Housing and Planning Bill

Written evidence submitted by the London Borough of Islington (HPB 151)

Summary

1. This response is submitted on behalf of Islington Council. Whilst the Council has significant concerns about the housing provisions within the Bill, this response only addresses our particular concerns in relation to the proposed changes to the planning system.

2. Islington Council is proud of its exceptional track record of housing delivery and in particular our delivery of genuinely affordable housing in England’s most densely populated area. We are successful because local communities can see the benefits that house building can deliver. However, we are concerned that the proposals within this Bill will undermine local support for house building and will be to the detriment of ordinary Londoners who are seeking an affordable home.

3. Despite consistently exceeding our housing targets, the cost of a home in Islington is amongst the highest in the country. In the relatively few ‘lower value’ parts of the borough a new one bed flat costs around £500,000 and a two bed flat costs in excess of £600,000. In high value areas new build properties can often cost close to or well in excess of £1 million. It is also worth bearing in mind that the cost of a new home can be significantly higher than this in large parts of Central London.

4. Islington Council strongly supports the principle of enabling ordinary Londoners to buy and rent homes in our borough. However, we believe that most middle income Londoners will be unable to afford any Starter Homes that are built in Islington and similar parts of Inner London. We are also extremely concerned that the delivery of Starter Homes is likely to be at the expense of other genuinely affordable forms of housing.

5. Appendix One (Scenario Testing of Starter Homes in Islington) contains our assessment of the affordability of the Starter Homes product in Islington. This analysis can be applied to other similar parts of Inner London and other high value areas. It indicates that a couple who both earn the median Islington salary of £35,000 would need a deposit of £170,000 to buy a £450,000 Starter Home (even assuming that they could get a mortgage of four times their joint income).

6. A household earning just over £100,000 a year (equivalent to two people with earnings above the 75th percentile in London) could afford a £450,000 Starter Home. This assumes that the occupants of this household can borrow four times their income and can access a 10% deposit. The Mayor of London currently sets an income threshold of £71,000 for a one or two bedroom intermediate home. It is therefore our view that the Starter Homes product cannot be considered to be a form of affordable housing in Inner London. In its proposed form it would fail to provide for the housing needs of the majority of middle income Londoners and would be significantly less affordable than other forms of intermediate housing notably shared ownership. As we also note in Appendix One, the very high private sector rents charged in Inner London make it extremely difficult for middle - income residents to save for the large deposit that would be needed to purchase such a home.

7. Islington Council is therefore opposed to the introduction of the Starter Homes product in its current form because (despite its name) it will be completely unaffordable to most ordinary Londoners. In many parts of our borough, a 20% discount from the market price would simply not reduce the value to £450,000, which is unaffordable in any case, let alone reduce the price to the level which is affordable to the vast majority of first time buyers. To bring the price down to under £450,000, discounts would often need to be much higher than 20%, and such discounts could only be delivered if little or no other genuinely affordable housing is provided. An outcome, where a relatively affluent few would receive a windfall of hundreds of thousands pounds, at the expense of the needs of wider community, is unacceptable. A reduction in the delivery of genuinely affordable housing will deepen rather than address London’s housing crisis.

8. In our submission we propose a number of changes to the Bill that would mitigate the impact of its introduction in Inner London. These changes are summarised below.

· In high value areas such as Inner London, the cap on the price of the home and site specific proportion of Starter Homes should be set at a local level rather than through national regulations; There should be a recognition that some sites in a particular area could deliver Starter Homes which are affordable to the target group, whilst other sites might not be able to do so for the reasons set out above.

· To ensure that Starter Homes go to people who are genuinely unable to afford housing on the open market, the price of Starter Homes should in determined by the income levels of residents in the local area.

· Starter Homes should be secured as such in perpetuity.

9. The Bill sets out a ‘general duty’ for local authorities to promote the supply of Starter Homes. It is totally unclear as to how this general duty will sit alongside other long standing statutory duties including the duties to plan for sustainable development and to meet the objectively assessed housing needs of the local area. We propose changes to the Bill that will clarify how this duty will operate.

10. The Bill also gives the Secretary of State new powers to intervene in plan making and to require that planning permission may only be granted if Starter Homes are secured as part of a development. The Secretary of State will also be given powers to determine the number of Starter Homes that are delivered. These changes give unprecedented powers to the Secretary of State to intervene in plan making and the making of planning decisions. We are concerned that these changes will undermine the plan - led system that provides transparency and accountability to local people, and stability and certainty to developers. In our view these detailed matters are best determined by a local planning authority having had regard to its planning policies, broader statutory duties and other material considerations. We argue that the Secretary of State already has substantial powers to intervene in these matters if they wish to do so.

11. Finally, we are strongly concerned about the proposals to enable ‘permission in principle’ to be granted on brownfield land and we argue that this must not compromise the ability of local authorities to secure high quality, contextual development supported by local communities.

12. Islington Council recognises that there is a pressing need to deliver affordable homes for ordinary Londoners. However, as currently proposed Starter Homes will be unaffordable to most middle income Londoners and we are concerned that delivery of this form of housing will inhibit the delivery of genuinely affordable housing. We therefore hope that the Secretary of State will reconsider the impact that their proposed introduction will have in Inner London (and other high value areas) and will clarify and amend their proposals as we suggest.

13. If the Secretary of State is dissatisfied with the failure of local authorities to plan for and deliver Starter Homes they already have extensive powers to intervene in the plan making and decision - taking process. The Bill gives the Secretary of State further powers to intervene in the process. These additional powers are unnecessary, draconian and contrary to the principle of localism. It is unclear how these powers will operate alongside existing statutory duties and we are concerned that this lack of clarity may slow rather than facilitate plan making and decision making. Our concerns are set out in more detail below.

DETAILED COMMENTS

PART 1 NEW HOMES IN ENGLAND

The price cap, and site specific proportion of Starter Homes should be set at a local level rather than through national regulations, and recognizing that on some sites delivery of Starter Homes should not be sought

14. As drafted, the Bill allows the Secretary of State to amend the price cap via regulations. Implicit in this provision is a recognition that a uniform approach would be ineffective in responding to the substantial variations in house prices and incomes across the Country. However, the proposed approach of setting out the price cap in national regulations simply cannot address the rate of change and often fine - grained nature of the housing market in London.

15. In view of this, the Bill should be amended to enable local authorities and/or the Mayor of London, rather than the Secretary of State, to set out appropriate local guidance regarding price caps and proportion of Starter Homes. These authorities hold the most thorough, detailed and up-to-date knowledge of house prices, incomes and housing need in the local area. This amendment will also ensure that Starter Homes are planned for in a way that makes a clear contribution to meeting evidenced local housing need, as set out in the relevant local Housing Strategies and Plans. This approach is also consistent with the Government’s stated aim of devolving more decision-making power to the local level.

Income thresholds should be defined at a local level to ensure that Starter Homes go to people who are genuinely unable to afford housing on the open market

16. Starter Homes will undoubtedly impact on the delivery of other forms of affordable housing. However, there is currently no safeguard in place to ensure that Starter Homes will be made available to people who could not otherwise afford to get onto the housing ladder.

17. As Appendix One to our submission demonstrates, the shared ownership product has been successful at supporting a diverse range of households into home ownership including households with comparatively modest deposits and mortgages. These households would otherwise be unable to access home ownership on the open market in Inner London. In contrast, our analysis shows that, as currently proposed, Starter Homes costing £450,000 would only realistically be accessible to those with a household income of £100,000 and upwards in combination with a substantial deposit.

18. Restrictions based solely on the age of the purchaser and the maximum property price cannot in themselves ensure that Starter Homes will provide homes for first time buyers who are genuinely otherwise unable to access home ownership. We therefore suggest that the Bill is amended to give powers to local authorities and the Mayor of London to define income thresholds for those households who are able to access the Start Homes product.

Criteria for Starter Homes should be defined locally

19. Because they are being sold at below market levels Starter Homes will inevitably have an impact on the viability of a development (unless sufficient government grant is available). High levels of developer subsidy for Starter Homes could undermine the ability of a scheme to deliver genuinely affordable housing including social housing and intermediate housing. To enable LPAs to plan for housing delivery which is informed by objectively assessed need we believe that the Bill should be amended to allow Local Planning Authorities flexibility to determine discount levels for, and site specific proportions of, Starter Homes in the area through their Local Plans.

Starter Homes should be secured as such in perpetuity

20. We are very concerned that there is no provision in the Bill to ensure that the discount on Starter Homes is retained beyond the first sale. The discounted price of these homes is likely to require a high level of subsidy either from the developer or government particularly in high value areas. If the initial purchasers are able to sell at the full market value they are likely to achieve a significant windfall. The subsidy will not however benefit future generations of people looking to buy a home. We therefore suggest that the Bill should require that any property secured as a Starter Home should remain a Starter Home in perpetuity and that any discount would apply to future sales of the property.

Section 3 General Duty to promote supply of starter homes

The imposition of this duty will undermine the plan led planning system

21. The imposition of a statutory duty on local planning authorities to carry out their planning functions, both plan-making and decision-taking, with a view to promoting the supply of a particular type of home as defined nationally, is unprecedented in the British planning system and goes well beyond the stated intention of the Government to build more homes that first time buyers can afford. As drafted, the duty would undermine a raft of existing legislation and fundamentally prioritise Starter Homes as the national development priority, despite there being no evidence to support this elevated status beyond high-level statistics on falling rates of home ownership over the preceding decade.

22. Under existing legislation in the Town and Country Planning Act 1990 (TCPA) and the Planning and Compulsory Purchase Act 2004 (PCPA), Local Planning Authorities set out local policies relating to the development and use of land in their area in their development plan. This plan must be based on robust local evidence, and decisions must be made in accordance with this plan unless material considerations indicate otherwise. In contrast, the Bill’s approach to Starter Homes represents a significant centralisation of policy development. Equally worryingly, it also ignores the existing legislative context and national policy requirement for local planning authorities to meet the objectively assessed needs of their area within the broader context of achieving sustainable development. This appears to be contrary to the Government’s wish to avoid delay and uncertainty within the planning system.

23. The imposition of the duty as worded will undermine the established ways of delivering new housing. By placing undue priority on an initiative that in practice will help only a lucky few this duty will undermine the principle of sustainable development and the balance that planning authorities are required to give to the different social, economic and environmental issues in their area. A more proportionate approach to the duty would still allow Starter Homes to contribute towards increasing the range of home ownership options, but would avoid the potential conflict between the need to plan for sustainable development as set out in Section 39 of the PCPA 2004 and meet the statutory duty to deliver Starter Homes.

24. To redress the wholly unprecedented priority afforded to the delivery of Starter Homes and to pre-empt potential conflicts with the wider objectives of plan-making and decision-taking set out in legislation, the Bill should be amended as follows:

a. An English planning authority must carry out its relevant planning functions with a view to contributing to the achievement of sustainable development as informed by local evidence, including with a view to promoting the supply of starter homes in England.

Clause 4 Planning Permissions: Provision of Starter Homes

25. As with the imposition of a statutory duty, the proposed level of centralisation in decision-making within this clause is unprecedented in the UK planning system. If a general duty is to be imposed – preferably in line with the amendment that we have suggested above – this would be enough to ensure that local authorities support delivery of the Starter Homes product.

26. Imposing a top-down target for any planning decision involving residential development is a blunt approach that would fundamentally place decision-making powers on critical local issues with Central Government. In seeking to modify Section 70 of the TCPA 1990 to refer to the regulations proposed in Clause 4 the Bill would introduce a much more onerous requirement regarding decision-making than currently exists within Section 70 subsection (3). Unlike the Acts currently referred to in 70(3), which set out clearly those matters that must be taken into account and in what way when considering whether to grant planning permission, the Bill provides only that regard must be had to forthcoming regulations, which the Secretary of State may issue at will.

27. Of further concern is that it is stated that the Regulations may require that planning permission may only be granted if a planning obligation is entered into to provide a certain number of Starter Homes or to pay a sum to be used by the authority for providing starter homes. This centrally prescribed approach does not take account of local variations in housing need and, critically, the ability of middle - income groups to afford such homes.

28. The explicit reference to the acceptance of a cash payment in lieu of on-site provision of starter homes in 4(4) also directly conflicts with the priority that national policy places on meeting affordable housing need on site. Should this approach be taken forward on a national level, this would be a fundamental and damaging reversal of the priority afforded to achieving mixed and balanced communities. The economics of housing provision differs substantially across the country, and therefore the economics of delivering starter homes also varies. An in principle acceptance of a payment in lieu will not deliver the Government’s stated objective of ensuring that ‘starter homes become a common feature of new developments across England’ [1] .

29. The most effective way of achieving this objective and delivering the increased flexibility in terms of affordable housing provision sought by the Government is for local authorities to clearly set out in their local plans how starter homes can be viably delivered alongside the other forms of affordable housing needed in their area, taking account of local circumstances. This will ensure that developers can be confident that in bringing forward schemes which include starter homes, they will not be required to meet centrally imposed targets which are not appropriate to the circumstances of their scheme. This would also avoid the over-concentration of starter homes in an area when it is more economically advantageous to deliver them, which could negatively distort the market. We therefore argue that Subsections (1) to (6) inclusive of Section 4 should be deleted in their entirety, and Section (7) should be amended to substitute section 70 of the 1990 Act to additionally refer to (d) section (3) of the Housing and Planning Act 2015 (general duty)

Section 6 Compliance Directions

30. Local Plans are subject to a rigorous public consultation and examination process, and the Secretary of State already has powers to intervene. This clause would however give further power to the Secretary of the State to cancel policies in adopted Local Plans without consideration of the impact that this may have on other policies, including those promoting the supply of new housing, or the national objective of achieving sustainable development. There is no explanation of what an ‘incompatible’ policy would be, and the explanatory notes make no mention of transitional arrangements or how the delays to plan-making that would inevitably arise from this clause would be moderated.

31. The introduction of such a power through primary legislation would clearly undermine the established process for local plan making and brings into question the Government’s stated objective of devolving power to the lowest appropriate level. Local plans, as set out in the NPPF, should meet the full, objectively assessed needs for an area. It is clear that the intention is that starter homes should be prioritised above all other local policy requirements/priorities for affordable housing. Not explicitly stating this in the primary legislation is potentially misleading and this approach would embed a fundamental conflict in the legislation. This needs to be resolved at the primary legislation level rather than leaving critical issues such as this to secondary legislation.

32. In devising a mechanism to comply with the duty it must be ensured that Starter Homes are embedded in the process in an integrated carefully planned way, not on an ad hoc basis as would be achieved by a compliance direction, and critically that the flexibility to deliver other forms of affordable housing is retained. This is necessary to ensure that local plans can meet objectively assessed need and that developers have the certainty that they can bring forward the most suitable mix of tenures for their scheme/area.

33. Attempting to achieve a national objective through the issuing of compliance directions would remove the ability of local communities to have a real say in the decision-making process, with the likely result that new development would be resisted by local people because it would seek to deliver top-down targets at the expense of legitimate local objectives and concerns.

34. The Bill seeks to introduce a general duty which would require local authorities to promote the supply of Starter Homes, and existing legislation already gives the Secretary of State powers to intervene in the plan-making process (and further powers to intervene are proposed in Section 97 to 99 of this Bill). It is therefore unnecessary to transfer further power to the Secretary of State to dictate local policy and Section 6 should be deleted in its entirety.

PART 6 PLANNING IN ENGLAND

Clause 102 Permission in principle for the development of land

35. We are strongly opposed to this provision because it further undermines the plan led system and centralises planning powers away from local authorities who are democratically accountable to local communities.

36. Notwithstanding these concerns it is our strong view that permission in principle granted via a national development order should be limited to the land use only. This will give local communities and developers certainty regarding locations for development and acceptable land uses whilst ensuring that the legitimate planning considerations that are fundamental to the assessment of a proposal at a local level are properly and thoroughly assessed. The inclusion of any more detail than land use and indicative capacity figures would be overly prescriptive and would undermine the stated aims of permission in principle.

37. It is our reading of (3) that applications for ‘technical details consent’ must be considered against the relevant development plan policies, other than in relation to the principle of use that is established through the permission in principle. However this is unclear in the drafting of (2ZB).

38. This consideration is necessary to ensure that the permission in principle process does not result in development that is of a lower quality than that delivered through the outline or full planning permission process. Details such as design quality, residential amenity, affordable housing and other requirements typically set out in relation to residential development in development plans are critical to the success of housing and must not be undermined by the permission in principle process.

For the avoidance of doubt, it should therefore be explicitly stated in new subsection (2ZB) that the technical details consent process encompasses consideration of all relevant policies as set out in the development plan.

APPENDIX One: Scenario Testing of Starter Homes in Islington

Table 1 Shared Ownership Sales in London 2013/14, recorded on CORE

Total number of sales

2,342

Median deposit

£14,000

Median mortgage amount

£79,200

Age breakdown of household head

18-29

768

30-39

1,070

40-49

296

50+

125

Age not recorded

83

Income (joint income of household head and partner, if applicable)

< £20,000

3%

£20,000 to <£30,000

20%

£30,000 to < £40,000

34%

£40,000 < £50,000

22%

£50,000 or more

20%

Existing Analysis

In August 2015, Shelter published research [1] identifying those areas of the country where Starter Homes would be affordable to those on the average wage and the national living wage. Their research considered areas to be ‘unaffordable’ where a 20% discount on the median house prices would exceed the Starter Home price cap, which in London is £450,000. Islington like much of Inner London was identified as ‘unaffordable’.

To further understand the characteristics of first-time buyers who would be able to access starter homes in Islington, we have carried out further research looking in more detail at local incomes and local lower quartile new-build house prices.

Local Incomes

The latest data from the Annual Survey of Hours and Earnings (ASHE) is from April 2014, as follows:

· London median gross weekly wage of £660.50. This equates to gross annual earnings of £34,346 [2] per annum for an individual, and £68,692 for a two-person household with both individuals receiving the median London wage.

· The Data Store from ASHE puts Islington total full-time weekly median gross earnings at £679.30 [3] , higher than the London median. This equates to gross annual earnings of £35,324 for an individual, and £70,647 for a two-person household with both individuals receiving full-time median Islington gross earnings.

· As male and female gross weekly earnings differ (£671.70 per week as compared to £559.30 per week), a two-person household composed of one male and one female earning their respective gender’s gross weekly earnings would have gross annual earnings of £64,011.

· The level of earnings for a two-person household is broadly equivalent to the Mayor of London’s threshold for access to intermediate housing of a maximum household income of £71,000 for a one or two bedroom unit. Households needing a 3-bed or larger unit can have a maximum income of £85,000.

Affordability Analysis

A generally accepted definition of affordability is that rent should not exceed 35% of net income. The following are some scenarios relating to the affordability of private rents for households with two earners and no children at the median income across London, and in Islington.

For the below scenarios, private rents data is sourced from the Valuation Office Agency at https://www.gov.uk/government/statistics/private-rental-market-statistics and presented as £ per calendar month, based on the year to 2015Q1

Location

Mean

Lower Quartile

Median

Upper Quartile

Inner London

£1,876

£1,235

£1,560

£2,102

Outer London

£1,308

£925

£1,200

£1,473

Islington

£1,900

£1,387

£1,731

£2,242

A. Two incomes, no children, London median earnings

In 2014 the median gross annual earnings in London was £34,346 [4] . A dual median income household would be able to afford £1,362 rent per month. For this household only the lower quartile rent in Inner London is affordable leaving £127 per month to go towards saving for a deposit and stay within the 35% of net income threshold.

However it is very unlikely that enough properties at the lower quartile exist to satisfy demand. Such a couple could ‘afford’ the median rent in Outer London of £1,200, but would not able to comfortably afford the median Inner London rent of £1,560, facing a £198 per month shortfall.

Due to the lack of supply or the very low quality of lower quartile rented dwellings, most households are likely to go above the 35% affordability threshold, often significantly above. This compromises their ability to save for a deposit, locking such households into expensive and insecure private rented accommodation. The median Inner London rent would cost this household 40% of their net income.

B. Two incomes, no children, Islington median earnings

Median earnings for residents of Islington are higher than for London as a whole. The median gross annual income is £35,324, compared to £34,346 in London as a whole.

The median rent in Islington is unaffordable to a household comprised of two people earning the median Islington income. The median rent swallows up 43% of household income of two people both at median earnings for Islington residents. Such households face a £330 per month shortfall between spending 35% of their net income on rent and the actual median rent of £1,731. This £330 per month is money that could be used to save for a deposit.

A couple comprised of two median Islington earners with a household income of £70,647 can afford the lower quartile rent in Islington with a surplus of £14 assuming that 35% of their net income is spent on rent.

Given that by definition, we know that these households live in Islington already, this shows that a large number of Islington’s private renters spend an unaffordable percentage of their income on rent, choosing to cut back on discretionary spending and/or saving.

All these calculations apply to couples with no children. A couple with young children is likely to need to need to spend money on childcare or have one individual work part-time, drastically reducing their income or raising their essential outgoings.

Table 2 Shortfall/surplus of rent against 35% benchmark

Rent Level

Mean

Lower Quartile

Median

Upper Quartile

Two person male and female household on Islington male/female median earnings

Inner London

-£606

£35

-£290

-£832

Outer London

-£38

£345

£70

-£203

Islington

-£630

-£117

-£461

-£972

Two person household on Islington median earnings

Inner London

-£475

£166

-£159

-£701

Outer London

£93

£476

£201

-£72

Islington

-£499

£14

-£330

-£841

Two person household on London median earnings

Inner London

-£514

£127

-£198

-£740

Outer London

£54

£437

£162

-£111

Islington

-£538

-£25

-£369

-£880

C. Two incomes, no children, earning above the median

There is no available data for distribution of income by region or local authority, so we have used figures from earnings distribution for the whole UK from the ASHE. For the whole UK, earnings at the 75th percentile were 141% of median earnings. Therefore to estimate 75th percentile earnings in both Islington and London as a whole the median figures have each been increased by 41%. This assumes that both Islington and London have the same income distribution between the 50th (median) and 75th percentiles, the accuracy of which is not known. Using this method, the 75th percentile earning in London overall is £48,428. In Islington it would be £49,806. A two person household earning at the Islington 75th percentile would have a joint income of £99,612.

D. Indicative mortgage calculations for starter homes

We have assumed the Starter Homes product is intended to help first-time buyers on the median wage. However, at the London price cap of £450,000, saving a deposit of even 5% of the purchase price (£22,500) would take many years given the high cost of renting. The £427,000 mortgage needed to pay for 95% of the £450,000 starter home is greater than the £282,589 maximum mortgage loan amount of four times the dual median Islington earnings by £144,911.

Even if in a dual Islington median income household could save up a £90,000 deposit in order to borrow 80% of £450,000, which is £360,000, the maximum mortgage loan amount of four times the joint income is still £77,411 short of the £360,000 that would be required.

A household of two people both earning the median income for Islington residents, living in a property at the lower quartile of private rents, saving 10% of their monthly income, would take 153 months, or just under 13 years, to save a deposit of £90,000. This assumes no contingencies like having children, paying for care for older relatives, unexpected expenses or events. For those paying above the lower quartile in rents, the time taken to save £90,000 will be even higher, and in actual fact may even be impossible given the percentage of income taken up by rent.

High rents make it more difficult to save, and the distribution of median earnings is weighted significantly towards those in the 40-49 and 50-59 age brackets [5] , with the biggest gap between the 22-29 and 30-39 brackets. Therefore it is likely that households that have formed as dual-median earners and have reached that median earnings level are already in the 30-39 age group.

Even if such households could commit to such a long-term savings plan, it is very likely that they would be well over 40 years old by the time they had a sufficient deposit, and would still not be able to borrow a sufficiently large sum to cover the rest of the £450,000 purchase price. This is also assuming that by 2028, £450,000 is still the upper limit on the price of a Starter Home in London, which appears highly unlikely given that residential values in London have increased by 22% since 2010 [6] .

A household of two adults, both median Islington earners, saving 10% of their income and paying lower quartile private rent (an option unavailable for many) could save £21,194 in 36 months. Added to the maximum mortgage loan of £282,589, possibly available at four times their joint income, this would give a theoretical absolute maximum price for a home they could afford of £303,783.

However, reputable online tools such as Money Saving Expert estimate that such a household would only be offered a mortgage of up to £240,000, which added to the deposit of £21,194 would give a maximum purchase price of £261,194. It is worth pointing out that this ability to save is only for households living at the lower quartile of rents. Those paying the median rent in Inner London face a £198 monthly shortfall between their rent and the figure of 35% of net income that defines affordability. These households would, and do, find it very difficult to save.

Taking the 30 lowest price new-build one and two bedroom apartments currently advertised for sale on Rightmove in Islington, the average price for a one-bed was £496,962. For a two-bed it was £613,250. These are located primarily in the north of the borough outside of the highest value areas on the fringe of the City of London, and as the prices are a ‘snapshot in time’ it is highly unlikely that new properties coming to the market will be priced lower.

To bring a new-build property at the lowest end of the market within the London price cap of £450,000 for a Starter Home would require a discount from these values of 9% for a one-bedroom and 27% for a two-bedroom. The suggested 20% discount on market value that is a defining feature of starter homes would bring the cost of a one-bedroom new build apartment in Islington at current values to £397,569. This would still leave a household of two people both earning the Islington median income £93,786 short of the maximum amount they could borrow at four times joint income with a deposit based on three years of saving.

The same household at the 75th percentile in Islington would, however, be able to access the required mortgage amount with a marginal headroom of £19,737. This demonstrates that while in theory there would be available purchasers for the starter homes product in Islington, in practice such households would need to be comprised of two high-earning individuals, i.e. already very highly-paid people who are capable of finding housing on the open market.

At the values seen in Islington the starter homes product will not be available to those on median incomes even if they are a household of two people with no children or other outgoings, i.e. credit high student loans.

E. Single income earner at £50,000

Not everyone who wishes to access low cost home ownership will be part of a household of two incomes. To assess affordability of starter homes for a single person with high earnings, we repeated these calculations for someone earning £50,000. This is around the 75th percentile of earnings (someone earning £48,428 is at the 75th percentile of earnings in London as a whole).

Someone earning £50,000 would be able to affordably pay £992 per month in rent – that is 35% of their net earnings. This person would need to spend 42% of their net income on the median rent in Outer London, and 55% in Inner London, so it is more likely that they would be living as part of a larger household with friends, family or other non-related adults in order to afford the rent.

At four times their income, the maximum loan to be advanced would be £200,000. Online tools such as Money Saving Expert estimate the range of lending available to be between £162,500 and £225,000, so £200,000 represents a rough midpoint between these estimates.

Someone earning £50,000 saving 10% of their monthly net income could save a deposit of £10,200 over three years and £17,000 over five years. If you add the higher of these figures to the £200,000 maximum mortgage loan, the highest price this person is likely to be able to obtain a mortgage for is £217,000. This is still £180,569 short of the £397,569 that would represent a 20% discount on the cheaper end of the new-build one-bedroom apartment market in Islington.

F. Existing non-market home ownership options

The income threshold for shared-ownership products in London is set by the Mayor. The limits are currently £71,000 for one or two bed dwellings and £85,000 for three or more bedrooms. This shows the thresholds above which the Mayor considers a household to be able to meet its needs through the market and not to require eligibility for intermediate products.

Two-times the median income for Islington residents is £70,647 or almost at the threshold for smaller dwellings. Therefore according to the Mayor’s current policy, nobody above the median income requires access to sub-market products. A one-bedroom Starter Home at the maximum 20% discount from market value of £397,569 would be out of reach to people at the top of the intermediate income threshold in London.

If Starter Homes are required at a defined percentage on ‘every reasonably sized housing site’ as per the Prime Minister’s suggestion, this will crowd out the provision of intermediate and affordable rented housing due to viability concerns, meaning that government policy has shifted from providing a route into home ownership though intermediate (shared ownership) product to one that only households with a minimum of two-times the 75th percentile even in a high-wage borough like Islington would be able to access.

December 2015

Prepared 14th December 2015