Lenders back shared ownership as the UK's 'fourth' tenure
Published: 19 February 2015 | Author: Bernard Clarke
With housing affordability proving to be a major constraint for many would-be owner occupiers, could shared ownership play a bigger role in meeting the UK’s future housing needs? Lenders believe there is potential, even if so far it has remained largely unfulfilled. As the UK’s "fourth tenure," shared ownership currently trails a long way behind owner-occupation, and private and social renting.
If the UK is to encourage the growth of shared ownership, it needs a policy framework in which it works as a tenure for consumers and providers, including mortgage lenders. That is the key point emerging from a new report published by Chartered Institute of Housing (CIH) and Orbit Group. We contributed to this report, helping to shape its content and recommendations.
Much of what it says reinforces the views on shared ownership that we set out in our own manifesto for housing issues in the forthcoming election, A housing market to be proud of.
Published last autumn, our manifesto emphasises the many ways in which the lending industry can help promote a healthy housing market, as long as there is a clear policy approach which focuses on delivering sustainable, long-term solutions.
What our manifesto says about shared ownership
In our manifesto, A housing market to be proud of, we set out some of the challenges for policymakers in encouraging the spread of shared ownership. This is what the manifesto says:
“Low-cost home-ownership schemes have the potential to allow more young people realise their aspirations of becoming home-owners. Part ownership schemes need to be made easier to understand, which may mean that there are fewer varieties of them. It should be recognised that, for some, part ownership may be a long-term, permanent tenure in its own right.
“The idea of shared ownership deserves further examination to remove some of the obstacles to its growth and to encourage lender participation. Policymakers need to take into account lenders’ concerns especially about the sale of shared-ownership properties if we are to expand the market, increase lending volumes and provide more long-term funding commitments.”
How does shared ownership work?
The current problems of housing affordability in the UK are not new. Shared ownership was introduced in the 1970s to help those who could not then afford a home on the open market. In its current form, it typically allows someone to buy a share of between 25% and 75% of the property. A housing association usually owns the rest, for which the part owner pays a subsidised rent.
Once someone has bought a share of their home, it is possible for them over time to buy additional shares and perhaps eventually come to own the property outright. The process of building the equity share in this way is known as ‘staircasing’. In practice, however, staircasing is not widely used, and few part owners succeed in becoming owners of the property outright.
If part owners want to move home, they are free to sell their share to someone else. The landlord still has rights, although the government is looking at ways of simplifying this to make it easier for part owners to move. But, even if the landlord is happy for the sale to go ahead, it can be difficult to match buyers and sellers. A shortage of shared ownership properties – including homes of different sizes and types – may make it difficult to move within the tenure.
Lenders are sometimes discouraged from supporting shared ownership because it typically requires a higher capital weighting, relative to the amount advanced, than more conventional mortgage lending. This is because firms have to calculate the loan-to-value ratio on the buyer’s share of the property, and not its full market value. This higher capital weighting can mean that shared ownership is more expensive for the customer than a conventional mortgage, and that may discourage take-up.
As an alternative to shared ownership, it may be possible to buy a home through a shared equity scheme. Under this option, the buyer takes out a conventional mortgage, which is topped up with an equity loan covering the rest of the cost.
Some lenders may favour this option over shared ownership, as it more closely resembles a conventional mortgage. It has also proved popular with borrowers, particularly through the Help to Buy equity loan scheme. Up to the end of last year, this had helped fund more than 41,500 purchases in its first 21 months – with 83% (more than 34,000) completed by first-time buyers.
The newly-published CIH report reflects our views on the capital treatment of shared ownership, which currently tends to discourage lenders and borrowers. The report recommends that the government and the Prudential Regulation Authority (PRA) should review the rules on capital weighting attached to shared ownership and ensure that, as far as possible, there is a level playing field for this kind of lending and conventional mortgage finance.
Some facts and figures about shared ownership
Shared ownership is cheaper than private renting, according to the CIH. The housing body says that the average monthly cost of shared ownership in England is £668, compared to £784 for renting. In London, the gap is even wider with shared ownership costing £857 a month, while a typical tenant pays £1,348 in rent.
The number of sales of shared ownership homes has increased by 55% from 6,248 homes in 2009-10 to 9,735 in 2012-13.
Demand for shared ownership continues to outstrip supply. According to the Homes and Communities Agency, there were 53,513 applications for shared ownership in 2013-14, but only 8,636 sales. More than half of those who do success in becoming part owners formerly rented their homes.
Despite the growth in part ownership, it is dwarfed by other tenures. Almost two-thirds (64%) of people own their own homes in England, while 18% rent privately and 17% live in the social rented sector. Only 0.8% of households are in shared ownership.
What’s needed to encourage more shared ownership?
- Capital requirements for shared ownership lending serve to discourage its growth. The CIH supports our view that the government and the PRA should review the rules on capital weighting for shared ownership. On behalf of lenders, we will be seeking evidence on this issue to present to the PRA and the government.
- As well reviewing capital requirements, the government should consider what else it could do to encourage the use of shared ownership as a mainstream tenure. It needs to consider what it can do to encourage the development of a more diverse mortgage market for this kind of lending. The government could also incentivise shared ownership through local plans and the use of public land.
- The government also needs to recognise that, for many, shared ownership may be a permanent tenure, rather than a stepping stone to full ownership through staircasing. At the same time, it needs to work with providers to promote ways of encouraging staircasing through savings schemes.
- To make shared ownership more attractive to lenders and borrowers, it needs to be simplified and streamlined. There should be clear information about shared ownership for consumers at the outset and through its lifetime. Borrowers should be able to access shared ownership more easily, and branding should be improved to raise awareness.
- There should be greater consistency in the use of the model lease and standardised eligibility requirements.
- Agencies offering shared ownership need to collect better data, and do so more consistently. That would enable people to understand the extent of the tenure and to understand the risks associated with it. Data should also cover the extent of staircasing and arrears levels.
- There is a need for more flexibility so that part owners are able to move more easily within the tenure as their needs change. Consumers need to have greater ability to move an accumulated share of equity from one property to another.
- More needs to be done to reduce, or at least make more transparent, the cost of property repairs and service charges. These are often a major source of dissatisfaction for consumers.
- The government needs to look at what might be done to encourage shared ownership of existing, as well as newly built, properties.
- More generally, the government could lead in the development of a voluntary code of practice for shared ownership. It could promote good practice in product development and service delivery through awards, publications and events.
As a fourth tenure option, shared ownership currently lags a long way behind owner-occupation and renting, either in the private or public sector. But more could be done to promote it. If shared ownership schemes are constructed in the right way, they could be a means of bridging the affordability gap for many who aspire to home-ownership, but who have seen house prices outstripping their incomes and their aspirations. The CIH believes there is potential to boost construction of homes for shared ownership to 30,000 a year.
Achieving a step change in the level of shared ownership requires a commitment to developing the right policy approach. That, in turn, requires a concerted effort from housing associations, developers, local and central government, investors and regulators, which would also encourage lenders. The goal should be to develop a more streamlined, consistent and simplified product that provides increased flexibility for consumers and opens part ownership to more people.