First-time buyers (FTBs) must be starting to ask themselves if the housing boom will ever end. It seems that even with expectations of interest rate rises looming, the housing market still remains stable. The Council of Mortgage Lenders (CML) recently announced that affordability constraints were acting as a natural brake on the housing market and that any further significant price rises were unlikely. This is small comfort though, in the short term, for FTBs and low-income earners. With the average UK house price for October at around £146,000, more than five times the average annual salary, the outlook is pretty gloomy. This has been reflected in the drop in number of FTBs in the UK. According to research from the National Association of Estate Agents (NAEA), the percentage of sales accounted for by FTBs in August sank to an all-time low of 13% [although other reports disagree]. So, is the prospect of taking the first step onto the property ladder really such a hopeless cause?
The affordability issue has been debated since as far back as the 1980s. The right-to-buy scheme introduced in 1980 enabled local authority tenants of two years to buy their homes at a discount price. This was followed more than a decade later by the right-to-acquire scheme. Introduced in 1996, right-to-acquire gives certain tenants of Registered Social Landlords (RSLs) a statutory right to buy their home at a discount. However, neither of these schemes addresses the plight of the FTB trying to purchase a property on the open market.
Recognising the need for more affordable housing, and aware that housing market rises were pricing many people out of the market, the Government put its support behind the Low Cost Home Ownership (LCHO) programme. The programme comprises four principle schemes:
• Starters Home Initiative (key workers)
• Do-It-Yourself Shared Ownership
• Conventional shared ownership
The Starters Home Initiative (SHI) is a Government funded scheme to help key workers – primarily teachers, health workers and the police, to buy a home in areas where high house prices are undermining recruitment and retention. The scheme is available in London, the South East and housing hot spots in Eastern and South Western England and is run by local scheme providers.
As house prices rise sharply it has become apparent that it is not just key public sector workers who need assistance. There are many other “key workers” vital to maintaining a thriving economy who are also finding it impossible to buy. Through the introduction of Homebuy and shared ownership the Government saw a way of spreading some of the benefits of owner-occupation to a wider range of lower paid people, irrespective of their occupation or where they live.
The Homebuy scheme was introduced in 1999. It enables tenants of Registered Social Landlords (RSLs) and local authorities, as well as others deemed a priority on local authority waiting lists, to purchase a home on the open market. This is possible with the help of an interest free equity loan from the RSLs equal to 25% of the purchase price, subject to certain limits. The remaining 75% is funded by the applicant through a conventional mortgage and savings. The loan that covers 25% of the purchase price of a home does not involve the purchaser making monthly payments. Instead, the loan is paid back when the property is sold. The amount paid back to the RSL is 25% of the value of the property at the time it is sold.
One of the key objectives of Homebuy is to release existing social lettings which can then be made available to people in need of housing. Homebuy therefore targets areas where there is a specific shortage of social housing. Applicants have no statutory right to Homebuy and not everyone who is eligible will be accepted. However, Homebuy has proved to be extremely popular among both lenders and borrowers.
Perhaps the most interesting and potentially beneficial scheme for FTBs is shared ownership. Michael Coogan, director general of the CML, went as far as saying that it could make a “significant” contribution to the growth of home ownership in the UK. With a shared ownership scheme, the borrower can buy a share in a home, typically between 50% and 75% with the remainder owned by a RSL, such as a housing association, to whom the borrower will pay rent on the proportion the RSL retains.
Shared ownership is not exclusively for people on low incomes. The borrower needs to be employed and able to take out a mortgage, yet unable to afford to buy a suitable property on the open market. Nevertheless, priority is usually given to council or housing association tenants, those on the waiting lists and also key workers in the public sector such as nurses and teachers.
As long as the borrower has a reasonable credit history, they will have no problem in finding a lender willing to give them a mortgage for this type of scheme. However, as with the traditional lending market, problems arise if the applicant has experienced credit problems or simply fails the credit score.
The final scheme is the Do-It-Yourself-Shared-Ownership (DIYSO). DIYSO is offered by a limited number of local authorities. It allows a purchaser to select a property on the open market and then buy it on shared ownership terms, paying rent to a RSL on the share they do not own.
In terms of choosing between Homebuy and shared ownership, the latter continues to offer specific advantages, particularly for people who may run into financial difficulty but are eligible for housing benefit to cover the rental payments. Also, the shared ownership is more flexible – allowing the borrower to “staircase down”, whereby they will sell back part of the equity they have bought to the RSL and pay rent in return. This is much more difficult to organise for Homebuy.
Housing is and will continue to be a key issue. The Government is fully committed to providing more affordable housing. Demand for low cost home ownership is very strong, particularly in high value areas. In Greater London in 2000/2, for example, more than 41,000 eligible applications were received for such properties. The Housing Corporation has already announced plans over the next three years to invest around £3bn to provide funding to build and renovate homes for low cost home ownership.
With the Government keen to provide a greater choice of low cost home ownership programmes, it is important for lenders to support the LCHO programme by offering a solution to those are not able to get a mortgage through a high street lender. Currently there are only 15 lenders offering shared ownership products.
Many lenders see shared ownership as more risky than other more conventional loans; probably because of the history of the scheme, which was primarily set-up to help the financially excluded. However, with rising house prices the type of individual wanting, or needing, a shared ownership product has changed. Therefore, other lenders are seeing the low cost housing market as an increasingly important one – particularly in the current economic climate.
There is little doubt that shared ownership products are here to stay for the foreseeable future. They also appear to be becoming an increasingly popular choice among all types of borrowers. In 2001 alone, there were around 78,000 shared ownership properties in England. This number will certainly rise as more people view it as a viable option. More recently, a CML report found low cost ownership schemes, such as shared ownership, provide more cost-effective use of Government funding than subsidising social renting.
So, are there options available other than through the LCHO programme? It is surprising that lenders have not reacted faster to the problems experienced by FTBs. Recently though, some lenders have started to think more seriously about affordability with the introduction of more innovative products to the market. One such product which has received widespread coverage in the media, is the “eight times” income multiple Bank of Ireland”s 1st Start Mortgage.
This allows FTBs the opportunity to borrow up to “eight times” their salary to purchase a property, by combining the income of a parent and a child. Under the deal, a borrower earning £25,000, for example, could be allowed to borrow as much as £205,000. However, this scheme has been criticised for encouraging dangerous levels of borrowing at a time when debt levels are spiralling out of control.
It could also be argued that if natural brakes on house price growth are removed, then a crash rather than a soft landing may become more likely
Despite evidence to the contrary, it is far from a hopeless cause for the disillusioned FTB. With both the Government and lenders keen to offer assistance to those people wanting to purchase affordable housing in the community, FTBs should feel that they do have viable options.
There are four schemes on the LCHO programme, SHI, Homebuy, DIYSO and conventional shared ownership.
The SHI is targeted at key workers, and is mainly available through local authorities in the South.
DIYSO has limited availability, but allows borrowers to buy a property on the open market on a shared ownership basis.