative, the First Homes Scheme. But this one is fundamentally different. This is not just another price-inflating buyer subsidy. In simple terms, First Homes are new homes which are sold to first-time buyers at a hefty percentage discount to current market prices, set at a minimum of 30%. Later, when these buyers eventually come to sell these First Homes, that same percentage discount has to be passed on to the new owners, but based on the market valuation at the time of on-sale. And these new owners must themselves be first-time buyers.
The First Homes Scheme enables would-be first-time buyers to get themselves on that elusive “housing ladder.” For a few years, their mortgage payments should be at least 30% below what they would have been without the scheme. That should allow them to save for an increased deposit, when they eventually decide to move up to a larger second home at full market price.
First Homes can be bought and re-sold without that dreadful scarcity premium. They will stay significantly below the inflated scarcity prices, and will stay that way for ever. The result will be that there are now two distinct housing markets.
The existing market will continue much as before. The scarcity prices that existing owners have already sunk into their homes will largely continue. For those buyers who are not first-time buyers, or who are willing to pay more in order to get more choice, there will be little change. However, for would-be first-time buyers who want to get on the housing ladder, and who find themselves a First Home, suddenly buying their own home has become much cheaper, relative to earnings. For them, the scarcity premium has been drastically reduced.
What this means is that existing home-owners should not be adversely affected, certainly not to any significant degree. So, the political costs of this major reform should be manageable. This scheme promises the best of both worlds: on the one hand, more reasonable housing costs for those who currently can’t afford to buy their first home; and on the other hand, no significant adverse impact on those who have already invested in inflated scarcity prices.
So far, a cautious and limited start
The First Homes Scheme is a radical departure. So, to start things off, the Government has been understandably cautious about keeping it fairly limited. The mechanism used in order to make these heavily discounted new homes financially viable has also served to keep this initiative limited. Typically, First Homes have been forced onto developers, on the basis of a “tax” that can be imposed by local planning authorities, on a totally discretionary basis, as a price to be paid by the developer for the privilege of getting permission to build new market-price homes.
This “tax” is called a Section 106 Obligation. Usually, this S.106 Obligation requires the developer to include in the proposed development a certain number of “Affordable Homes.” Depending on local conditions, these Affordable Homes will usually be a mix of homes rented at below market levels, plus Shared Ownership Homes. Now, First Homes can be included in the mix. Typically, there will be 20-30% of Affordable Homes within a development scheme. As a result, First Homes so far represent a tiny proportion of new homes being built.
Since the supply of First Homes is well below the potential demand, access to these homes has to be rationed. The local authority therefore imposes additional rationing criteria, beyond just limiting the scheme to first-time buyers. For instance, that these homes may only be purchased by local people, who want to stay in the community, or that they are only available to key workers such as nurses or police officers.
The result of this reliance on the S.106 “tax” as the mechanism which makes First Homes financially viable, is that the First Homes Scheme has so far got nowhere near reaching its potential to create a real solution to the first-time buyer crisis. And the S.106 “tax” may well soon be scrapped, eliminating this current route to making First Homes financially viable.
There is another way, and the enabling legislation is already in place
Since December 2021, however, there now exists the possibility for local authorities to allow First Homes to be built on land not actually allocated to housing within the Local Plan. These are called Exception Sites. This is a highly significant move, since these sites normally cost the developer significantly less than the price of land with Planning Permission for building market homes.
What this means is that the significantly lower cost of the land becomes the mechanism by which First Homes become financially viable, rather than the S.106 tax. This was the mechanism that enabled garden cities like Letchworth to be developed before the post-war planning reforms. It worked well then, and it can work well now.
The challenge now: scaling up to “First Homes Everywhere.”
Within five years, the objective should be to make discounted First Homes available everywhere in the country. Every household wanting to get on the home-ownership ladder, even if the household consists of two people on the National Living Wage, should be able to, by purchasing a heavily discounted First Home. And this should be within reasonable travelling distance of where they want to work, or near to friends and family. And their monthly mortgage should not absorb more than 30-40% of their joint net income.
Such an objective is finally within reach, thanks to the First Homes and Exception Sites legislation. What is needed now is for the whole thing to be scaled up. Currently, many of the initiatives for creating Exception Sites come from “Community Led Development” [CLD]. In other words, local part-time, unpaid volunteers get together, and put together a scheme which then garners the support of the local community. It provides Affordable Housing to local people, and typically adds in other benefits to the community, like a new village green, a ring road, or a new GP surgery. In addition, the local community is likely to be more sensitive to any potential negative environmental impacts from any new housing development.
In this way, such initiatives build local support, and as such, become acceptable to local councils. Quite the opposite of what local councils typically face when a commercial housing development is proposed – huge opposition from local voters. This volunteer route is to be commended and encouraged. However, the reality is that, on its own, this route cannot create the scale required to achieve the result needed.
For Exception Site planning permission to be granted, what typically matters to the local council is that two conditions are met. First, the scheme should have broad local support, and second, it should provide clear benefits to the local community, primarily by making Affordable Homes available to local people who want to stay in the area.
These two conditions do not require local unpaid volunteers to be the ones who take the initiative, although that, so far, has been the typical route. Other players need now to be encouraged and incentivised to take the initiative: land-owners, architects, estate agents, house-builders and others. We need all these players to be actively searching out opportunities, and then involving parish councils and the local communities, as soon as they have found opportunities of interest.
To speed up this process, and get us the scale we need within five years, incentive packages would really help. In East Cambridgeshire, grant funding is made available to community groups, in order to bring in outside expertise, organise village meetings, and undertake local housing needs surveys. And to incentivise the smaller local house-builders, the ones who have the local connections, how about a credit guarantee scheme, modelled on the Government’s Export Credit Guarantee Scheme, to help them raise the finance required to make a scheme happen?
If we encourage and incentivise all these various players, then within five years, we can finally solve the first-time buyer crisis. At last, we have legislation in place which puts this within our reach.
- Paper by “Which?” – 23 November 2019, “See how food prices compare to thirty years ago, and you might be surprised.”
- Daily Telegraph, “House price boom pushes affordability to record low,” August 11, 2021, updated with data from the House of Commons Library Briefing of March, 2022, “What is Affordable Housing?”
- “Fixing our Broken Housing Market,” Government White Paper, 2017.
- PWC, UK Housing Market Outlook [annual]
- Savills Farmland Values Survey, 2022.
- Ministry of Housing, Land Value Estimates, 2019.
- The concept of a housing market split in two is not new. It has worked for many years in Guernsey. Local people can buy on the Local Market. Others have to buy on the much more expensive “Open Market.”
- See “Michael Gove paves way for council housing explosion,” Daily Telegraph, April 16, 2022.
- For instance, in a recent development, the agricultural land was worth around £10k per acre. Land inside the Local Plan “envelope,” available for market homes, was selling for around £900k per acre. The Exception Site was purchased for around £100k per acre. For more on this, see the section on East Cambridgeshire in the companion website to this article: www.FirstHomesEverywhere.com.