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The shared ownership solution

Danny Lovey says the revitalised shared ownership scheme could help first-time buyers

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I do not agree that young people have lost the aspiration to own a home but there is a gap between the aspiration to own and the reality of being able to.

The problem now is that if they can afford the mortgage, most do not have the deposit and the Bank of Mum & Dad seems to be in a bit of a cashflow crisis itself.

Forced to live at home to save or rent and not be able to save, most young people are between a rock and a hard place. The only good thing is that home prices are likely to remain subdued for the next few years.

For those who have no choice but to rent privately, the big problem is a lack of security of tenure. There is always a chance you will have to move on if the landlord wants to sell the property or you cannot agree a new contract. Such insecurity is not a basis for a long-term relationship or bringing up a family.

For many reasons, I believe shared equity/ownership schemes provide a point where a home may be affordable with a smaller deposit, leading to full ownership is possible and there is provision for security of tenure in the same way as if you were buying the full equity of a home at the outset.

The affordable homes issue has been around for years and the previous Government did have shared equity schemes but they were complex, limited and severely underfunded.

With fewer lenders in the mortgage market and even fewer prepared to lend for shared equity/ownership and a lack of Government funding, the problem is to achieve what would be a solution for many young people, a programme of building a substantial amount of new affordable shared equity/ownership properties, but where is the funding going to come from?

Funding for mortgages could get worse before it gets better.

This brings me back to the question, how do you fund new affordable homes for first-time buyers through shared equity/ownership?

Assuming that somehow the Bank of England and the banks square the circle on refinancing, then maybe it calls for some imaginative thinking to stimulate the housing market to provide new homes, particularly for young people in shared equity/ownership.

What about a revised HomeBuy Direct scheme where you can have a minimum of a 50 per cent share or more, the remaining share financed through a housing association, which gets its funding by issuing medium and longdated bonds to the domestic institutional market with a Government-backed guarantee scheme. Or am I just dreaming?

Danny Lovey is principal at The Mortgage Practitioner

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Comments

There are 19 comments at the moment, we would love to hear your opinion too.

  1. i agree that something is needed to help FTBs to the market, but i would prefer the Government pays down the debt first before turning their attentions to this. i would be angry if funding for Schools and Hospitals went on this type of scheme first.

    only realistic opportunity is to get Private industry to fund it, (including Housing Associations) but as we enter a double dip, how many are going to do it, or incur more borrowing to fund it?

  2. Do such schemes actually prop up the market without any real benefit for the purchaser? Since 1985 I have seen all variations on the theme, quite often the biggest loser is the buyer, being unable to get out of the deal at the right time for instance.

  3. Anonymous seems to have missed the point I was making, what I am saying is that it would be private institutional funding to the housing associations and that way it would not drain away from Government funding. At the moment the HomeBuy Direct is minimum 70 per cent share with government and the builders funding 15 per cent each. That is clearly not sustainable and funding from elsewhere is required and a lower minimum share of 50 per cent in my opinion.

  4. “…the big problem is a lack of security of tenure”

    So lets try and resolve this issue, rather than invent yet more ludicrous ways to have the younger generation pay over inflated prices for property.

    Oh but wait, your a morgage adviser no doubt specialising in this sort of mortgage.

    Shared ownership is a con. All the downside of owning (repairs, insurances, negative equiy) and only half of any upside.

    Its called tinkering around at the edges people. Not innovation and certainly not going to fix the problem

  5. “how do you fund new affordable homes for first-time buyers through shared equity/ownership?”

    Banks, businesses and even wealthy individuals would be sure to provide this funding if the risk of default was lower.

    The riskof default would be lower if the prices paid and therefore the mortgage payments were not so high in the first place.

  6. A good debate opening up here …
    Andy – I agree security of tenure is a problem, but that is renting, with Shared equity you have the same rights as if you owned 100 per cent of the property
    Also, it is not a con it is a way for aspirations to be partly satisfied, which is better than no aspirations satisfied and be paying somebody’s else’s mortgage and having the lack of tenure – you are entitled to your other opinions, which I respect but disagree with.
    I have explained already how the funding could be provided
    The risk of default is no greater or different than any other housing committment, argruably it could be to the contrary depending on the way the scheme is set up as either shared ownership ir part mortage and part rent or shared equity.
    One of the current problems is a lack of lenders in the mortgage market and even less prepared to do shared ownership/equity schemes.
    The CML advise that the lenders prefer the shared Equity route which is way I am suggesting that the ONLY scheme rather than the previous mis-mash that should be the standard is a scheme along the HomeBuy Direct scheme. If there was one standard scheme then there would be a better chance of getting more lenders involved in the market.
    Danny

  7. If local authorities only had to provide homes for tenants in receipt of state benefits, funds could be redirected to assisting the lowly paid and first time buyer. The affordable housing market needs 100% LTV capital repayment loans with mortgage indemnity guarantees covering the amount in excess of 75% LTV based on prudent lending criteria. If local government was in a position to fund the MIG fee for this type of borrower, so that lenders are protected by offering a mortgage in excess of 75% LTV, this would considerably assist FTBs and ease up the housing market. The local authority would naturally only need to cover the MIG fee for as long as the mortgage exceeded 75% LTV.

    Or is this too radical?

  8. House prices have to be linked to affordability…. as various factors have conspired to artificiality bump up the price of an average FTB home then we get the issue we have at the moment.

    Shared ownership is not the answer, as Evan said this merely props up the current status quo….

  9. Congratulations Danny on an excellent article which has obviously sparked a lively debate! If we are considering a model for how a workable UK wide scheme might operate could I suggest that you take a look at the Co-Ownership Housing scheme which has been sucessfully operating in Northern Ireland for about 30years now and has helped thousands of first time buyers to bridge the difficult first step to home-ownership? The longevity of the scheme means that it has been able to show a track record of proven sucess through a variety of different prevailing market conditions which may address some of the concerns about such a scheme that have been stated here.

  10. Thanks for the continuing comments:
    To Paul – whilst I agree with you that house prices are still too high in many ways, just ask yourself why?
    It is a simple economic supply and demand answer and in the UK we have had an explosion in the number of people in the land, be it natural, partnership/marriage breakups, aging population, increase in birth rate or of course immigration.
    This year the National Housing Federation noted that there has been a 30 per cent decline in house building over the past two years- that around 122,000 homes have been built in the past year – fewer than at any time since 1923 (excluding War years) – that the UK which is well behind in its home building programme needs to build over a million new homes.
    The point is Paul that without schemes to increase the supply of homes and make them affordible the upward pressure on home prices will continue to be upwards, albeit becuase of the fiscal situation in the UK I am not expecting this to happen in the short term and indeed would like to see them a little lower. If of course property prices collapsed then we are in a completely different ball game and parodoxly this will create other problems not least in the banking sector.
    As I have said I believe a major move on developing shared ownership assists by allowing more FTBs onto the ladder and at the same time counting towards that 1 million homes needed.

    To MD in Northern Ireland I would like to know where I could get the information on this scheme
    Danny

  11. Jon-Paul Rougeolle 7th September 2010 at 11:55 am

    Dear Mr Lovey,

    There are an estimated 1 million empty homes in the UK. Refurbish them and we’ve solved your apparent shortage problem.
    If the supply and demand issue really does exist then why are so many newbuild properties left unoccupied?
    Why would you encourage people to buy half of something leaving them liable for all the negatives of home ownership and none of the positives of renting?
    Would we not be better encouraging people to save for houses and moving away from the ‘buy it now’ culture that was the reason for the financial crisis in the first place?
    Why with such a big presence does the estate agent industry not campaign and lobby for greater tenant protection if, as you say, this is needed?

    Equally this comment, ‘What about a revised HomeBuy Direct scheme where you can have a minimum of a 50 per cent share or more, the remaining share financed through a housing association, which gets its funding by issuing medium and longdated bonds to the domestic institutional market with a Government-backed guarantee scheme. Or am I just dreaming?’ is very worrying. Are mortgage brokers really that pig ignorant that they’ve learnt precisely nothing from the financial crisis? Your further comment, ‘The CML advise that the lenders prefer the shared Equity route’ suggests that there are some firms who have short memories. Shared equity was a mess first time round. Let’s avoid that again – presumably brokers are dead against this or are they blinded by the pound signs?

    I don’t take offence to you and your argument but shared ownership is something that I think we should move away from. Lease or buy something rather than a halfway house (no pun intended) that hold none of the positives of either. We really need to encourage people to save, stop promoting home ownership as a one way ticket and there is a need to extol the virtues of renting whilst pressing the govt to legislate in a way that gives tenants greater protection. As a final point these schemes have been in existence for a while under one form or another. They haven’t really worked so let’s stop trying to flog a dead horse and actually look at the structure of the market and what can be done to aid those in need of a home. I think the housing ‘crisis’ exists only in the minds of brokers desperate for business and Daily Mail readers.

    I see the more cynical amongst the posters argue that it is your job title that is driving this article. It would be churlish of me to suggest otherwise.

  12. Mr Lovey

    I started to agree with your post of 1201 yesterday till you got this far:

    “whilst I agree with you that house prices are still too high in many ways, just ask yourself why?
    It is a simple economic supply and demand answer and in the UK we have had an explosion in the …”; the next part should of course read “… domestic credit supply”. The rate of increase is house prices is considerably more than the product of the rates of monetary inflation and population increase (whether measured in terms of headcount or family units).

    Your article is titled “The shared ownership solution”; what was the “problem”? I find it difficult to disagree with previous posters who suggest that its your inability to sell mortgages…

  13. I bought a 40% share at the peak of the market three years ago, and I’m feeling increasingly let down by two major factors: the inability to sublet the property (even at 100% ownership according to my contract!) and the high service charges the HA tries to increase every year. I think many people are wising up to the fact shared ownership is a con, especially the service charges.

  14. Hi Danny, I see that the debate is still ongoing! As I said earlier the Co-Ownership Housing scheme is unique to Northern Ireland and for more information the best place to start is probably the scheme’s own website (www.co-ownership.org). For more detail on the actual funding model for the scheme and for a more indepth analysis of the role of the scheme in the current housing market I would recommend looking at the Co-Ownership Corporate Plan (http://www.co-ownership.org/fs/doc/corporate_information/corporate-plan-2009-2012-bus-plan-2009-2010.pdf). This also contains some research into the local housing market which would appear to echo some of the points made in your article.

  15. Dear Mr Anonymous
    Thank you for your comments of 7th September. I am always at a loss to understand why people remain Anonymous only to be rude. (Brokers pig ignorant etc)
    As for the number of empty homes the last estimate was actually between 700,000-800,000 empty houses in the UK at any given time and of this some will be ‘transitional’ by way of either short term, because of moves, or being renovated or whatever – I have recently asked the Housing Minister for a more precise figure and await his reply. What I do know is that a lot of these houses could be brought up to standard with some investment, but another problem is these empty properties are often in areas that there is little work and people do not wish to be there. It is conceded that there must be ‘some’ that could realistically be available which is another question I have asked the Minister.
    The new built left unoccupied is more to do with the excesses of building too many flats in city centers and selling at inflated prices and is something that has to be got to grips with. The lenders will not lend on these types of properties recently built unless you have 25-30 per cent deposit. However just solving this problem would only be a small part of the overall problem.
    With regard to the comment about the negatives of buying only half, I actually see this as a positive not a negative because it allows people to have security of tenure and an opportunity to staircase to complete ownership – so we will beg to differ on this.
    The reason for buying or renting does not remove the fact that if you are buying or renting you still are living somewhere no matter who owns the property. It remains the case that there is a shortage of properties to either rent or buy or part own.
    Your question re ‘greater tenant protection’ is not one that is the problem with renting. The Assured Tenancy agreement is very clear and effective with a 6 month or 1 year with rollovers of the agreements allowed. It is just the fact that medium to longer term security of tenure is not what an AST is about. Lenders will only lend to landlords providing they have an AST in place and not a very long term lease to a tenant. Nor would I suggest a landlord would generally wish to have any tenant that they could not remove from the property at the expiry of an AST should they wish to.
    I cannot agree with you on your comments on shared ownership generally. Brokers are neither – pig ignorant nor blinded by pound signs – people like myself are far more devoted to the genuine aspirations of young people who we see on a regular basis than any lender will ever be. Rather offensive comments Mr Anonymous.
    A final comment Mr Anonymous, you seem to think that the housing shortage is some kind of crisis that is in the minds of minds of brokers, business and the Daily Mail. You are so very wrong, ask any young people who have aspirations to buy a home to settle down.
    Danny

  16. Re Adam Smith comments:
    Yes, point taken I agree, too much money available for mortgages as well from too many lenders chasing market share at cut throat rates was a root cause leading to the explosion. The point being also that were there not a shortage of properties the effect would not have been so great.

    Barbara
    As you say you bought at the peak and you will feel let down no matter what you had bought I suspect. You should remember that all the schemes vary so I cannot comment on your case, but if it is a flat keep in mind they will have a lease in the same way as any 100 per cent flat will be. There will always be service charges on leasehold property and is something all should be aware of. In practice leases normally say you cannot sub let without the freeholders permission. Normally in practice this is agreed in my experience

    MD – thank you for your info
    Danny

  17. Jon-Paul Rougeolle 8th September 2010 at 12:57 pm

    I choose to remain anonymous due to a previous encounter with some idiot who tried to make a name for themselves at my expense. Knowing who I am makes little difference to the situation and I think you’re strong enough to take a bit of vitriol every now and again. The world would be much more boring if I just agreed with you every step of the way.

    That aside it was not my intention to be rude but merely objective as to your article and follow on comments – I have no doubt that you’re a genuine individual; after all, who isn’t? That aside I can only look at the facts around and see the amount of mortgage brokers whose business models are reliant on sales only; i.e. transactional income – therefore in my view many would be motivated purely by the ability to sell something irrespective of the buyer’s circumstances (a la sub prime / Northern Rock et al).

    There really isn’t a housing shortage – as you’ve agreed there are 800,000 unoccupied houses and plenty of houses that remain unsold due to inflated prices – this actually indicates that prices are unrealistic and there’s a lack of funding that allows buyers to reach that level. I would agree that not all are in places where people want to work but what are we going to do? Build lots of flats in centres where people want to work? That exists now but as you say lenders won’t offer finance on those properties above 75% LTV. Thinking about it what’s the issue with that? Do you think we should encourage people to gear massively on a tradeable asset or do you think we should encourage people to be more sensible? Do you want to return to a practice of letting the banks take all the risk (and more) or should we stop and think actually sensible lending is better for everyone and leads, potentially, to a more stable market.
    So just where is this shortage? Enlighten me please because if it were really true then there’d be millions of homeless people which just isn’t the case. Furthermore if supply really was so short then prices would be on a continuing rising trend. They’ve fallen 16% since 2007. There’s a shortage of investment properties for people to get themselves involved in and a shortage to buy but there are plenty of places for people to live in.

    I’ll note you agree with my comment that prices are too high; let the market set fair prices then – simply inflating it further will not help people’s aspirations but, actually, push them further into poverty as they live in houses they don’t fully own, can’t afford to maintain and can’t sell because they’ve ‘purchased’ an inflated asset that is not worth the value they paid. As you’ll see below they have the opportunity to buy the remainder at a market price so you effectively create a two tier market – buy at an ‘affordable rate’ on 50% then purchase the remainder at the market rate; if you couldn’t afford a whole ‘affordable’ house how in the hell can you afford a whole ‘market price’ property? Or do we veer into the extremeness of planned economies where we set prices?

    The problem with ‘affordable housing’ is that developers want to profit, by asking them to sell at a reduced cost they will make the things smaller or use inferior materials. Then we end up back at the original point of new builds being empty because they don’t meet the needs of buyers. What actually tends to happen is they don’t sell below at all – they say the house is worth £280k and ‘discount’ it to £250k (when it was only ever worth £230k).

    I’ll take you to task again about raising finance for these schemes – do you really believe that a bond backed mortgage scheme is what we need when we’re recovering from a financial crisis caused by … a bond backed mortgage scheme? Govt backing just removes the risk from the private sector. Something about privatising profits, nationalising losses springs to mind.

    You write off the rental sector because it doesn’t meet buying aspirations and believe that ASTs with added rollovers help? They give practically no protection to either owner or leaser. If I rent I’m secure for 6 months at which point I’m on a month to month basis. Equally the owner knows I can pack up and clear off within pretty sharpish potentially costing them a void. It would be nice to know that as a tenant I could lease for up to five years without the worry of being booted out for no real reason. This would benefit LLs too – steady income streams; it’s too much ‘us and them’ at present. Just because renting does not meet aspirations of buying is not a reason to say no to rental. I lease my car and know that I have it for x years; why can’t we do the same with houses? A stronger rental sector that allows for long term contracts will give the security that so many people want (this is the boon of owning; the security). There is a mindset that renting is throwing money away but this, quite simply, is not the case. I’ll pick you apart on this because your argument is inconsistent:

    Original article: For those who have no choice but to rent privately, the big problem is a lack of security of tenure.

    Response to me: Your question re ‘greater tenant protection’ is not one that is the problem with renting.

    So renting gives tenants a lack of security but tenant protection is not an issue? Please explain what you mean here…….

    Finally to cover the shared ownership ‘positive’ how exactly is it positive? The developers rarely discount the house from the off so you’re paying less than full price by virtue of the fact that you’re buying less than 100% of it – you have to ‘staircase’ by buying further chunks based on the market price (good if prices fall/bad if they rise) so you don’t benefit like a normal homeowner. Equally because the local housing association owns as much (if not more) than you, you have to ask them for permission to make alterations (not a positive)! My local council struggle to collect bins so how would they deal with the requests to paint a ceiling?! Security of tenure – yes you’re right but it’s going to cost you!!

    There really are no tangible benefits compared to renting or owning outright. It’s a massive compromise and one that promoted with scant disregard. In general terms it offers none of the benefits of renting (flexibility, no maintenance costs) and none of the benefits of ownership outright (benefitting from any increases, ability to decorate etc). It seems to be the last throw of the dice in propping up property prices. The real problem is people overstretch themselves – shared ownership promotes this even more so. It may as well say can’t afford a house? Buy half of one!! Live beyond what you can truly afford and hope to God that prices don’t rise because you might be priced out of buying your own home! It’s a return to a highly credit fuelled market place which I thought (and hoped) we were moving away from.

    We really need to move away from this social welfare state of giving people what they want at any cost. The message should be work hard, save and buy what you can afford. I’m sorry but if you don’t have the money then you can’t buy. That’s life and, no, it’s not fair. There is scope for institutional letting companies to forge a way through here and buy properties to be offered for long term lets backed by equity or debt etc in the traditional ways that most companies would operate. Owning is not the only solution!!

    So come on – is this about genuine concern for young people and housing or is this a push for a new revenue stream? I’ve critiqued enough for now…..

  18. Dear Mr Anonymous

    Following up on your last missive – We can agree on one thing and that is that I am a big boy and prepared to stand up for what I believe in and take any flak going in the process and I defend my views.

    So therefore let me again address your points:
    Firstly, the plight of the people who either would like to rent or indeed buy their home is nothing to do with any mortgage brokers sales models. I would actually argue that the majority of brokers are there as advisers first and salesmen second; having said that as in all walks of life there are those who are not as ethical as others. That cannot be said in most cases for the lenders of course whose staff are trained to sell something to you once you are in their door.

    You appear to be in denial that there is a housing shortage. It is not something that I have imagined; you would seem to be in denial with the pillars of our society – to name a few – all three Political Party’s, Shelter, The Joseph Rowntree Trust, Ric’s, CML, National Housing Federation and many more I am sure.

    Let me just advise of further facts for you to digest:
    The Government office for statistics says that the population of the UK will rise by 4.3 million by 2020 to 65 million.
    According to the 2001 census overcrowding in family homes was 7 per cent in 2001, compared with 3.5 per cent in 1981
    In 2009 there was a record 4.5 million people or 1.8 million households on housing waiting lists
    RICS report that the shortage of private rental properties are pushing rents up

    There have been mistakes over recent years in the building of too many small flats, rather than more family sized accommodation for example. I have already mentioned the problem of some disused properties not being where the population need them most, for example some vacant properties in the north and a bigger shortage of properties in the south, but that is only a part of the problem. Whilst you seem to be in denial of the shortage my contention is that the problem is real and could get worse unless the building programme increases, which in the current fiscal situation is not going to be easy. I am relaxed as to if they are for social, private rental or indeed for sale including shared equity, the most important thing is that building happens heading towards satisfying the need of the people of this country.
    Incidentally, you should also keep in mind one of the long term benefits to the country if people buy their home. In latter life people’s mortgages should be paid up and therefore not potentially be looking for the country to pick up the bill for housing benefit.

    I am sorry, but your comments with regard to shared ownership seem to have degenerated into a rant.
    You are also wrong about a bond mortgage backed scheme; they have been around for decades. The thing that went wrong was in America where the things were poor quality mortgage assets that were packaged and then sold off to investors. The sad thing is it has rubbed off throughout the industry. I do not believe that any sterling issued bond for prime business has or is ever likely to default that has been issued in recent years. Nothing wrong with the concept, it has to do with the underlying mortgage asset.

    Similarly, in your rant on security of tenure, your interpretation is out of context with what I was saying and had explained adequately, that the lack of security of tenure is all about the medium long term not the AST for 6 months or a year.

    You seem confused about the positives and negatives of shared ownership. I do not think me going all over it again will serve any purpose. We disagree – that’s fine. Also, you have to remember that if a lender does not think the 50 per cent share is worth the money they are unlikely to be granting you the mortgage you require. There is always a premium for a new home as no doubt you will have observed over the years

    Anyway Mr Anonymous I have enjoyed your diatribe and thank you for it

    Danny

  19. I agree with Danny that we need to see more shared equity schemes. However, the funding should come not from the public sector (whether through government Homebuy, which isn’t going to happen) or housing associations) but from private investors. There are many private individuals and pension schemes who would be only too happy to put money into the residential property market, provided they could do it in small chunks without taking all the risk of being a buy-to-let landlord. Shared equity allows them to do this, for the benefit of first time buyers and others. I would refer you to http://www.equityshare.com where these concepts are more fully explained.

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