A significant expansion of newly built shared ownership could assist low and modest income working families across the UK onto the property ladder, while keeping their housing costs affordable, according to new analysis from independent think tank the Resolution Foundation.
The report, One foot on the ladder, shows that shared ownership – where buyers purchase at least 25% of the equity in a home and pay a low rent on the remaining share owned by a Housing Association – is affordable for a couple with one child on £22,000 in 87% of local authorities in Britain, assuming they spend no more than 35% of their net income on housing costs.
The report also suggests that the latest phase of Help to Buy, which provides a government guarantee on 95% mortgages, is really geared towards households on middle and higher incomes whose main barrier to home ownership is raising a large deposit rather than meeting high monthly mortgage costs.
For low and modest income working families, while it is the case that Help to Buy greatly reduces the time it takes to save for a deposit in most local authorities, the policy still leaves monthly mortgage costs unaffordable across the great majority of the country. For example, looking at a couple with one child with net income of £22,000 (which is the just over a third of the way up the income distribution) living in a two-bed home.
- In Cambridge, they would have to spend 85% of net income (£1,557 per month) on meeting monthly the costs of a 95% mortgage compared to 42% of net income (£772 per month) for shared ownership;
- In the London borough of Hounslow, they would have to spend 76% of net income (£1,395 per month) on meeting the monthly costs of a 95% mortgage compared to 38% of net income (£692 per month) for shared ownership;
- In Exeter, they would have to spend 53% of net income (£970 per month) on meeting the monthly costs of a 95% mortgage compared to 26% of net income (£481 per month) for shared ownership;
- In Aberdeen, they would have to spend 50% of net income (£918 per month) on meeting the monthly costs of a 95% mortgage compared to 25% of net income (£455 per month) for shared ownership.
The report says that shared ownership is more affordable for low income families because they initially take out a mortgage on only a share of a home not the entire property and pay an annual rent of no more than 3% on the remaining share, with annual rent rises in line with RPI plus 0.5%. While they own less equity, their payments are more predictable and they are less at risk from changes in the mortgage market. Shared owners can claim Housing Benefit on the rent but this is rare.
However shared ownership currently accounts for only a very small number of homes – 174,000 in England. Related innovations such as rent to buy and home purchase plans have also so far failed to achieve scale.
The Resolution Foundation report says that with growing numbers of families stuck in the private rental sector, shared ownership needs to become the mainstream fourth tenure to help meet their aspiration to own, generate much needed new housing supply and help address Britain’s growing wealth gap, while also reducing volatility in the housing market.
The report calls on government to make this a reality by creating a new shared ownership equity fund to encourage an increase in the number of homes built for shared ownership, building onthe current Build to Rent fund that was announced in last year’s Autumn Statement to kick start purpose-built private rented accommodation.
The report also proposes that many of the regulations and restrictions that currently limit the flexibility of shared ownership should be stripped away. For example restrictions on marketing properties through estate agents, sub-letting properties and more onerous valuations than for conventional house sales, should be scrapped and replaced by a simple, transparent set of standards that are easy for buyers to understand.
