Cllr James Cartlidge, of Babergh District Council, is Director of Share to Buy
The withdrawal of support for mortgages through Funding for Lending (FLS) is hugely significant in terms of the housing market; many are likely to agree with Robert Peston and others that this policy had more impact on stimulating the recent recovery in demand than Help to Buy.
However, whilst removing FLS from mortgages will be welcome by those who believe Governments should never intervene in the housing market, it surely does not mark a change in the broad consensus that ‘something must be done’ to assist first time buyers. With statistics abounding showing a less mobile society, and affordability pressures still huge in many areas, it is hard to see Governments turning their back on support. There therefore remains the important question as to which is the best tool available to support sustainable home ownership.
Historically, Governments have used one of two methods to put keys in the hands of aspirant home owners. Either, shared ownership: often referred to as ‘part buy part rent’ because you buy a share in a home and pay below-market rent on the remainder, with the option to buy more shares as your circumstances improve (in a process called ‘staircasing’). Or, shared equity, whereby you purchase the whole property but with an equity loan for a large chunk of the deposit (in the case of Help to Buy equity loans, this is for 20 per cent and is interest free for five years).
I believe that shared ownership, a 30 year old product often maligned and misunderstood, offers the most socially profitable and sustainable way to supporting first time buyers. Shared ownership has been back on the blogs of late because of a highly incisive report from the Resolution Foundation highlighting that the product is affordable for a couple with one child on £22,000 in 87 per cent of local authorities.
The key to this affordability is that the required deposit can be as little as 5 per cent of a 25 per cent share; the rent on the unbought equity is usually capped at 2.75 per cent and in most cases there is no initial requirement to pay stamp duty. Aside from being more affordable, shared ownership has two often unappreciated and underestimated strengths.
First, the product is dominated by housing associations who use profits from shared ownership sales to reinvest in building rented housing for those on the very lowest incomes. Secondly, there is an active second hand market which creates more choice for buyers and more flexibility for owners. This is where existing owners have chosen not to staircase to 100% ownership and sell on their existing share to a new buyer.
In towns like Milton Keynes, you can find a whole range of period properties available to buy at under £100,000 – these are shares, being resold. It’s hard to see how this supply of property, otherwise unavailable without shared ownership, is ‘artificially raising prices’. The first resale I was personally involved in assisting was when a young couple on moderate earnings with a young baby purchased a flat in Highbury Fields – the contrast between what they paid out on deposit and costs, and what they would have had to find buying the property conventionally was breath-taking. I was witnessing government assisted social mobility in motion.
Shared ownership is certainly not perfect. From a customer’s point of view, the product can appear complex, particularly in terms of its eligibility rules, often overlaid by local authorities who (understandably) want to ensure that homes in their district go to those most in need of them. My own view is that this in itself emphasises the point that the product was designed to assist those in greatest need, and much of the complexity is about defining that need – never a pure science, but surely justified for a scarce resource like affordable housing.
In contrast, Help to Buy equity loans is ‘eligibility lite’ without the income constraints of shared ownership and, therefore, particularly in London, it offers an attractive choice for homebuyers neither earning a low enough income to qualify for shared ownership nor high enough to buy outright. However, you cannot ‘resell’ a Help to Buy equity loan home; you can only sell it on outright, so no secondary affordable market is created. The profits from a private developer’s Help to Buy sale do not go back into funding rented homes for low income families.
Of course, Help to Buy was not designed to achieve such social outcomes but a more fundamental one of stimulating building in a weak economy and therefore helping to create more property supply, more jobs and more confidence – and yes, more profits for house-builders to reinvest into more property supply, more jobs and more confidence. Help to Buy has patently achieved those ends, and those who criticise the new build version of the scheme, should remember how the clarion call to ‘build more homes’ was, until Help to Buy, constantly met with the refrain ‘but customers cannot get the finance’.
Yet if all such schemes were stopped tomorrow – not just FLS but all elements of Help to Buy – second hand shared ownership resales would still be coming on to the market, in every local authority area in England. This is a vital pipeline of supply that is overlooked but will eventually run out unless new shared ownership development is forthcoming. I hope that Resolution have started the ball rolling on a re-appreciation of our most sustainable home ownership product.