LUHC Committee inquiry into shared ownership

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The Levelling Up, Housing & Communities (LUHC) Committee is undertaking an inquiry into shared ownership. The deadline for submitting written evidence was 14 September 2023.

Shared Ownership Resources’ response is below.

Introduction

Shared Ownership Resources champions the interests of shared owners and households considering shared ownership. The project publishes case studies; collaborates with housing, legal and financial experts to offer specialist information and advice; and campaigns for improved transparency and better outcomes and against mis-selling and other poor practices in the sector.

Sue Phillips (FCCA) founded the Shared Ownership Resources project in 2021. In 2023 she published Shared Ownership: The Consumer Perspective. This submission includes 18 recommendations (italicized) from that report. It addresses the inquiry terms of reference from a homebuyer/shared owner perspective with a particular focus on long-term outcomes and value for money.

1. Do the schemes Shared Ownership and Right to Shared Ownership provide good value for money for the potential users of the scheme?

1.1. Value for money compared to home purchase on the open market

1.1.1. Initial shares may comprise poor value for money (VFM) for two reasons: first, a policy focus on new-build developments with corresponding new-build premiums (around 15% [1]); and, second, the possibility that: ‘The usual market mechanisms which help regulate property prices may not work as well in the case of shared ownership’. [2]

1.1.2. Shared ownership (SO) requires staircasing at ‘current market value’ – with professional and administration fees associated with each staircasing transaction – meaning shared owners may pay considerably more in total than had they purchased their home on the open market. [3]

1.1.3. Furthermore, staircasing to 100% provides ‘ownership’ of a wasting asset – once a lease has fewer than 80 years remaining – unless it obtains the freehold (which will not be the case for flats, leasehold houses or where staircasing is capped below 100%).

1.1.4. If shared owners do not, or cannot, staircase to 100% they are exposed to compounding annual, ‘upwards only’ rent rises at a premium to inflation. Savills estimates that this leads to SO becoming more expensive than full ownership by the end of the mortgage term. [4] Researchers at the University of York conclude: ‘Over-inflationary rents mean shared owners’ monthly costs converge with open market buyers’ costs beyond year 15 while accruing much less equity, challenging the products’ value for money’. [5]

1.1.5. The complexities of Stamp Duty Land Tax on SO homes also have implications for VFM, whether homebuyers make a full market value election [6] or choose to pay in stages [7]. Additionally, some solicitors are providing inaccurate advice on matters including sub relief on simultaneous sale and staircasing transactions, market value elections, and net present value of rent, leaving shared owners out of pocket..

• HMRC should update existing guidance on sub-relief of Stamp Duty Land Tax (SDLT) on simultaneous sale and staircasing transactions as soon as possible, and publish widely a clear position on this matter outlining options for those who have overpaid as a consequence of incorrect advice. HMRC should consider extending the one-year deadline in such cases.

1.1.6. Some shared owners report only a small gain, or even a loss, on resale due to the impact of new-build premiums and/or 100% liability for selling costs. There is a paucity of monitoring data and research on the VFM of SO as a ‘starter home’.

1.2. Value for money compared to private rental

1.2.1. JRF found that between 2016 and 2022 social rental tenants saw an average 3% increase in rent and private sector tenants an average 10% increase, yet for shared owners it was 22%. [8] Savills also finds that SO can become less competitive over time compared to the private rented sector: ‘While rental growth at a national level is roughly in line with RPI, this hides a great deal of regional variation. In many parts of England, private rents have shown little growth over the last decade. For example, rental growth in the North East was just 6.4 % between 2008 and 2018 according to the ONS. RPI over that period was 31.1%. Applying that inflation plus a premium to shared ownership rents results in rental growth far in excess of the market’. [9]

1.2.2. Of course, unadjusted comparisons between SO rents and open market rents do not compare like with like. Repairs and maintenance are included in rent paid by private tenants but shared owners are treated as homeowners with 100% liabilities for these costs regardless of the size of their equity share.

1.2.3. The smaller initial share an SO household can afford, their greater the exposure to compounding ‘upwards only’, annual rent rises. This is likely to be mitigated where households are in receipt of Universal Credit. But there is little data in this regard.

1.2.4. One study found that: ‘‘Shared ownership tenants were statistically more likely to have unaffordable rent compared to social and market rent tenants – 16 per cent of tenants in shared ownership had unaffordable rent compared to 9 per cent of tenants in market rent and five per cent in social/affordable/intermediate rent properties’. [10] However, the study also found that: ‘Tenants on Housing Benefit were statistically less likely to have unaffordable rent compared to tenants who did not receive Housing Benefit’. The report did not analyse between shared owners reliant purely on earned income and shared owners in receipt of benefits.

1.3. Value for money to the public purse

1.3.1. Given that a number of shared owners rely on Universal Credit to pay housing costs, ‘upwards only’ rent rises at a premium to inflation raise questions as to whether SO constitutes good VFM to the public purse, relative to other tenures.

2. How can the Government ensure that Shared Ownership and the Right to Shared Ownership remains an affordable programme in light of rising provider costs and inflation?

2.1. Schrödinger’s flat and affordability

2.1.1. SO has been described as ‘Schrödinger’s flat’; it is simultaneously affordable and unaffordable.

2.1.2. Government and housing providers define affordability by way of contrast to short-term costs of buying outright or renting, or access to a mortgage deposit and loan. Consequently initial affordability assessments do not stress test relationships between current and anticipated future household income, anticipated pathways through the tenure and inevitable increases in total housing costs.

2.1.3. Per University of York evidence submitted to a previous LUHC Committee inquiry: ‘Initial costs of entry to ownership are not sustained, and this is poorly understood by purchasers as no projections of medium- or long-term costs are provided at the outset even under the new model lease’. [11]

2.1.4. The current requirement that prospective shared owners purchase the maximum share that they can afford – combined with a high affordability threshold of 40%-45% – leaves shared owners little headroom to absorb any subsequent increase in total housing costs, with potentially adverse consequences if wage inflation decouples from general inflation.

2.1.5. The following recommendations could help ensure SO remains affordable to shared owners.

• A review of initial affordability assessments, to inform reforms to facilitate ongoing financial sustainability for shared owners.
• Consultation with housing providers, sector trade and professional bodies, lenders and representatives of shared owners to determine a new ‘affordable rent’ formula for the shared ownership scheme.
• An independent review of the performance and regulation of service charges over time and reform to ensure that service charges are more likely to remain affordable for shared owners. The review should consider the option to apportion liability according to the respective equity shares held by the shared owner and the landlord, plus an overall financial cap on total shared owner liability.

3. What support can be offered to Shared Ownership tenants given the impact of leasehold properties?

3.1. Assured tenancy

3.1.1. Any shared owner is a leaseholder. But their lease takes the legal form of an assured tenancy until the shared owner staircases to 100%, whereupon they become a standard leaseholder (if occupying a flat) and may also be able to obtain the freehold (if occupying a house).

3.1.2. Assured tenancies have fewer rights and more burdens than ‘conventional’ leasehold. In particular, shared owners face a risk of mandatory possession with no legal right to reimbursement of equity in the event of rent arrears and have no statutory right to extend their lease. A number of shared owners – a majority of whom were sold short 99 or 125-year leases – report being unaware of these issues at the point of purchase.

3.1.3. Options to better support shared owners as leaseholders and, in particular, as assured tenants, include:

• Amend the legal status of shared ownership from an assured tenancy to ‘conventional’ leasehold in order to afford shared owners the same rights and protections as any other leaseholder.
• Fund lease extension to at least 250-years at an affordable flat fee for all shared owners whose lease term was originally 125-years or less.
• Make peppercorn ground rent a requirement for all parties with an interest in any shared ownership lease, with retrospective application.
• Resolve the problem that lease extension – which takes effect as a surrender and re-grant of a lease – is not covered or exempted in the new Building Safety Act 2022 meaning that any shared owner who potentially qualifies for leasehold protections will now lose those protections on extension of a short lease. Action should be taken to ensure no leaseholder loses protections as a result of lease extension undertaken after 14 February 2022.

4. What impact, if any, are changing sector regulations having on the Shared Ownership and Right to Shared Ownership Scheme?

4.1. Regulator of Social Housing

4.1.1. The Regulator of Social Housing’s Consultation on Consumer Standards makes no distinction between shared owners and social housing rental tenants. The failure to take account of hazards specifically associated with SO reduces the likelihood of changing sector regulations being beneficial for shared owners.

4.1.2. The new tenant satisfaction measures (TSMs) are welcome but do not fully address gaps in data. Notwithstanding a claim that: “Our standards are outcome-focused”, not all the TSMs apply to SO and, crucially, none relate to the outcomes of affordability and a realistic pathway to full home ownership.

4.1.3. SO homes are also excluded from the five TSMs relating to ‘keeping properties in good repair’. The rationale is that equivalent repairs under the SO scheme are the shared owner’s responsibility, not the landlord’s. However, service charges are a significant cause of discontent for shared owners. The current set of TSMs does not provide for data collection to assist monitoring and assessment of shared owners’ experiences of repairs and maintenance, and related costs charged on as service charges.

4.2. New Homes Quality Board (NHQB)

4.2.1. Shared ownership is excluded from the provisions of the New Homes Quality Code.

5. Is there a lack of mortgage providers for Shared Ownership properties?

5.1. Mortgage providers

5.1.1 There is a smaller pool of lenders for SO properties, and rates are typically higher than for other mortgage products. Underlying factors include: high loan to value ratios [12], a low number of years remaining on the lease, and any restrictions on staircasing to 100% (e.g. 80% cap) or on resale (e.g. local connections criteria).

5.2. Mortgage terms

5.2.2. Most shared owners (66% in 2018) have a mortgage term longer than 25 years. This can make staircasing challenging because households may be unable to extend their loan any further when re-mortgaging. [13]

6. What challenges are associated with repair costs being covered by those utilising the Shared Ownership schemes?

6.1. Affordability

6.1.1. Although the Capital Funding Guide (2022) specifies that: ‘The level of service charge must be affordable for the intended client group’, service charges are uncapped in all the model leases (including the new model after the initial 10-year repair period). Affordability problems may arise not simply from cost per se, but also from shared owners’ lack of control over occurrence, timing, specification and quality of repairs. Some shared owners express concerns about rapid rises in service charges. [14]

6.1.2. 100% liability is widely perceived as unfair, and may push full ownership out of reach if households have too little disposable income after total housing costs to save towards staircasing.

6.2. Accuracy

6.2.1. Problems with service charge errors and over-charging have led to a consumer campaign to “end service charge abuse”. [15]

6.3. Transparency

6.3.1. The model lease is silent on 100% liability for service charges – and other costs – regardless of the size of the equity share held by the shared owner. Those utilising the scheme may not understand this aspect at the point of entry.

7. How viable is full ownership through the Shared Ownership scheme and/or the Right to Shared Ownership Scheme?

7.1. Gaps in data

7.1.1. There is a paucity of national monitoring data on full life cycle costs, exit routes and transition to full home ownership (whether via staircasing to 100% or a gain on sale). In 2022 Peter Denton, Chief Executive of Homes England, said that he is “not aware” of whether the agency directly tracks staircasing or how many properties eventually come out of SO because they are bought out fully [16]

7.2. Flaws in data

7.2.1. Existing national monitoring statistics conflate households who staircase to 100% in a home they continue to live in with households who undertake a simultaneous sale and staircasing transaction as part of a sale process. This makes it challenging not only to assess how many shared owners transition to full ownership via staircasing to 100% (a measure of success), but also to quantify the transfer of social housing stock to the open market via simultaneous sale and staircasing transactions (a measure of failure).

7.3. Is full ownership viable?

7.3.1. There are indications that some shared owners – for example, households who paid an excessive new build premium, have a short lease and/or onerous ground rent terms, whose rent has risen to levels higher than private sector rents, who face liability for building safety costs [17], or whose total housing costs to income ratio has risen above the maximum threshold specified in initial affordability assessments – can end up trapped in a home that is no longer be suitable for their needs and is increasingly unaffordable, with no viable exit route.

8. Does the Right to Shared Ownership policy in its current form reduce homeownership risks for individuals from lower income backgrounds?

8.1. The long view

8.1.1. The report Do Affordable Home Ownership Schemes Reduce Homeownership Risks for Lower Income Households in England? concludes: ‘It remains the case that shared ownership cannot always maintain the lower housing costs relative to private rents and full ownership, due to inflationary rents and service charges, particularly for flats. Over time the relative cost advantage of shared ownership is lost but this facet is known but little discussed’. [18]

8.1.2. The report did not assess SO relative to social housing rents. However, there is clearly a strong possibility that lower income households could be exposed to greater financial risk in giving up a social rent tenancy for an interest in an SO lease.

• Government, Homes England and the Greater London Authority should support a review to establish safeguards to ensure no household is likely to be financially disadvantaged as a result of entry into shared ownership via recent reforms, whether a lower initial share than under the current model or the new Right to Shared Ownership.

9. What more can be done to secure the Shared Ownership scheme as an affordable route into home ownership?

9.1. Ensure policy consistency. Lord Greenhalgh, former Minister of State (DLUHC) says: “With outright ownership being the mission, shared ownership should [not] and must not be a destination” [19] But some in the social housing sector have an opposing view: “[Shared ownership] is not just a stepping stone – it offers people security and a stake in their own home, regardless of whether they increase their share to full ownership or not”. [20]

9.2. Undertake identification and resolution of fundamental tensions, mutually incompatible interests and conflicts of interest inherent in the cross subsidy development model as it stands. [21]

9.3. Build in flexibility (including subletting) and viable exit routes (including buyback where appropriate).

• Government should support an independent review of current criteria for buyback to provide earlier and greater support for households where total housing costs (including current and future liabilities related to building safety [22]) are financially unsustainable and/or ground rent is higher than a peppercorn and/or where ground rent is triggered by staircasing to 100% and/or shared owners are unable to sell their share at the price established by a RICS valuation.
• Remove the prohibition on subletting, with proportionate safeguards to ensure commercial landlords do not purchase an interest in shared ownership properties prior to 100% staircasing.

9.4. Fund independent specialist resources to assist informed purchase decisions and to support complex decision-making post-purchase.

• Government should fund a specialist, independent and impartial shared ownership website including online guides and resources, alongside an impartial, free telephone advice service.
• Government, Homes England and the GLA should undertake a benchmarking exercise with other sectors engaged in provision of complex information to lay people about products involving potentially high levels of risk, to drive further improvement of both the content and presentation of the Key Information Documents, and other information provided by Homes England and their agents.

9.5. Tackle non-compliance with consumer protection requirements [23] and misleading advertising campaigns [24].

• Government, Homes England, the GLA, the CMA, the ASA and CAP should support an independent review into shared ownership marketing, consult on options to prevent mis-selling and deliver an enforceable Code of Practice for shared ownership marketing and promotion.

10. How does the variation of costs from Housing Associations and other providers impact the Shared Ownership Scheme and the experience of tenants or potential buyers?

10.1. There are trade-offs to be made between choice and standardisation. In the marketplace, choice is generally seen to be beneficial. However, as publicly subsidised social housing, there is a persuasive argument for standardisation of the SO scheme – including costs – to improve consumer understanding and to ensure consistent quality standards.

11. What should be done to improve the Department for Levelling Up, Housing and Communities’ data collection regarding Shared Ownership and the Right to Shared Ownership?

11.1. Existing data on SO brings to mind a quote from Aaron Levenstein: “Statistics are like bikinis. What they reveal is suggestive, but what they conceal is vital”.

11.2. Characteristics of potential users vary widely (e.g. earning £80-£90k/reliant on Universal Credit, single person/couple/family). Characteristics of SO properties also vary (e.g. house/flat; urban/rural; low value location/high value location). Consequently it is essential to avoid broad generalisations. Granular data is vital for improved understanding of the VFM, long-term outcomes and impact of the scheme for different demographics.

11.3. A household’s intended pathway through the tenure will affect VFM: whether 100% staircasing or transition to full ownership via a gain on sale. Or, indeed, whether they enter the scheme because it is perceived as a more secure form of renting.

11.4. The two pathways to ‘full ownership’ create mutually incompatible needs of the property market for shared owners. Shared owners intending to staircase to 100% hope that property prices will not rise substantially. Those hoping for a gain on sale depend on them doing so. Consequently, the SO model cannot deliver optimum outcomes, including VFM, for one group other than at the expense of the other.

11.5. It should be of greater concern that there is such limited data on the specific demographics most likely to derive benefit from the scheme and, conversely, those who are exposed to risks of poor VFM, or even financial unsustainability, over time.

• Government and the Regulator of Social Housing should undertake robust data collection, evaluation and reporting on the ongoing financial sustainability of shared ownership.
• Government and the Regulator of Social Housing should undertake robust data collection, evaluation and reporting on the extent of shared owner transition to full ownership.
• Government and the Regulator of Social Housing should undertake robust data collection, evaluation and reporting on transfer of shared ownership properties from social housing stock to the open market, analysing between 100% staircasing by a shared owner who continues to live in that home and simultaneous sale and staircasing transactions.
• The Regulator of Social Housing should disaggregate data collection and reporting on shared ownership from the Low-Cost Home Ownership category currently employed, and review tenant satisfaction measures for shared ownership as a distinct category.

12. Are alternative schemes such as ‘Rent to Buy’ viable and do they offer more value for money?

Not answered.

13. What more should be done to support first time buyers and those from lower income households onto the property ladder?

13.1. It would be equally valid to ask whether first-time buyers and those from lower income households should be supported onto the property ladder at all if the purchase is likely to be financially unsustainable?

UPDATE: The LUHC Committee published its report Shared Ownership on 28th March 2024. You can download it here. The Government’s response is due by 28 May 2024.

[1] York, M. (2023), Shared ownership: what’s the risk of negative equity?, The Times, 3 February. Available at: https://www.thetimes.co.uk/article/shared-ownership-whats-the-risk-of-negative-equity-x6cwdfmsp.

[2] “The usual market mechanisms which help regulate property prices may not work as well in the case of shared ownership. Because the market is made up of buyers purchasing part shares, differences in value may have less effect than in the wider property market. For example, someone buying a 25% share in a flat worth £400,000 might be tempted to pay £20,000 extra. But in the open market buyers might never pay £480,000 for that property”. Murphy, RICS surveyor, quoted in: Phillips, S. (2021) Shared ownership valuation and selling. Available at: https://www.sharedownershipresources.org/need-to- know/valuations/shared-ownership-valuation-buying-selling/.

[3] For example, assuming a shared owner purchased a 50% initial share of a property with a market value of £300,000, the first share would cost £150,000. Say, they staircased to 100% 15 years later, and the property had increased in value to £500,000,the second share would cost £250,000. The housing association would benefit from the uplift in value. But the shared owner would pay £400,000 for a property that could have been purchased for £300,000 at the outset, plus additional mortgage interest on the difference of £100,000. Total mortgage interest on the difference of £100,000 will be significant (as will rent on the 50% share of the property held by the landlord for 15 years).

[4] Bowles, L and Buckle, C. (2019) Shared Ownership: The heir apparent?, Savills. Available at https://www.savills.com/research_ articles/255800/282799-0.

[5] Wallace, A., Rugg J., & Jiaxin Lui J. (2022) Do Affordable Homeownership Schemes Reduce Homeownership Risks for Lower Income Households in England?, University of York. Available at: https://www.york.ac.uk/business-society/research/spsw/ housing-and-environment/affordable-homeownership/.

[6] If an entrant to the scheme elects to make a full market value election (and assuming the transaction is over the SDLT threshold) this may represent poor value for money if they subsequently find they can’t afford to staircase as anticipated, or if their property has a cap on staircasing over 80%.

[7] If an entrant to the scheme elects to pay in stages, although no SDLT is payable until they staircase over 80%, at this point total SDLT could be higher than if they had purchased the same property on the open market in the first place. This is for two reasons: firstly, because SDLT is payable on the current market value, which – in a rising property market – is likely to be higher than the value when the initial share was purchased, and secondly, because shared owners lose the tax benefits of first-time buyer status once they’ve acquired their first share.

[8] Elliott, J. and Phillips, S. (2022) Q&A with JRF: Does shared ownership create poverty? Available at: https://www. sharedownershipresources.org/need-to-know/affordability/shared-ownership-poverty/.

[9] Bowles, L. and Buckle, C. (2019) Shared Ownership: The heir apparent?, Savills. Available at https://www.savills.com/research_ articles/255800/282799-0.

[10] Green, S., Pattison, B., Reeve, K. and Wilson, I. (2016), How affordable is affordable housing? Available at: https://shura.shu.ac.uk/14641/1/how-affordable-is-affordable-housing_0.pdf.

[11] Wallace, A. (2023), Written evidence submitted by Dr Alison Wallace, Centre for Housing Policy, School for Business and Society, University of York.  Available at: https://committees.parliament.uk/writtenevidence/120607/pdf/.

[12] Wallace, A., Rugg J., & Jiaxin Lui J. (2022) Do Affordable Homeownership Schemes Reduce Homeownership Risks for Lower Income Households in England?, University of York. Available at: https://www.york.ac.uk/business-society/research/spsw/ housing-and-environment/affordable-homeownership/.

[13] Wallace, A., Rugg J., & Jiaxin Lui J. (2022) Do Affordable Homeownership Schemes Reduce Homeownership Risks for Lower Income Households in England?, University of York. Available at: https://www.york.ac.uk/business-society/research/spsw/ housing-and-environment/affordable-homeownership/.

[14] ‘My SO Home’ case studies – Available at: https://www.sharedownershipresources.org/category/my_so_home/.

[15]  https://findothers.com/campaign/servicecharges.

[16] https://committees.parliament.uk/oralevidence/10695/default/.

[17] End Our Cladding Scandal (2022), Dereliction of Duty: How housing associations failed leaseholders trapped in the building safety crisis. Available at: https://endourcladdingscandal.org/wp-content/uploads/2022/02/Dereliction-of-Duty-EOCS-report-FINAL.pdf.

[18] Wallace, A., Rugg J., & Jiaxin Lui J. (2022) Do Affordable Homeownership Schemes Reduce Homeownership Risks for Lower Income Households in England?, University of York. Available at: https://www.york.ac.uk/business-society/research/spsw/ housing-and-environment/affordable-homeownership/.

[19] Correspondence with the author of this submission.

[20] Nettleton, A. (2019) Inside Housing, 9 October. Available at: https://www.insidehousing.co.uk/comment/comment/we-need-the-government-to-be-a-positive-voice-for-shared-ownership–not-to-tweak-it-too-much-63619.

[21] Chapter 5, Is Shared Ownership Fair?, Phillips, S. (2023) Shared Ownership: The Consumer Perspective. Available at: https://www.sharedownershipresources.org/campaigning/reports/consumer-perspective/.

[22] End Our Cladding Scandal (2022), Dereliction of Duty: How housing associations failed leaseholders trapped in the building safety crisis. Available at: https://endourcladdingscandal.org/wp-content/uploads/2022/02/Dereliction-of-Duty-EOCS-report-FINAL.pdf.

[23] CAP Executive (2022), Property: Shared Ownership. Available at: https://www.asa.org.uk/advice-online/property-shared-ownership.html.

[24] ASA (2022) ASA Ruling on Keaze Ltd t/a SharedOwnership.net. Available at: https://www.asa.org.uk/rulings/keaze-ltd-a21-1098519-keaze-ltd.html.

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