The right-to-buy scheme is arguably the most successful initiative ever taken by a Government to enable people to buy their own homes. However, two decades since its conception, there are now questions as to whether it will continue.
Introduced by Margaret Thatcher in 1980, the right-to-buy scheme has enabled more than two million tenants to purchase council flats and houses worth in excess of £75bn at today’s prices. Priority is usually given to council or housing association tenants, those on a council waiting list, first-time buyers and those who need to move for social reasons such as overcrowding or to receive support.
The thinking behind the initiative was simple. The Government’s official line was that it was everyone’s right to be ‘king of their own castle’. However, it was also becoming concerned with the increasing levels of funding tied up by local authorities in bricks and mortar, which could be released for other important schemes, such as schools, hospitals and roads.
As soon as the right-to-buy scheme was announced in 1980 it was inevitable it was going to be popular. The scheme enabled council tenants, who had lived in their property for a minimum of two years, to buy it at a heavily discounted price. For houses, the discount is 32% with an additional 1% for every year of occupation, up to a maximum of 60%. For flats, the discount starts at 44% rising by 2% a year up to a maximum of 70%. With such hefty price reductions on offer and incentives such as Mortgage Interest Relief At Source (MIRAS) tax relief being available, it is easy to see why the scheme was so popular.
Between 1982 and 1986, 661,000 properties were sold under the right-to-buy scheme and in 1989 alone 139,700 sales were completed. While the onset of recession and rapidly rising interest rates in the early 1990s dampened demand, sales in 2000 were over 50,000 and the value of property being sold is worth more than £1bn annually.
This growth has been sustained in part due to the impact of housing associations, which have also become involved in acquiring council property to sell on to tenants.
Last year, 140,000 houses were transferred from local authorities to housing associations for this purpose. Housing association schemes differ slightly from local authority right to buy in that when a tenant moves into a housing association property, their right to buy remains for 12 months and thereafter it subtly changes into a ‘right to acquire.’ Although conceptually this scheme is much the same as right to buy, the maximum discount reduces from £38,000 to £16,000.
Moving into the market
According to latest estimates, there are now over five million local authority and housing association rented properties in the UK, representing 22% of the total housing stock. Therefore for mortgage advisers the right-to-buy market has always, and continues to, offer significant opportunities.
Phillip Evans of B&E Consulting, whose firm is heavily involved in the right-to-buy market, explains: ‘Right to buy can prove worthwhile, although loan values are usually small in comparison to normal mortgages and the work involved can be greater. The majority of the brokers we deal with charge fees for right-to-buy business, as they offer a complete service: submitting the forms to the local authority, ensuring applicants get the maximum discount available, that any legal issues are satisfied and the applicants hand is held throughout the process.’
Evans suggests brokers should take the following into consideration when undertaking right-to-buy business:
• Most local authorities have a service time of eight to 10 weeks to issue applicants with the Section 125 agreement, which is needed to complete a mortgage.
• Applicants may have a different perception of what adverse credit is. For example, missed and late rent payments could be common, as the council may not chase them instantly.
• Deed of Postponement may be required when applicants are borrowing over and above their discounted purchase price. Look for a lender who has title insurance to combat any problems.
• Brokers will, as a matter of course, come across applicants who have had housing benefit or are on housing benefit. You should always have a contingency plan to place this.
• Ensure the chosen lender has a good selection of self-certification products in its right-to-buy product portfolio.
End of an era
Unfortunately, however, the right-to-buy market appears to have a limited life span, which is nothing to do with either brokers or the remaining available stock of qualifying houses. The problem stems from the Government’s shifting attitude towards the right-to-buy scheme.
John Prescott, Deputy Prime Minister, is thought to believe right to buy threatens the Government’s targets for affordable housing. It is also thought to be at odds with the Government’s attempts to house key workers, such as teachers, firemen and policemen, in property hot spot areas.
During a recent Labour Party conference, housing minister Lord Rooker also expressed concerns over some tenants buying their council homes at a discount and then pocketing a large profit by selling or renting the property at market rates. Lord Rooker observed: ‘We did not say, ‘you can buy your home and then become a landlord.”
It appears the Government’s concerns stem from fears some groups are profiting from the sale of social housing, while at the same time others are desperately trying to get a foot on the first rung of the housing ladder so they can undertake essential jobs. From recent comments it appears ministers see right to buy working against the key workers scheme and believe the time has come to do something about it.
Whether the Government’s concerns about right to buy are correct is open to debate. Inevitably, there will be a minority of people who will try to abuse any scheme of this type, but there does not appear to be evidence which demonstrates the problem is widespread.
What the Government has overlooked is that the majority of tenants who purchase property under the scheme do stay in the property for a number of years after purchase. Part of the terms of right to buy insist they are tied to the property for a minimum period, but it appears many spend money improving their property ‘ and the neighbourhood. It could be argued the right-to-buy scheme has, therefore, not just increased the level of private home ownership, but has also helped to improve the quality of housing stock.
An independent think tank has added to the debate by suggesting how the right-to-buy scheme may be reformed. The Institute for Public Policy Research (IPPR), supported by the Council of Mortgage Lenders, Nationwide Building Society, The Housing Corporation and the Joseph Rowntree Foundation are suggesting an alternative scheme based on the concept of ‘equity stakes.’ The key objective of equity stakes, according to the IPPR, is to enable tenants to build their own assets, improve the status of social housing and encourage tenants to value their tenancy.
Sue Regan, an associate director of IPPR, says: ‘Social housing tenants, as renters, are more likely to be among the asset-excluded as they have no housing wealth. They are also more likely to be poor and therefore have low levels of financial assets overall. Tenant equity stakes may be a means of addressing this problem.’
She continues: ‘One way of improving the social housing ‘brand’ could be to improve the status and esteem of tenants who increasingly view themselves as consumers with choices ‘ particularly those living outside high demand areas. Incentives for tenants to value their tenancy and increase their self-esteem could contribute to improving their own and the general view of the sector.’
Mark Lupton, policy analyst at the Chartered Institute of Housing, adds: ‘If funded properly, locally developed equity stakes could help develop dynamic new relationships between social landlords, tenants and financial institutions.’
How this initiative will develop only time will tell, but it appears inevitable the right-to-buy scheme as we have known if for more than 21 years is destined to change.
As this debate continues, it should be remembered right to buy has been the main way for low-income groups to buy their own property. Shared ownership is another option and the shared ownership scheme enables tenants of a housing association property to buy a share of their home and pay rent for the remainder. When the tenant can afford more, they can increase their share of the property until they own it outright.
Right to buy has served many thousands of home owners well for over 20 years and still has an important role to play. The only question is ‘for how long?’ While the Government continues to ponder the issues, however, financial advisers should look at the opportunities in their own geographical areas to extend their client base by focusing on this important market.
Peter Beaumont is sales and marketing director of Mortgages plc