Despite the view that affordable housing could be the ideal option for middle-income buyers in the UK, take-up has been slow. David Thame explores the complexities surrounding the scheme
Can shared ownership become the fourth pillar of the UK housing market? There are plenty who hope it can take its place alongside private rented, public rented and owner-occupied. From housing charities through to private investors, there is a growing lobby who see shared ownership as the ideal option for high-aspiration but low-capital, middle-income buyers.
And yet shared ownership has not taken off. It accounts for less than 1% of the UK housing stock. With just 15,000 new shared ownership homes coming onto the market each year (and the overwhelming majority of those in London), it will be years before it is anything other than a niche business.
The problem, say specialists, is that shared ownership takes too much explaining – to both potential buyers and potential investors. Meanwhile, policymakers have confused an already complicated narrative with a raft of competing initiatives.
Given this, the government has recognised the need for simplicity and clarity. In January, housing minister Brandon Lewis announced new measures to remove unnecessary bureaucracy and red tape. The plans ought to make it easier to move on from – or move out of – shared ownership but does nothing to address more fundamental inflexibilities (see below).
Industry experts have also been applying their minds to ways to simplify and clarify. Earlier this year Orbit Group and the Chartered Institute of Housing released an interim report exploring the potential to expand shared ownership. It hopes supply could grow to at least 30,000 new homes a year within the next Parliament, potentially around 13% of the 240,000 new homes England is said to need each year.
Melanie Rees, head of policy at CIH, says: “Shared ownership could be viable but there are fundamental issues to overcome, such as helping buyers to understand the product. With some thought and some tweaks these problems could be solved and problems – like those associated with buying more equity in the so-called staircasing process – could be resolved.”
Rees adds: “We also need to introduce more variety of housing into shared ownership. Today it is mostly smaller one- or two-bed flats, which makes it difficult for owners to move on to larger properties, when they need or want to.”
Mervyn Jones, head of residential consultancy at Savills, agrees there is work to be done to make shared ownership into a clear, appealing product. He too agrees that shared ownership may sometimes make a poor second to other options – such as affordable rented accommodation, particularly in central London where even shared ownership is likely to be outside ordinary people’s reach.
“The process of shared ownership is labyrinthine and needs to be smartened up. The process of selling on a shared ownership property needs to be smoothed,” he says.
But Jones is also concerned that policymakers risk suffocating the chances of shared ownership by introducing competing schemes. The government’s Help to Buy initiative is a case in point, he says.
“There is overlap with other products like Help to Buy. My advice to policymakers would be to keep it simple.”
And what of investors – do they find shared ownership appealing? Compared to the clear narrative of investment in the private rented sector, buying into shared ownership could seem dauntingly uncertain.
Nobody wants to be seen to criticise, but privately, fingers are being pointed. A leading housing campaigner told EG: “The key point with regards to shared ownership is that it is limited in a way by the market – developers get less of a return on it than they would in the private rented sector or owner occupancy.
“New builds of shared ownership have tailed off dramatically – down from about 18,000 a year in 2007-08 to around 10,000 a year today.”
Jones says: “I would like to see a product that can attract investors, and investors like it simple. Today the regulations are complex and there is a gap on performance data. For instance, the delinquency rate – we suspect it is very low – but there are no statistics. The same for the turnover rate among occupiers.”
Jones says that with a clear story to tell shared ownership could begin to tap into the streams of funding now heading into the private rented sector.
Some of the registered social providers working in the shared ownership sector also think there is a need for more data.
While he rejects the idea that anybody investing in the sector is flying blind, Oliver Boundy, head of new business at Camden-based Origin Housing, agrees some information is missing.
“We just don’t have the dataset on, for instance, how many buyers ever eventually ‘staircase’ out – the term given to buying out 100% of the equity. If that dataset exists, I’ve not managed to find it,” he says.
Boundy isn’t just asking from a pure intellectual hunger for information – it really matters, especially for providers like Origin, whose financial calculations depend on how much staircasing goes on.
“In high property value areas like ours, mayoral and borough affordability criteria mean we have to set the rent we charge on the unsold equity at close to zero. So we get almost no rental stream and our financing calculations are based on house price inflation on the equity we retain, and on owners staircasing, that is buying further shares of the equity.
“But,” Boundy says, “the data is not there to show that they will in fact staircase in high-value areas.” He adds: “Of course some owners staircase quickly, get to 100%, and sell on, but others are caught with house prices inflating faster than wages, so owners could remain on equity as low as 25%.”
The expense and complexity of buying further slices is offputting even for those with the resources to pay for it. Each staircasing step involves an entirely new purchase process with valuations, fees and stamp duty.
In these circumstances, deprived of both rental income and the occasional lump sums of staircase purchases, scheme providers could find themselves in what Boundy calls a “detrimental” situation. Fortunately, shared ownership is just a small part of their business – no risk of a provider going underwater – but it isn’t a nice feeling all the same.
Behind it all lies a fundamental confusion: is shared ownership about providing a home that wouldn’t otherwise be available, or is it about providing those who buy into it with an equity share in a rising housing market? Is it less about housing need, more about providing people with a little capital a chance to see it multiply? Is it a housing policy – or a consumer retail investment product?
Complexity, lack of clarity, lack of data. Shared ownership needs to answer a lot of questions before it can take its place as the fourth pillar of the housing market.
Trying to make shared ownership more appealing
According to research by the Chartered Institute of Housing, demand for shared ownership homes outstrips supply by as much as 10 to one – no surprise, given that most supply is in London, where a chance to buy into a skyrocketing market is grabbed with both hands. Removing complexities in the shared ownership rules could make it even more appealing by providing more flexibility for occupiers.
Anyone looking to sell a property brought through government-funded shared ownership schemes has to offer their housing provider first refusal – often leading to delays in the process.
Abolishing this requirement will open up the prospect of sales. And those who have managed to purchase further shares to buy their property outright would not need to give the housing provider the first refusal at all.
Consultation on the plan ended at the beginning of March and a government decision is expected soon.
Buying – but at what cost?
Shared ownership is badged as buying a house but – especially for buyers who do not staircase into buying further shares of equity – in some ways it resembles more closely buying a financial instrument which can deliver capital growth. This instrument, like all complex financial products, comes with potentially offputting restrictions that renting or normal mortgaged home ownership do not.
The resale market is where most of the problems are to be found. The CIH/Orbit report says: “Shared owners cannot trade up or down to another shared ownership home as their circumstances or household size change… This can potentially ‘trap’ people within shared ownership.”
Selling out of a share home may involve paying back some or all of the discounts providing by scheme providers. Even if the occupier owns 100% of the house they may still need their landlord’s permission to sell, and may only be allowed to sell to people living or working in the local area. And if they want to stay in shared ownership, they may struggle to find larger family houses available.
Affordable scheme in W1
Origin was behind the six shared-ownership units at Suffolk House, Whitfield Street, W1. The affordable housing development was delivered as a result of section 106 agreements being developed in partnership with Derwent London. The £3.9m contract went to Allenbuild. The scheme was designed by Peter Taylor Associates.
