In its response to the government’s consultation launched yesterday, the Council of Mortgage Lenders raised concerns that one of the unintended consequences of the scheme was the potential for it to create distortion in the housing market.
The CML explained that for the government to meet its combined starter homes and shared ownership target it would need to build some 112,000 properties every year for the next three years.
“We believe that the target of delivering 200,000 starter homes over the lifetime of this parliament is too ambitious, particularly when combined with the goal of providing 135,000 shared ownership properties over the same period. We believe that it is highly unlikely that such a target could be achieved,” it said.
Another worry is that there is lack of clarity in how the initiative, which gives first-time buyers under 40 a 20% discount off the purchase of their home, would run alongside other programmes, such as the Help to Buy equity loan scheme.
It said: “One concern is that this makes it more complicated for borrowers to understand the transaction, and what their equitable interest and obligations are in the property. Some lenders believe that this would make lending more risky.”
Firms have also raised concerns that the potential to combine incentives could deliver a larger increase in the property’s value over a relatively short period. This could boost demand, contributing to instability in property prices.
In its consultation, the government suggests a tapered approach to how a starter home is sold back onto the market. This would allow the property to be sold at an increasing proportion of its market value, to eventually reach 100% no later than eight years after the occupation begins, to ensure homeowners are able to move freely in the market.
The CML said it also favours a tapered approach to the restriction of equity when the time comes to selling a starter home, but suggested that a maximum period of 10 years should apply.
“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. There is probably a maximum period of 10 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.
“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,” it added.
However, the CML acknowledged that its suggestion of a maximum 10-year period may not be “politically acceptable”.
The government’s consultation is open to responses until 18 May.
