Delivering Affordable Housing Low Cost Home Ownership – Equity Share Jacqueline Blenkinship This project was supported by the Housing Corporation through its Innovation and Good Practice Grant programme. The contents of the report do not necessarily reflect the views of the Housing Corporation. Kim Doran, Development and New Initiatives manager for Eden Housing Association and Kirstine Riding, Manager of Cumbria Rural Housing Trust provided direction and project management for the project. Copies of the full Report can be obtained from Eden Housing Association on 01768 861400 Summary Aim The aim of the research was to investigate methods through which Housing Associations can provide low cost affordable housing for owner occupation within high value areas, concentrating on the Lake District National Park and the surrounding area. By undertaking a review, testing and challenging the existing funding and procedural frameworks open to Housing Associations and affordable housing being delivered by speculative developers on current or existing schemes we have endeavoured to propose alternative methods to existing practice. Methodology The initial stage of the research was to try to discover the thoughts, views and facts from those involved in the provision of housing in the area. Interviews with and questionnaires to the following groups were undertaken: Local Authority Housing Departments Local Authority Planning Departments Private Developers and Contractors Estate Agents Housing Associations Their views lead to the conclusion that as with many other areas in the country the Lake District National Park and the adjacent market towns of Kendal, Penrith and Cockermouth are suffering from increased and increasing demand for housing. Supply is unable to keep pace with this demand and is leading to significant house price inflation. This inflationary effect on land, buildings and house prices has tipped the balance of affordability, thus making it extremely difficult for local people to afford to purchase any equity stake in a property in their area and as such they are unable to access the property ladder. A study of the various facts and figures available for the region lead to the view that at a time when we are building fewer new homes, when the largest percentage of affordable housing is allocated to those who are retired, with a projected increase in households, what appears to be needed is to increase the delivery of quality homes, on exception sites where necessary, restricting such homes to those local people in need. The tenure of the property in which people live should be flexible to allow them to own a stake in their home if they so wish, following the general desire for owner occupation, the flexibility of equity ownership allowing for the affordability factors of local wage levels. The Options An assessment of the options available, outright sale, the sale of planning quota properties, social rent, shared ownership, homebuy, homebuy plus, equity share and a hybrid of homebuy and shared ownership was undertaken showing the following: Outright Quota Rent Shared Homebuy Homebuy Equity Hybrid Sale Site Ownership Plus Share Freehold held by occupier X X X X X Lease required X X Resident has an equity stake in their home X X X X X X X Flexibility of purchase percentage X X X Purchaser requires their own mortgage deposit X X X X Public subsidy required X X X X X X Occupier maintains their home X X X X X X X Allocated to people in housing need X X X X X X X Association has a rental stream to mortgage X X X Association has an asset to mortgage X X X X Purchaser benefits from house price inflation X X X X X X X Purchaser has risk of negative equity X X X X X X X Flexible tenure X X The financial modelling of four projects in the Lake District enabled financial comparison of the above tenure types and lead to the conclusion that only some social rented schemes, shared ownership schemes and equity share schemes were financially viable for Housing Associations to develop. In all instances the properties forming part of the model projects were valued at more than the homebuy value ceilings, in one instance 66% higher, thus homebuy is not a viable option. Affordability The Office of National Statistics reports that nationally housing expenditure (comprising mortgage, rent, water and council tax) per week accounts for 16% of weekly income. In the north west this figure drops to a 14.5% average. The models tested show that social rented properties cost between 22% and 29% of the occupiers income, excluding water and council tax, considerably higher than the regional average. The costs of occupation as a percentage of the cost of purchasing the same property through outright sale show the following comparisons for a 2 bedroom house: Rent Shared Homebuy Equity Ownership Share Percentage purchased 0% 50% 75% 50% Windermere 43% 74% 79% 53% Chapel Stile 41% 73% 79% 52% Penrith 52% 80% 79% 54% Lazonby 56% 82% 79% 54% Traditional shared ownership provided through the Housing Corporations low cost home ownership program is extremely expensive for the occupier. Rented properties are also expensive based on the fact that the occupant owns no equity. Equity Share The principle behind equity share is to enable a ‘not for profit’ organisation to develop homes for low cost ownership. Dependant upon the affordability of that home within the open market, an individual can purchase a percentage of the property not lower than 40%, (as lower percentages are deemed as a mortgage risk and possible property maintenance risk), and not more than 80% (as the home is to remain affordable in perpetuity). The developer retains the remaining percentage of open market value. The purchaser obtains a tenants in common freehold (where freehold is available). This model has already been used by Threlkeld Housing Trust. The owner pays no rent and a nominal service charge for communal facilities including a management fee covering the cost of managing resales, retaining waiting lists and providing structural insurance. At a later date if a purchaser wishes to purchase a greater percentage (up to a maximum of 80%) then they are free to do so. The developer could use the proceeds of this transaction to finance other developments, or by enabling a resale property to be sold at a lower equity percentage. In principle if a purchaser can no longer afford to own the minimum 40%, but wishes to remain in the property the Association could repurchase the property (where necessary using the proceeds from other escalation sales proceeds) and the tenure will convert to rent. The tenure flexibility potential for equity share has not been tested in this report. The financing of the scheme is based on: build cost – receipt from % of open market value purchased = grant Should this model be adopted, the purchase percentages and grant will be agreed within the Housing Corporations current total cost indicators and grant rate regime as a benchmark, balancing additional factors of local affordability and build costs. Funding Equity Share In principle the Council of Mortgage Lenders (CML) would approve funding for equity share schemes for both developer and purchaser, subject to minor amendments. CML take the view that a minimum 40% equity stake should be sufficient to ensure that the occupier takes responsibility for the property and provides a balanced risk for the mortgagee. At present Low Cost Home Ownership (LCHO) provides the equivalent of one mortgage transaction per mortgage lenders branch per year. This low volume of business does not warrant the expense of extensive training on the range of LCHO products available. If the volume of business could be increased or the range of products consolidated there may be an incentive to increase staff training, increasing the efficiency for an applicant and with an increase in transactions a more competitive market. Planning Permission for Equity Share Planning permission for affordable homes on exception sites within the Lake District is given on the understanding that the properties are to be allocated to local people in housing need. The Planning Board are in principle unconcerned with the tenure of the property; however, they strive to ensure that the properties remain affordable in perpetuity. Equity Share does highlight a concern that if properties are developed on an Equity Share basis, allocation of the properties will not be to those in need irrespective of tenure, but to those able to afford a 40%-80% equity stake. This view leads to the requirement for further detailed study of the model and its ability to offer a truly flexible tenure, offering a rented tenure to those unable to afford a minimum 40% stake. Conclusion Owner occupation is here to stay and is an aspiration of many people, evident in the responses in Cumbria Rural Housing Trusts housing needs survey results. Outright sale by speculative developers is beyond the reach of many local people, particularly those on low wages. Quota sites and the sale of properties at 80% of their open market value clearly gives a helping hand to those who just cannot quite manage to meet their dreams of owner occupation, but again for many this is still unaffordable and supply of such properties is limited. Traditional shared ownership can be seen in the models to be expensive for the purchaser when an initial 50% is purchased and is seen in the models as being as expensive as purchasing an equity of 80% on a quota site property. However, the scheme does offer the option to purchase an initial 25% equity share, although it may be difficult to find a mortgage due to the perceived high risk of the applicant. Whilst there is a place for Homebuy, purchase and repair, existing satisfactory and other current Housing Corporation schemes that require the purchase of existing properties in the open market, at a time when one of the main drivers for house price inflation is high demand and limited supply, Associations are only fuelling house price inflation and providing additional competition for first time buyers. Homebuy Plus or Affordable Equity Purchase is yet to be piloted. The current limited availability of low interest mortgages and the additional complexity they introduce may delay the delivery of the affordability benefits of this model. Social rented properties in high value areas are increasing less affordable due to the rent restructuring formula. In order to • create an increased supply, regardless of how slight • ensure homes are allocated to those in need initially and in the future • ensure homes remain affordable in perpetuity • ensure that affordability is flexible to meet the wage levels and aspirations of individuals, equity share seems to provide some solutions. Recommendations 1. In order to view the wider applicability and financial viability testing is required on a national basis. 2. One of the most effective ways to trial and refine a product is through pilots. A series of pilots, ideally nationally spread across high value areas with differing issues should provide the necessary feedback to produce a tool that is not only effective but also continuously improving. 3. A minor amendment to the ability of Associations to restrict equity on shared ownership schemes to include discretionary restriction in areas with populations of over 3,000 would also give some security that properties developed prior to the testing of equity share will remain affordable in perpetuity. 4. Whilst the basis of Equity Share rests in the bones of shared ownership for the elderly, Threlkeld Housing Association Limited, and the financial ‘profit’ between build cost and open market value, there are still many players who will need to be involved in order to refine the model into a workable practical tool. These players are Housing Associations, Mortgage Lenders, Chartered Surveyors and Valuers, Solicitors, and the statutory and regulatory agencies. 5. Research the scope for Equity Share to offer flexible tenure 6. Research the scope for Equity Share to offer wider potential gains if it can be used instead of the existing discounted right to buy, voluntary purchase grant and statutory purchase grant schemes. If the 1 million social housing residents (25%) who are employed on a full time basis purchased 50% of their £75,000 homes this would create a staggering £37.5 billion injection into housing which could repay loan debt, enable new developments and create flexible tenure.