Why most shared owners don’t and can’t staircase….
Richard Murphy (MRICS, RICS Registered Valuer) is a Director with RJC Surveyors. In this feature he explains why most shared owners don’t and can’t staircase. This is Part 1 of a series of articles by Richard on shared ownership. Part 2 will deal with shared ownership and leasehold reform.
What is shared ownership?
According to Which?:
Also known as ‘part buy, part rent’, shared ownership is a scheme that allows you to buy a share of a property and pay rent on the rest. It’s designed to help people with small deposits and lower incomes get on the property ladder.
I prefer to describe it as follows:
A ‘shared ownership’ tenancy is where the rent paid by the tenant is reduced according to the percentage of equity paid for. If the shared owner pays 25% of the value of the flat, then the rent payable is set at 75% of the housing association rent. This rent is initially calculated as 2.75-3.00% of the market value of the flat. Options are available to reduce the rent by making further down-payments of the market value usually at additional 25% chunks up to 100%. At this point the rent is reduced to zero, in a process known as staircasing.
It certainly helps people get on the ladder, but once on the ladder can they ever get to the next rung?
Very few shared owners manage to achieve 100% ownership. Unofficial figures suggest only 5-8%, but housing associations (HAs) have been reluctant to release these figures.
By doing some analysis on current price and making similar projections over the next 15 years, it is quite easy to see why this is the case. And it’s unlikely to change in the future – unless there is a radical change to the rules in this sector.
My analysis is based upon a new scheme in Walthamstow known as Feature 17 where 2 bed flats are currently selling for £500,000 and the service charge is £1,800pa. I have assumed the purchaser is a bus driver with a salary of £31,594 (the man on the Clapham Omnibus!) who would be eligible to buy a 25% share.
Renting v shared ownership
Flats on an earlier part of the scheme are currently renting at £1,400pcm i.e. £16,800 p.a. (This represents approximately 70% of the bus driver’s net income).
Assuming the HA charges 3% of the market value for their rent and the mortgage rate is 3% for the 25% share, the HA rent/mortgage payment (interest only) would be £15,000 p.a.
The total cost of rent plus service charge (assumed at £1,800 p.a.), would be £16,800 p.a.
This shows that cost of renting is about the same as buying into a shared ownership flat. There is no real subsidy. The bus driver would certainly be no better off than if he stayed purely renting (if he opted for a repayment mortgage, he would be approx. £3,300 worse off initially).
He would also not be required to make a long-term commitment to a property where the repairs and maintenance costs are unknown, but the lease would require him to pay.
That situation is unlikely to improve over time, as the rent increases by RPI plus 0.5% and yet public sector salaries are being limited to 1% currently. This will make it difficult to save for an additional share.
Projection – 15 years’ time
If we then project forward using the trends over the last 15 years (public sector pay only increased by an average of 2.4% per year over the last 15 years), the bus driver’s income would increase to £45,000. During the last 15 years, the House Price Index for Waltham Forest went up by 212% so projecting that forward the new price of our example would be £1,060,000.
A 25% share of this property would be worth £265,000. If this were added to the existing mortgage of £125,000, the total mortgage would be £390,000 representing 8.6 times his projected salary. This would be deemed to be unaffordable.
Therefore, if trends continue as they have over the last 15 years, it is unlikely that the bus driver would ever be able to afford to pay an additional 25%, never mind 75%!
Hopefully, this is a graphic example of why staircasing has not been successful for ‘shared owners’. The figures are only illustrative and would vary for each scheme and in different parts of the country. However, it probably summarises the situation in most London Boroughs.
For HAs on the other hand, their asset has increased in value from £375,000 to £795,000 at no cost to themselves apart from borrowing at the risk free rate, currently 0.05% see SONIA.
It is recognised that the Government are planning to introduce a cap on service charges for new build schemes for the 1st 10 years, which is a step in the right direction. Jenrick unveils huge £12 billion boost for affordable homes – GOV.UK (www.gov.uk)
Going forward if shared owners were only charged maintenance and repairs in direct proportion to their equity, the shared owner could use the savings to put towards an additional share. This would help to allow shared owners to get to that 2nd rung of the housing ladder.
This only duplicates what happens in the market currently. Renters do not generally pay service charge in addition to the rent they pay to the landlord on the usual Assured Shorthold Tenancies (ASTs). The rent includes most if not all these charges. Why should shared owners pay for maintenance and repairs for the equity share that they do not own?
If they didn’t have to this would also be more equitable, and it would encourage HAs to build more carefully and take more responsibility for the defects in their buildings – particularly fire safety and cladding.
Richard Murphy Dip Surv; MRICS; RICS Registered Valuer
Director of Enfranchisement
Twitter @RichardMurphy1 and @RJC_Surveyors
Phone: 020 7499 8043
I would be interested to hear any other views on this subject. Please do join the discussion via Leave a Reply at the end of this article.
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