The headlines accompanying this morning’s report by the National Audit Office are pretty stark: not one of the government’s 200,000 Starter Homes promised in 2015 has been built. Behind this lies a long and inglorious story of policy failure, one that illustrates much of what can go wrong between a clever plan being announced and it actually being delivered. I was an observer at the birth, short life and death of Starter Homes – first as policy lead for Shelter, and then as an adviser to PM Theresa May – and saw close up how wrong a policy can go if it isn’t thought through properly.
Like many a cunning policy wheeze, there was a kernel of a good idea in the Starter Homes concept: land that homes can be built on is way more valuable (like, up to a hundred times more) than land that cannot be developed. So when planning permission is granted, huge amounts of value is created – known as “planning gain”. Most of that goes to the lucky landowner and the developer that pushed the planning permission through – but some of it can be captured for public benefits like affordable housing and infrastructure. This is what the planning system does, imperfectly, all the time.
The problem is that the market can generally predict which bits of land might get planning permission in advance, and so the price of those bits goes up accordingly – leaving less to be captured for public goodies. The cunning idea behind the original Starter Homes policy was to convert bits of industrial and commercial land that wouldn’t normally be granted permission for housing into new homes. As the land cost can be easily half of the total development cost, you could make those homes a lot cheaper than normal.
Simple – and in fact, this is exactly what happens on “rural exception sites”: land is released exceptionally to provide affordable housing for local people. So David Cameron felt pretty confident announcing 100,000 of these homes back in December 2014. Nice round number that. It went down so well that they soon doubled it to 200,000 and rushed through the legislation, leaving all the tricky details to be dealt with in later regulations. George Osborne even found £2.3billion to support the programme.
But right from the beginning, two problems crept into this otherwise simple idea. Firstly, the government said developers would be exempted from the normal requirements to provide affordable housing. This meant that Starter Homes would now be built instead of more affordable social housing. So all that extra planning gain would have just gone to the landowner and the developer – and fewer genuinely affordable homes would have been built. This got the developers onside, but destroyed any potential support from affordable housing campaigners.
Secondly, there was a problem with the whole “sell homes cheaply” idea. Couldn’t the first buyers just sell the home immediately at the open market price and pocket the difference? That would be seen as a poor use of public subsidy. Initially, the idea was to require the homeowner to pass on the discount when they came to sell – so if you bought at 20% off the market price, you sell at 20% off too. But ministers worried that this would create a second class of homeowners, who wouldn’t thank them come an election. So they insisted that the buyer would get full ownership after five years.
But this created a new problem: mortgage lenders couldn’t value the homes properly. How much is a home worth now, if it’s sold at 80% today, but will be worth 100% in five years? This isn’t just a problem of market uncertainty: it’s messing around with the most intimate bits of the banks’ lending models. A special panel of lenders and policy wonks (including me) wrestled with this one for ages. The banks were desperate not to seem difficult, as the government had bailed them out quite recently, but they really, really didn’t like having to promise to lend on an untried product with a sketchy policy framework.
So by the time the first Starter Homes should have been coming out of the ground, the entire policy was slowly sinking under the weight of its own contradictions. The Housing White Paper of February 2017 downgraded it from a flagship policy to just part of the homeownership agenda. The funding was allowed to be spent on other programmes. By the time I went to Number 10 in 2018 everyone assumed Starter Homes were dead. Everyone, that is, except the civil servants tasked with drawing up those detailed regulations, who dutifully kept trying to get them out, despite repeated instructions to drop it.
Having witnessed its hopeful birth and difficult childhood, it was my sad duty to turn off the life support on the Starter Homes policy. But the original idea remains basically sound, and if ministers can resist the urge to cripple it with contradictory intentions, something similar may yet be revived. In fact, Community Land Trusts have been building homes like this for many years, helping local people buy a place in some of the most unaffordable parts of the country. Learning from them might be a better place to start than picking a number and doubling it.
Toby Lloyd is the former special adviser to Theresa May and head of policy for Shelter. He is the coauthor of Rethinking the Economics of Land and Housing, which came out in 2017.