A recent independent report has concluded that the government needs to address the affordable home ownership ‘gap’ if it wants to reverse the decline in home ownership.
The report, ‘Thinking outside the box. Exploring innovations in affordable home ownership’ is written by Christine Whitehead and Peter Williams from the London School of Economics. It was funded by the Building Societies Association and the UK Collaborative Centre for Housing with the objective to gain a better understanding of affordable home ownership, its barriers and growth potential.
There are four areas the government should consider in order to assess the scale of the affordable home ownership gap, the report suggests. Two of the biggest barriers are raising a deposit and low income while two further contributory factors are wide variations in house prices across the country and attitude to risk.
Affordable home ownership initiatives have centred on government-led schemes. These include partial equity such as shared ownership; shared equity like Help to Buy; and direct subsidy products such as Right to Buy and the proposed First Homes scheme.
Other housing initiatives have included savings schemes such as ISAs; and guarantees, like New Buy and guarantor mortgages.
Right to Buy and shared ownership were both introduced in 1980, with the former having the most impact in terms of numbers. More than two million Right to Buy homes have been bought in England, 500,000 in Scotland and 140,000 in Wales.
The second most successful scheme has been Help to Buy, set up in April 2013 but due to be phased out by 31 March 2023. Up until June 2020, the number of Help to Buy properties stood at 278,639, according to the Ministry of Housing, Communities & Local Government (MHCLG).
Shared ownership has been the third most popular affordable housing initiative but the report states this has so much more potential and needs to be reformed.
The authors say the government should consider the costs, benefits and risks for both providers of shared ownership and buyers. They recommend better shared ownership reporting and data collection while the regulatory framework and the role of Homes England should be simplified. In addition, tensions around leasehold need to be addressed.
Most of the affordable home ownership schemes have been government-led but not all of them have been successful. The report notes that Rent to Buy has supplied less than 100 homes a year but this could be because first-time buyers are unaware of the scheme.
The House of Commons Public Accounts Committee (PAC) has recently published a report criticising government housing policies. Since 2015, the Committee says that none of the promised housing programmes have delivered their objectives, which the PAC describes as a ‘cycle of policy invention, abandonment and reinvention’.
A case in point is Starter Homes, first mooted in 2015 but this scheme was a non-starter and officially abandoned in 2020. It was supposed to be a discounted scheme for first-time buyers and 85,000 people had signed up to it.
First Homes is the next discounted scheme on the horizon aimed at local first-time buyers but details are vague. MHCLG plans to build 1,500 First Homes ‘within the next couple of years’ as a pilot before further planning of the new scheme.
The LSE report says an urgent priority is for government to set out in detail its long-term vision for homeownership, to give private sector providers much clearer signals and help to harness the potential for partnership between state and market.
Deposits and higher LTV lending
Other recommendations in the ‘Thinking outside the box’ report are for more assistance with deposits and securing higher LTV borrowing. There are encouraging signs that market-based initiatives will help re-open the higher LTV market although Covid-19 has led to some delays.
For example, Perenna, a new digital mortgage bank, is waiting for its banking licence and developing a long-term fixed rate mortgage up to 30 years requiring just a 5% deposit.
Resolution Compliance is working on Market Mortgage, an investor funded top-up loan blended into the lender’s main mortgage product for higher LTV lending.
WayHome is in the process of developing a co-ownership model which works like shared ownership but without a mortgage. A minimum of 5% of the property is bought by the home buyer and the rest by an investor. The homeowner pays rent to the investor and can staircase up each month or in lump sums.
An initiative to help with the deposit is already up and running via Stepladder – a peer-to-peer platform where would-be buyers join together to collectively fund deposits. One person is allocated the total each month until everyone has received their deposit – a bit like the original building society model.
The report also recommends mortgage guarantees as a cost-efficient way of expanding affordable home ownership. Countries such as Latvia, Finland and the Netherlands have government guarantees which reduce the mortgage interest rate charged. But the report notes lenders can be suspicious about such guarantees and resistance to these solutions would have to be overcome.
Nevertheless, a re-insurance specialist is creating a product where UK house builders pay into a remote fund which provides lenders with mortgage insurance on high LTV lending on their properties. This is being developed with 16 UK house builders and a soft launch is planned for 2021.
In conclusion, the government needs to work with key stakeholders in the housing market and provide a strategic framework that can support and encourage further development of affordable homes. Government sponsored housing schemes have been supported by mortgage lenders and that will continue so we wait with interest for the details of the First Homes scheme.
Read the full report here.
Robin Fieth is chief executive of the Building Societies Association