Homes built at £60,000: a stepping stone for first-timers

Laura Brady asks if a government challenge to show that properties can go up at a low cost will solve Britain's affordability crisis

The first-time buyer market is collapsing and the Government has been shaken to its foundations.

First-timers still account for just under a third of all house purchases, according to the Council of Mortgage Lenders (CML), but that's down from nearly half this time 10 years ago. And in recent years, housing construction costs have been rising at four times the rate of inflation - using the Consumer Price Index measure.

That is why the Government's latest initiative to solve Britain's affordability crisis, help new buyers on to the ladder and repair this vital structural support for the whole property market has centred on proving that spiralling building costs can be slashed.

Last month, Deputy Prime Minister John Prescott unveiled the nine consortiums that have successfully made it through to the shortlist in his Design for Manufacture competition. Launched in April, this challenged UK building firms to provide 1,000 well-designed homes on 10 sites, among which around a third will be solely for first-time buyers. The benchmark price will be £60,000 for two-bedroom properties, but all units, whether they be family homes or studios, will be built with equivalent cost-efficiency.

Under the rules of the competition - being run by the Government's regeneration agency, English Partnerships - the £60,000 limit only applies to the construction price. It does not include the cost of the land for the properties as the Government will provide public sector sites - once used for schools, hospitals and military bases - to build on.

The cost of site infrastructure, such as drainage, estate roads and parking, is not being priced into the limit either.

On the shortlist are firms including Barratt Developments, Geoffrey Osborne and George Wimpey UK. They will now be invited to bid to build their designs, which must be energy efficient.

The overall aim, says a spokesman for the Office of the Deputy Prime Minister (ODPM), is to show that the cost of building does not need to be high. "Once we have learned from this, the methods can be used on a wider basis to assist groups such as first-time buyers."

But while the £60,000 challenge looks good on paper, it may be of little use to the thousands who are unable to grab the first rung of the ladder.

"The impact of this scheme will be limited," says Mark Harris, managing director of broker Savills Private Finance. "With just 1,000 properties set to be built, and just a third of these available to first-timers, the number who will actually benefit is fairly insignificant."

He adds that the first four areas in which these properties will be built - Milton Keynes, Northampton, Maidstone and Leeds - are all outside London. So those in the capital, who struggle most to buy their first home, will not gain.

"This amounts to a drop in the ocean," adds Peter Bolton King, chief executive of the National Association of Estate Agents. "We need tons more houses than this to even start to address the problem."

The Government , he says, "is simply tinkering at the edges of the housing problem".

The Tories have also cast doubt on the Government's promises , claiming that all the nominated developments are on contaminated sites in highly undesirable areas - including in view of a landfill and next to a high-security prison. But the ODPM defends its locations by pointing out that brownfield sites are being used instead of the green belt, and that all land will be made fit to live on.

Another concern is that the £60,000 limit is not linked to the sale value, which is likely to be determined by location and so could rise much higher.

The Building Cost Information Service, a division of the Royal Institute of Chartered Surveyors, points out that both houses and flats are already being built for £68,000 or less.

It says that based on a survey of more than 200 social housing schemes, the average cost of a two-person, one-bed unit is currently just under £57,000.

"Our research shows that building a home for £60,000 is clearly possible," says spokes- woman Dawn Wood. "But our primary role in this initiative is to make it absolutely clear to people what a £60,000 building cost means: that figure refers to the construction costs and not the purchase price."

Once built, the 300 starter homes will be offered to first-time buyers on a shared-equity basis under the Government's HomeBuy Initiative. This means the purchaser will only have to borrow a certain percentage of the house value, with the rest of the cash stumped up by housing associations, lenders or developers. When the property is sold, any profit will be redistributed in equivalent proportions.

"Co-owning this way is a great idea if your salary will never reach the total value of the house in terms of income multiples," says Rob Clifford, managing director of broker MortgageForce. "But when you come to sell, you could still own only a part of the house, which could also be in an undesirable area."

Work will get under way on the first site, in Milton Keynes, next spring, and some of the developments are targeted for completion by the end of 2006.