A starter home refers to the first house which an individual or a family can afford to buy with their savings, by taking a mortgage loan, or by a combination of both which is often the case. In real estate, the term would normally refer to small houses often with one or two bedrooms, however, a family’s first home could be bigger. Starter homes are likely to be older homes or occasionally, low-cost new developments.
The concept of the starter home has its roots in post Second World War United States when many young families preferred to buy entry-level homes which were considered an important element of the American Dream.
Since starter homes are often purchased by young individuals and young families, they would normally be designed specifically with this demographic in mind. Developers base the design of the starter home considering a number of factors peculiar to first-time homeowners, including the size of their pockets.
The rise in demand and prices of properties in many medium and major cities in the United States has left many first time buyers looking to the outer suburbs for affordable housing, and even when they are able to afford an option in the high-demand areas, there may be no suitable options available. The American Dream of building a new family home on an unused lot is taking many Americans away from the urban areas to places where they can find low-cost land.
The problem is the rapid rate of urbanisation has resulted in a total lack of low-cost land in many areas. As a direct consequence of this, many real estate developers have resorted to developing either densely packed low-cost town homes or massive high-priced single-family houses. Due to the high-end single-family homes being the preferred option, starter homes continue to favour those with higher incomes. For the others who can’t afford such homes, they are forced to move outside the city centre and have to travel long distances to get to their workplaces. Meanwhile, developers continue to base their decisions on factors such as market demand, land prices, construction costs, perceived value, city planning law, and ultimately, maintaining healthy profit margins.
Changing financial requirements and mortgage interests are capable of affecting the ability of certain income brackets to in the long run, finance affordable housing which have their prices determined by the market. Individual and family incomes have not been high enough to keep up with these changes. Starter homes seem affordable as far as income is concerned but it’s another matter when it comes to actual financing where we see an entirely different picture.
in major cities such as London, New York, or Shanghai, there is often no such thing as affordable housing. In these locations, it is highly unlikely that first time buyers will be able to find starter homes a short distance from the city centre. In some cities, local authorities have not only recognised the problem but are taking steps to solve it. For instance, in Santa Cruz, California, the authorities have set out to provide assistance to first time home buyers in need of accommodation as close to the city centre as possible by re-zoning previously commercial vicinities for residential buildings, particularly starter homes. Efforts like this are only one of many around the world to provide entry level affordable housing.
In the UK, the government has a Starter Homes initiative which has been created to enable first time buyers in England gain access to as many as 200,000 affordable homes by 2020. Created specifically for first time buyers between the ages of 23 and 40, the initiative enables young persons to buy a house at a discount of 20% off the average price of property in the area. Persons interested in the programme will only be required to provide a mortgage of 80% on the actual value of the house, not including the lender’s required deposit.
To be eligible to benefit from the initiative, an applicant must be no younger than 23 and no older than 40 years old and must have never purchased their own house before. Also, cash buyers will be rejected and applicants will need to have a combined household income that’s no more than £80,000 if outside London, and £90,000 if in London. The designs will range from flats to family-size detached homes with three bedrooms.
The 20% discount provided by the initiative is funded from a waiver granted by local authorities to builders. Typically, developers and home builders are required to pay £15,000 on each house to the local authorities to fulfil planning obligations. Now, home builders who provide Starter Homes don’t have to pay these fees and the savings will be extended to first time buyers. The new houses will have their prices capped to £250,000 outside London and £450,000 within the capital, with the values determined by independent local valuers.
Other than the Starter Home initiative, the UK government has other programs such as Help to Buy, designed to help first time buyers get started in the property market. One of the initiatives included in Help to Buy is its Isa which is an account that lets buyers save money every month while the government puts a bonus on top of the deposited amount. Apart from a deposit of £1,200, the account holder can save no more than £200 every month and the government adds a bonus of 25pc up to £3,000 when the money is used to purchase a house. The Help to Buy scheme also encompasses Shared Ownership and the Mortgage Guarantee which lets buyers purchase a property with a deposit of 5pc. Other initiatives for specific demographics include the Older People’s Shared Ownership which could help persons older than 55 purchase as much as 75pc of an eligible property. There is also the Forces Help to Buy created for servicemen and servicewomen.
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