CML news & views

One of many key questions the new government will have to answer is what it should – or perhaps more realistically what it can afford to – do to promote low-cost home-ownership. 

By far, the most successful low-cost home-ownership initiative we have seen so far was the right-to-buy scheme. Although it had its critics, this initiative was – during its heyday in the 1980s – making subsidised owner-occupation a reality for considerably more than 100,000 households a year. Over a 25-year period, right-to-buy provided a low-cost route into owner-occupation for more than 2.2 million home-owners. 

Since the late 1980s, however, annual right-to-buy sales have declined, although they still totalled more than 41,000 as recently as 2005. But as the numbers have diminished, other low-cost home-ownership initiatives have been developed, driven by a desire to continue to provide wider access to the benefits of property ownership, against a backdrop of increasing owner-occupation, rising house prices and readily available funding.

Since the onset of the credit crunch, however, this backdrop has become much less favourable. Despite this, each of the main political parties has continued to support low-cost home-ownership. At the last election, for example, the Conservative manifesto aspired to a property-owning democracy with everyone having the right to own their own home. Labour wanted social tenants to be able to build up an equity stake in property, and the Liberal Democrats favoured “equity mortgages” as a way of providing more affordable homes in rural areas.

At the end of last week, the coalition government published a draft structural reform plan, setting out its intention to develop and put in place by next spring options to help social tenants own all or part of their home.

The reality is, however, that in the post-election environment there has been a greater focus on addressing the fiscal deficit. This has created a much more challenging funding environment for delivering any of the parties’ aspirations on low-cost home-ownership. Superficially, there is an opportunity for lenders to fill this gap. But they, too, have been constrained by their own acute shortage of funding since the onset of the credit crunch – and that looks likely to persist in the coming years.

Different tenures

The challenges for those who support low-cost home-ownership have intensified in recent years partly because the capacity to sustain provision in each of the main housing tenures has come under much greater pressure. 

For the first time in many decades, home-ownership has been in decline, largely as a result of a combination of the mortgage funding shortage, continuing affordability problems for first-time buyers and the economic downturn. According to the Survey of English Housing, the proportion of owner-occupiers fell from 70.9% in 2003 to 67.9% in 2008-9. 

The likelihood of any recovery in home-ownership in the medium term looks more remote since the general election. Housing benefit cuts and the public sector pay freeze announced in the recent emergency Budget, along with the prospect of further spending cuts and an increase in pension costs for many people in work, will not improve the confidence of consumers aspiring to owner-occupation or their ability to take on and sustain a major financial commitment.   

For a decade from the late 1990s onwards, supply in the private rented sector was boosted by the abundant availability and take-up of buy-to-let funding. But, since 2007, there has been a decline in activity, driven by the mortgage funding shortage, pressures on rental yields and diminished prospects for capital growth for property investors in the short to medium term. 

The funding shortage – which has tightened its grip on the capacity of both lenders and the government – has also affected the social rented sector, where growth in demand has continued to outstrip supply. In 2008/9, there were just over 250,000 lets from a waiting list of 1.7 million.

Housing associations have found that there is still strong demand from consumers for the more restricted low-cost home-ownership provision they are able to offer. A survey of five HomeBuy agencies showed that they were dealing with more than 80,000 applications at the beginning of 2010, compared with an annual building programme of between 10,000 and 12,000 new homes. And anecdotally housing associations, particularly those based in London, are reporting a growth in demand.

Shared equity or shared ownership?

In the aftermath of the right to buy, most low-cost home-ownership initiatives have essentially been based on either a shared equity or a shared ownership model. 

The former enables a borrower to buy a home with the help of an equity loan, either from a housing association, the Homes and Communities Agency or a developer, and to take out a conventional mortgage for his own share of the property. Under shared ownership, the occupier also buys a share of the property with a mortgage but rents the rest of it from the supplier, usually a housing association.

Traditionally, lenders have tended to favour shared equity, which more closely resembles a traditional mortgage offering. Shared ownership is more difficult to administer for lenders and attracts a higher capital weighting from the Financial Services Authority (FSA). This is because the FSA requires lenders to calculate the loan-to-value ratio on the buyer’s share of the property only, even though the lender is able to claim against the whole of the property – including the share retained by the landlord – if the borrower defaults on the mortgage.

How much is ‘low-cost’?

In the immediate aftermath of the financial crisis, the last Labour government stepped up its commitment to shared equity, partly in an effort to boost activity in the flagging housing market. The new coalition government, however, is signalling a clearer preference for shared ownership, perhaps in response to current fiscal pressures. 

A discussion paper, The role of shared ownership in the future housing market, published by Moat Homes in April estimated that funding a shared ownership purchase cost the public purse an average of just under £27,000, while the cost of funding shared equity averaged just over £44,000. Another advantage of shared ownership is that it continues to allow housing associations to raise finance through a charge on a property.  

The reality is, however, that fiscal constraints are likely to curtail severely government funding for all housing schemes for the foreseeable future.  In its place, the coalition hopes that housing supply will increase through a combination of more liberal planning laws and greater freedom for communities to devise their own solutions to local housing problems.

It is much too early to say how effective this new permissive regime will be in delivering housing volume. But there are considerable hurdles to surmount, given the scale of funding constraints.

Current challenges 

Between 2004 and 2009, around 52,000 households were helped into owner-occupation through a variety of shared ownership schemes. In the four years up to 2009, 12.400 affordable new homes were completed annually. The forecast for 2009/10, however, is for just 7,800 properties, partly because a boost in spending to help sustain activity in 2008/9 has resulted in lower levels of grant funding currently and in the years ahead. 

It is possible, however, that other affordable housing models – perhaps based on other tenures – may be developed to fill the gap. Some in the affordable housing sector, for example, are looking at options for providing more rented homes, at near – as well as full – market rents. The housing association model is a tried-and-trusted method of levering in private investment in support of affordable housing. 

There are possibilities for funding to be attracted from a range of sources, through a number of different vehicles, for investment in housing in a variety of tenures. The kind of government funding we have seen in the past may be augmented or substituted by initiatives based on better use of assets, including land, or funding incentivised through tax breaks or the relaxation of planning restrictions. But the outcome remains uncertain.

Meanwhile, devolved administrations in Scotland and Wales are also looking at their own options for funding investment in affordable housing. There is potential for government at all levels to support housing in a range of tenures, potentially with increased flexibility to rent or buy over time.

A range of funding initiatives also potentially creates opportunities for different types of lender. As in the mainstream mortgage market, a range of options that can be supported by smaller, local lenders as well as large, mainstream players contributes to a vibrant market, with the potential to deliver the benefits of choice and competition to housing providers.

Conclusion

The provision of low-cost home-ownership is at a crossroads. Pressures on providing affordable housing in all tenures have intensified in recent years, and are unlikely to subside in the foreseeable future.

By far the most successful low-cost home-ownership initiative has been the right-to-buy scheme. It has been superseded by a variety of shared equity and shared ownership measures, which – although smaller in scale – have helped significant numbers of households take a stake in owner-occupation at a reduced cost.

But given the scale of the fiscal challenges ahead, the government is currently re-appraising its approach to low-cost home-ownership. The extent of its commitment will be clearer following the comprehensive spending review in the autumn. Meanwhile, housing associations, lenders and others are also considering their own options – and from a similar position of acute funding constraints. All will need to address fundamental questions about their commitment to low-cost home-ownership and how they can contribute to its future funding.

If lenders and others want to sustain their commitment to low-cost home-ownership, we need to have a frank debate about measures needed to facilitate its funding in the future. Can we do anything more to sustain those lenders already engaged in the market? Will larger lenders have the desire and capacity to provide increased funding? And are there particular opportunities for smaller, local lenders?

The new government appears to favour support for shared ownership. But it will need to clarify its intentions – and the extent of its financial commitment – in the coming months. The CML, meanwhile, is keen to host a debate among lenders and others about the extent to which firms wish to engage with the government on the continuing provision of low-cost home-ownership, and how this can be funded in the future.