Summary

Custom and self-build (CSB) housing is well placed to provide more affordable market housing opportunities as well as affordable, or social, housing for those who cannot access market housing.

This advice note considers the various forms of affordable housing, providing an outline of the requirements for each, a summary of central Government and local authority policy, several delivery examples, as well as some specific issues for consideration.

Introduction

CSB housing has, historically, been perceived as being the preserve of high earners developing detached houses on remote, rural plots. It is, however, becoming accepted as a delivery route for more affordable housing solutions tailored to the needs of their occupants. CSB can deliver housing which is affordable ‘with a little a’, as in more affordable market housing products but also affordable ‘with a big A’, that is affordable, or social housing, meeting the needs of those who cannot access market housing solutions.

National Planning Policy Framework definition

Affordable housing, ‘with a big A’, is defined in the National Planning Policy Framework July 2018 (NPPF) as:

“housing for sale or rent, for those whose needs are not met by the market (including housing that provides a subsidised route to homeownership and/or is for essential local workers)”.

The document then goes on to provide definitions for four potential types of provision: affordable housing for rent, starter homes, discounted market sales housing and other affordable routes to shared ownership. These are considered in further detail below.

There is no specific reference to CSB in the NPPF affordable housing definitions and, in fact, the NPPF exempts developments

“proposed to be developed by people who wish to build or commission their own homes”

from the requirement for 10% of homes on major developments to be provided for affordable homeownership. However, CSB is well placed to deliver affordable or social housing, provided it is consistent with the NPPF definitions.

It could be argued that self-build housing can be in itself an affordable route to homeownership, if not necessarily shared ownership. It is more affordable to build your own home than to purchase a home in the local market, especially where there is an element of ‘sweat equity’ (personal labour) involved. Industry data from the Home Building and Renovation Self and Custom Build Market Report (2017) indicates that self-builders can benefit from an approximate average of 30% uplift in the value of their completed property.

Types and tenures

A brief outline of affordable housing types and tenures, as noted in the NPPF, is set out below:

• Affordable housing for rent: rent is set in accordance with the Government’s rent policies for Social Rent where rent is calculated according to a formula based on property values and local earnings (target rent); or Affordable rent: rent (including service charge) is set at up to 80% of the local market rent for an equivalent home.

  The landlord is required to be a registered provider (registered with the Regulator of Social Housing), except where it is included as part of a Build to Rent scheme.

  Provisions are required for the properties to remain at an affordable price for future eligible households, or for the subsidy to be recycled for alternative affordable housing provision.

  Build to Rent schemes are defined in the NPPF as

  “Purpose built housing that is typically 100% rented out. It can form part of a wider multi-tenure development comprising either flats or houses but should be on the same site and/or contiguous with the main development. Schemes will usually offer longer tenancy agreements of three years or more and will typically be professionally managed stock in single ownership and management control.”

  For Build to Rent schemes, affordable housing for rent is expected to be the normal form of affordable housing provision (and, in this context, is known as Affordable Private Rent).

• Affordable routes to shared ownership: housing that provides a route to ownership for those who could not achieve homeownership through the market. This includes Shared Ownership, relevant Equity Loans (such as the Help to Buy scheme), other Low-cost Homes for Sale (at a price equivalent to at least 20% below local market value) and Rent to Buy (which includes a period of intermediate rent).

  Where public grant funding is provided, there should be provisions for the homes to remain at an affordable price for future eligible households, or for any receipts to be recycled for alternative affordable housing provision, or refunded to Government or the relevant authority specified in the funding agreement.

  Shared ownership allows a customer to purchase a share of a home and pay rent on the remaining share. Historically the initial share purchased would be anywhere between 25% and 75% with the annual rent being anywhere between 0% and 3% of the unpurchased equity, including service charges. The Affordable Homes Programme 2021 to 2026 (AHP 2021-26) has now introduced a new Shared ownership model which sets the minimum share for purchase at 10% and places the repair and maintenance liability with the provider for the first 10 years (previously shared owners were responsible for the maintenance and repair of their properties from the outset). Purchasers will normally be required to secure a mortgage to purchase the initial share or use existing savings. Purchasers may also have the option to purchase additional shares in the future, known as staircasing. Where restrictions are imposed, such as in certain rural areas, this may be limited to 80%. Elsewhere purchasers may be free to staircase to full ownership removing the need for any further rental payments.

  The Help to Buy equity loan scheme provides a loan up to 20% (40% in London) of the purchase price of a new-build home. The purchaser is required to pay a deposit of 5% and then cover the remainder through a mortgage of at least 25% and savings. No interest is charged on the equity loan for the first five years, only a nominal management charge. Interest is then payable from year six, index linked, along with the management charge. The loan only needs to be repaid in full when the purchaser pays off their mortgage, sells their home or comes to the end of their equity loan term, usually 25 years. The loan can be paid off at any time, in full or in 10% chunks before the end of the loan period. The amount borrowed is a percentage of the value of the home, and so the amount repaid is the same percentage of the value of the home at the point of repayment. The Help to Buy scheme is not available for CSB homes; however, NaCSBA is currently campaigning for a similar Help to Build scheme to be introduced for CSB. Rent to Buy is defined in the prospectus for the AHP 2021-26 as

  “homes let to working households at a lower cost to give them the opportunity to save for a deposit to buy their first home. The rent (including service charge) is set at or below 80% of the market rent for an equivalent home for at least five years to allow a tenant to save for a deposit or purchase sooner via shared ownership.”

• Starter homes were defined in the Housing and Planning Act 2016 and the NPPF. They are proposed as market sale products to be developed on specific, approved, exception sites and sold to first-time buyers, under 40 years of age at a discount of at least 20% below market value, subject to upper limit caps for in and outside of London. Eligibility criteria, including household income, were to be applied as well as restrictions on sales and lettings within five years from the original purchase. The necessary secondary legislation was never introduced and so the starter homes initiative did not come to fruition.

  It now seems highly likely that this will be reinvigorated and reintroduced under the proposed First Homes policy which has recently been the subject of a public consultation. First Homes are to be made available at an increased discount of 30% below market value, to be prioritised for first-time buyers, serving members and veterans of the Armed Forces, and key workers. The discount will be passed on to future buyers.

• Discounted market sales: housing sold at a discount of at least 20% below local market value, eligibility is determined with regard to local incomes and local house prices, should include provisions to remain at an affordable price for future eligible households.

Central Government policy

The Government’s priorities, regarding affordable housing, appear to remain the promotion of shared ownership and continued low levels of grant subsidies. Central Government provides grant funding for certain forms of affordable housing, most recently through the AHP 2021-26, administered by Homes England.

The prospectus for this most recent funding round sets out its key areas of focus as homes for rent (50% of the programme) and routes into homeownership (50% of the programme) including for people with long-term disabilities, older people and rent to buy, as well as supported housing, rural housing, traveller pitches and empty homes.

As mentioned above, the AHP 2021-26 has now introduced a new shared ownership model, as well as the right to shared ownership, which will apply to all grant funded rented homes, with some exceptions. The funding also looks to promote modern methods of construction, good design, energy efficiency and sustainability and the use of SME contractors.

Grant funding is also available from local authorities.

Local authority policy and implementation

Local authorities will each have their own strategic housing policies, informed by a local housing need assessment and other local conditions. This will set out the number, size, type and tenure of homes needed for different groups in the community including those who require affordable housing. Whilst the NPPF sets out a range of affordable housing options, local authorities’ key priorities will be the provision of affordable rented accommodation, preferably Social Rent, which sits at about 50% to 60% of open market rent, or Affordable Rent. In reality, 80% of market rent is not affordable to a large number of households, and shared ownership, to a lesser extent, in terms of demand and the severity of housing need this addresses. The provision of starter or first homes and discounted market sale is less of a priority but will provide a more diverse offer.

Affordable housing requirements will be agreed on a site-by-site basis in line with the local authority’s policies, taking into account any site-specific issues.

Affordable housing will generally be allocated subject to eligibility criteria, including housing need, inability to secure housing on the open market, local connection (to the local authority concerned or, in some rural instances, to specific parishes), as well as financial criteria including household income and savings, especially with regard to shared ownership applications.

Delivery examples

Local authorities are keen to ensure that the provision of CSB housing does not impact on the delivery of affordable housing.

A large proportion of a local authority’s affordable housing will be delivered through quotas imposed on large market housing developments. This requires developers of sites over a certain threshold, usually 5-15 units, will be required to provide a percentage, usually 30%-50%, of the site for affordable housing. This requirement will be set out in a planning obligation, such as a S106 agreement, or conditions. The current review of the planning system, ‘Planning for the Future’, is considering a new approach regarding the use of S106 agreements and the site size threshold.

Numerous examples can be found of affordable housing being provided through CSB by local authorities, registered providers and community-led housing groups.

These examples include:

• Local authorities and registered providers constructing custom build shells sold on a shared ownership basis, allowing the purchasers to complete the fit-out of the property as self-finish to their own design and specification;
• Community-led housing groups constructing custom build shells, through new build and refurbishment, sold on a shared ownership basis or rented at an affordable rent, allowing the purchasers to complete the fit-out of the property as self-finish to their own design and specification;
• Registered providers constructing custom build turnkey completed homes sold on a shared ownership basis, with some element of customisation;
• Community-led housing groups undertaking group self-build developments, with varying degrees of direct involvement, providing homes sold on a shared ownership basis or rented at an affordable rent;
• Local authorities establishing CSB specific rural exception site policies providing a ‘build your own’ scheme for local people whose housing needs are not met by the market. This permits individual, modestly sized, new, privately, custom or self-built homes on sites that would not secure planning permission for market housing, provided the household building the home is in housing need, has a strong local connection, a need to live locally and restricts the end value of the property in perpetuity to 60-80% of the prevailing market value of the completed property at time of sale.

Other possible approaches may, potentially, include the following – specific examples for these have not been identified and these models may need some development to satisfy specific definitions or requirements:

• Discount market sale, possibly provided through serviced building plots, custom build shells, or custom build turnkey properties. The percentage discount of the entire completed homes would need to be at least 20% below market value, so may require serviced plots to be sold at nil or a heavily reduced land value;
• Starter or first homes, again possibly provided through serviced building plots, custom build shells, or custom build turnkey properties, although the market value discount required for First Homes is likely to be 30%.

Issues to be considered

The following key issues should be considered when looking to deliver affordable housing through CSB.

• Affordable housing, by its very nature, will result in a reduced return or income when compared to market housing. Therefore, some form of subsidy is usually required to bring it forward, whether this is a subsidised or reduced land value, grant funding or cross-subsidy from profit-generating market development on a mixed-tenure scheme.
• The development of affordable rented and shared ownership homes will require an organisation to act as the long-term landlord, for affordable rented housing. This landlord will need to be a registered provider, particularly if grant funding is to be secured.
• Decisions around customisation and input into design may be challenging to manage as prospective rented tenants and shared ownership purchasers are often not identified until late in the process. Some agreement may need to be reached with the nominating authority so tenants or purchasers can be identified at an earlier stage.
• The level of customisation offered will also need to be carefully considered, particularly regarding self-finish, to ensure that the tenants or purchasers can complete the works required.
• Where work is undertaken to a plot or property by more than one party, such as with a custom build shell being self-finished by the purchaser, or tenant, some consideration will need to be given to how the quality of the work is managed. Agreement will also need to be reached with the building warranty provider as to how this is signed off.
• Direct involvement in the construction of their homes, using their own labour, allows tenants or purchasers to ‘earn’ some ‘sweat equity’ which may allow them to secure training opportunities (to help build their own homes), rent reductions, an increased level of equity in a shared ownership property (which means they need a smaller mortgage or a lower deposit), shares in a community-led or owned organisation or a one-off payment in compensation for their work to invest in furnishings etc.
• Community-led housing schemes, particularly those with direct involvement through self-finish or self-build may require a specialist facilitator or a willing housing association partner to lead, fund and organise the development.