June 2005
Response to the ODPM Consultation Paper - Homebuy: Expanding the Opportunity to Own
Introduction
The JRF is supportive of efforts to help working households that cannot buy their own homes. We will shortly be publishing a report from Professor Steve Wilcox looking at local measures of the limits to the ability of such households to become home owners.
In essence, while we are very supportive of versions of Homebuy which will generate more homes – i.e. increase the supply – we are not so keen on an extension of the Do-It-Yourself version which will increase demand for existing homes. This latter approach seems likely to be inflationary and, by enabling some to buy at the expense of others, could be self-defeating. In theory, extra resources for first-time buyers should stimulate additional housebuilding: but we know that the market works imperfectly and, even if there is increased building because of extra support from buyers, this response only comes after a lengthy time lag.
1. Our experience
The views here on the consultation paper on Homebuy are based on the research programmes of the Joseph Rowntree Foundation, but also on the practical operations of our housing association, the Joseph Rowntree Housing Trust. Our direct housing role involves trying out ways of providing affordable accommodation, with a special interest in mixed and flexible tenure (MFT).
After pioneering early schemes of cost rent, co-ownership, cost sale and improvement for sale, we have built many shared ownership homes: for the last 15 years, these have always been integrated into mixed tenure developments so that our social rented housing does not become “ghettoised”. For existing tenants we have made good use of the Voluntary Purchase Grants, although the attractiveness of this scheme to tenants has reduced in recent years because the grant has failed to keep pace with property price inflation. We have also offered a shared ownership option through our ETHOS (our Existing Tenants Home Ownership Scheme) – which has not been popular because no subsidy is provided for the share that is acquired.
We have used shared ownership in sheltered housing, for those older people who have sold their previous home; and we have used sales of very small shares – down to 10% – particularly in rural schemes. We have also pioneered the Flexible Tenure arrangements that allow people to “staircase down” if they get into financial difficulties.
We have been very pleased with our SAVE scheme (Sales of Alternate Vacants on Estates) which is designed to change the tenure mix on a predominantly rented housing estate; and we have experimented with Homebuy in different forms, using our own resources. We have used Homebuy to sell vacant property and have found it a helpful way of extending home ownership to people who could not otherwise afford it to buy.
The JRF has a current project using a consultant, Graham Martin, and solicitors, Cobbetts, to prepare a flexible version of Homebuy to extend its usefulness.
2. Better value for purchasers
For the majority of new purchasers, Homebuy represents improvement in value-for-money compared with conventional shared ownership (CSO) arrangements. It is much simpler because it removes the need for rental payments and the service/administration charges. It is easier for purchasers to negotiate with building societies and banks on the basis of requiring a straight-forward, conventional mortgage. It is easier too for lenders since few lenders employ experts at the Branch level to handle shared ownership schemes; and, where shared ownership mortgages have been granted, difficulties have sometimes emerged when arrears have occurred.
More significantly, Homebuy means more equity for the occupier, for similar outgoings at the beginning: this is because shared ownership absorbs expenditure on rent – “money down the drain” – while in Homebuy it all goes on repayment of a bigger mortgage. Thus a £90,000 Homebuy stake would have similar monthly payments to a £60,000 shared ownership stake. And shared ownership will become more and more costly to the occupier, compared with Homebuy, as rents increase every year.
3. Problems with Homebuy
We have discovered one inherent difficulty in the Homebuy arrangements. This comes where occupiers run into financial difficulties because Flexible Tenure is more difficult with Homebuy than in shared ownership schemes. While it is straightforward for those in shared ownership schemes to sell back shares to the housing association – “staircase down” – and pay proportionately more rent, this arrangement does not work with Homebuy where there are no rented shares. We have got round the problem by first converting the Homebuy purchaser into a shared owner and then deploying the “staircasing down” route.
We have used the Flexible Tenure arrangements to help more than 50 households who might otherwise have lost their home because of changes in their financial circumstances, such as losing their job or marital breakdown. This represents just over 10% of the relevant stock. We would certainly agree with Baroness Dean’s Low Cost Home Ownership Inquiry that these arrangements should be adopted by all housing associations providing shared ownership accommodation. Unfortunately many housing associations have been reluctant to allow “staircasing down” because they want to spend the surpluses from “staircasing up” on different items. It would be a shame if the introduction of Homebuy meant even fewer housing associations adopted the Flexible Tenure approach to preventing homelessness amongst these, often borderline, purchasers.
CSO can, with additional subsidy, reach households on lower incomes, who cannot afford 50% shared ownership (or Homebuy at 75% equity). Homebuy would only be an option for these households if it too was to be available with more subsidy.
4. Exceptional cases
There are also cases where shared ownership remains preferable for certain purchasers.
We have noted that Homebuy is not such a favourable deal as shared ownership for those purchasers who buy with a cash sum and get Housing Benefit to pay rent on the remainder. These are the people who can afford only a 50% share from the proceeds of the sale of a family home following marital breakdown or downsizing. These purchasers could not afford 70% or 75% of the cost of the property but could manage the 50% with HB taking the strain.
These exceptions to the normal position of Homebuy being much better for the buyer, suggest to us that the shared ownership option should be retained to provide choice for incoming purchasers.
5. Worse for providers
Shared ownership is likely to be more financially advantageous for the providers, than Homebuy. The CSO system allows the provider to bridge the gap if the cost of the home is more than its value, by charging the occupier for the excess through their rent. Shared ownership also provides the registered social landlord with an ongoing revenue stream which is beneficial to the overall funding position on mixed tenure developments.
Like Homebuy, shared ownership also provides the housing association – and, in the future, perhaps housebuilders too – with capital gains when occupiers acquire a bigger stake and/or leave. In the case of the registered social landlord, the extra benefits to the provider are, mostly, recycled for social purposes (principally for social rented housing). If profit-making companies were to provide the housing, then the surpluses would not, of course, be retained for social purposes at all.
In conclusion
We would certainly commend Homebuy and we hope to be able to use it in preference to shared ownership for most new build homes. But we recognise that costs and values are lower in some areas than others and a 75% Homebuy mortgage is unaffordable to key workers and first-time buyers in many places. The consultation paper suggests a solution in terms of making a further share available on the basis of a rent (perhaps yielding 3%): this part of the total cost would be less than the extra mortgage repayment (at around 6%) but it brings back all the disadvantages – in terms of complexity and poor value – which come from introducing a (rising) rental component. A case may exist, therefore, for a higher level of (repayable) grant in those areas where 75% Homebuy is not an affordable proposition.
We hope these comments are of help.
RICHARD BEST
Director