From 28th June 2021, national policy will require at least 25% of all Section 106 affordable homes to be First Homes.
So what are First Homes?
First Homes must be sold at a minimum discount of 30% from market value (MV), with the discount secured in perpetuity. Local authorities will be able to set a higher discount (up to 50%) if they can provide supporting evidence for the requirement.
As with Shared Ownership homes, First Homes are to be prioritised for first time buyers and household incomes cannot exceed £90,000 pa in London or £80,000 pa outside of Greater London. Local authorities can set their own eligibility criteria for the first 3 months of marketing, in line with local incomes.
After the discount from MV is accounted for, prices cannot exceed £420,000 in London and £250,000 outside of Greater London. This London cap is in line with the Help to Buy cap of £600,000, which is due to end in March 2023. Again, local authorities can set a lower cap with supporting evidence.
There is no requirement for the units to be managed by a Registered Provider, therefore First Homes can be sold directly by developers.
How does this impact the provision of other affordable housing tenures?
Once 25% of Section 106 affordable homes are secured as First Homes, Social Rent homes should be secured in line with the required local plan percentage. The remainder of the affordable tenures (such as Shared Ownership or traditional Affordable Rent) should then be delivered in line with the percentages set out in the local plan.
For instance, if the local plan requires 80% Shared Ownership and 20% Social Rent, a policy compliant provision would be 25% First Homes, 20% Social Rent and 55% Shared Ownership.
The local authority is responsible for calculating the value of the new affordable housing mix to establish whether an application is policy compliant (to ensure the same value is captured as would be under the local authority’s published policy).
The First Homes policy does not apply where planning consent is in place before December 2021 or there has been significant pre-application engagement and the application is determined before March 2022.
Local plans and neighbourhood plans submitted for examination before June 2021, or that have reached publication stage by June 2021 and subsequently submitted for examination by December 2021, will not be required to reflect the First Homes policy requirement.
What are the potential implications of First Homes?
The introduction of First Homes may decrease overall scheme viability.
This is because First Home values could be lower than Shared Ownership values given local authorities can set discounts up to 50% of MV. Although the new Shared Ownership model will simultaneously reduce Shared Ownership values, it is unlikely to result in values as low as 50% of MV.
The increase in First Homes and reduction in Shared Ownership homes may also have a negative impact on a developer’s cashflow. Because First Homes are not true Section 106 stock - which is typically sold to a Registered Provider on a forward commitment basis with the majority of revenues received by practical completion - developers must wait until the unit is sold before they recoup any costs.
Although First Homes will be welcomed by many and do typically offer lower household costs in the long-term, they are not as accessible as Shared Ownership homes, particularly in higher value locations such as central London. For instance, a deposit on a £500,000 Shared Ownership home could be as low as £12,500 (and even lower under the new Shared Ownership model), whereas an equivalent First Home (discounted to £350,000) would likely require a deposit of £17,500.
Although higher discounts set by local authorities can make First Homes more accessible, they will simultaneously have a negative impact on the viability of schemes and could lead to a reduction in overall affordable housing delivery, including the delivery of social and affordable rented homes.
What does this mean for the future?
The statutory development plan will remain the starting point for planning decisions and unless First Homes are enshrined in development plan policy, they will only be a material consideration at the discretion of the decision-maker. We have seen local planning authorities be dismissive of national policy and written ministerial statements in the past on matters such as Vacant Building Credit and restricting the use of planning obligations to major development schemes only.
Whilst First Homes are unlikely to be as politically divisive as such matters, it remains to be seen how some local planning authorities will respond, particularly if the overall impact of introducing First Homes is to reduce the amount of affordable housing or the quantum of a specific tenure which that local planning authority is mostly in need of.
Any applications due to be determined after March 2022 need to consider whether the local authority will enforce the national requirement for First Homes and if so, the potential implications on the viability of a scheme, in comparison to existing policy requirements. If you require any advice on the policy backdrop or financial implications of First Homes, please get in touch.