Shared ownership rent: affordability

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Is shared ownership rent affordable? The answer is complicated and depends partly on how you interpret the question…..

This is the second of a 2-part feature on shared ownership rent. In Part 1 we covered:

  • How shared ownership initial rent is calculated
  • Shared ownership annual rent reviews
  • How RPI affects annual rent reviews

In Part 2 we’ll look at ongoing affordability of shared ownership rents, including:

  • How the amount of shares still held by the landlord affects ongoing rent affordability
  • Whether shared ownership is cheaper than the private rental sector (PRS)
  • Whether shared ownership is cheaper than buying outright
  • The relationship between total housing costs (including rent) and net income
  • Your options if you’re not happy with your rent review

What difference does my initial share % make to my rent?

In Part 1 of this feature, we used Chloe as an example. We assumed that in 2012 Chloe bought a 45% share in a shared ownership home with a total value of £179,563 (the average property price in England that year). We tracked her rent increases using actual RPI up to 2021. Then we assumed that RPI in 2022 was 10% and then reverted to 3% every year for the remainder of her 25-year mortgage term.

Portrait of a woman

Since Part One was published the National Institute of Economic and Social Research has issued a forecast that RPI could rise as high as 17.7% this year. So in Part Two we’ll work on that basis. We’ll assume that RPI is 17.7% in 2022, that it’s 10% in 2023, and then reverts down to 3% for the remainder of Chloe’s 25-year mortgage term.

We’ll also assume that neighbours Mikhael and Sahira purchased a 25% share, and a 10% share respectively. (And we’ll ignore the fact that it wouldn’t have been possible to purchase a 10% share in 2013. Recent reforms introduced 10% initial shares. The aim here is simply to examine what difference the size of the first share makes to ongoing rent affordability).

Annual rent review – Chloe, Mikhael and Sahira

Rent comparison (2012-2037)

As you’d expect, twenty-five years later, Chloe is still paying more than either Mikhael or Sahira. (We’ve assumed that none of them have staircased during this period). But what is interesting here is that Chloe’s rent on the 55% share still owned by the landlord has increased by £408, whereas Mikhael’s rent on a 75% share has increased by £557, and Sahira’s rent on a 90% share has increased by a whopping £668 in the same period.

It’s clear that the lower the initial share you can afford to purchase, the higher your exposure to annual rent increases.

Is shared ownership rent cheaper than private sector rent?

This is a difficult question to answer. It depends which part of the country we’re talking about. It also depends on the time period over which we’re comparing private rental with the costs of shared ownership. Regardless, it’s essential to be aware that shared ownership may not stay cheaper than renting privately over the longer-term.

The private rental sector (PRS)

Of course, it’s essential not to underestimate the downsides of the private rental market, A lot of people enter shared ownership to escape the costs and insecurity that come with private rentals.

Chart showing private rental prices 2013-2021

But open market rents can – and do – go down as well as up. This graph compares private rental prices per Zoopla, Rightmove and other sources of data). Each source of information shows a slightly different picture. But it’s evident that, regardless of the data source, private rents dipped in 2013, in 2017-18 and again in 2020.

Of course, national averages tell only a partial story. It’s quite possible that no private rental tenant had their rent reduced by their landlord. But private tenants do, at least, have the option of moving to a cheaper property if rents are falling in the area they want to live. Shared owners don’t have the same flexibility.

Private tenants don’t pay for repairs and maintenance

It’s also worth bearing in mind that private landlords should pay for repairs and maintenance. Whereas shared owners have to pay 100% of repair and maintenance costs, regardless of the size of their equity share. So comparing shared ownership rents and private rents is a bit like comparing apples and pineapples!

But there doesn’t seem to be any conclusive evidence that shared ownership rent remains cheaper than private sector rents over the long-term (particularly if you take service charges into account, where applicable). In fact, Savills research suggests that shared owners’ ‘contracted rent increases could mean their housing costs rise faster than the open market’.

Is shared ownership cheaper than buying a home outright?

Total housing costs include rent, mortgage and service charges. These will vary from home to home making it difficult to generalise. However, Savills’ research suggests that:


‘as the rent portion of shared ownership costs rises at a premium to inflation, monthly costs will rise faster than for full ownership. This ultimately leads to shared ownership becoming more expensive than full home ownership by the end of the mortgage term’.

Savills, Spotlight on Shared Ownership

Of course, a mortgage will eventually be paid off. Whereas shared owners who don’t – or can’t – staircase to 100% continue paying ever-increasing rent every year. (Raising some troubling questions about what happens if their income decreases drastically in retirement?)

Wage inflation and RPI

Entrants to shared ownership schemes have to undertake affordability assessments to ensure they can afford their home purchase. Homes England set their affordability benchmark as ‘between 25% and 45% of a household’s net annual household income’. The GLA (who oversee shared ownership provision in London) considers annual housing costs are affordable at under 40%.

Average national earnings

But what happens if rents rise faster than wages? Do rents rise faster than wages? Again this is something which will depend on various factors including where you live, and your occupation. Still, it’s helpful to look at national averages.

Table - wages and RPI (2012-2021)

What does this table tell us? Firstly, between 2012 and 2021 average earnings increased by a higher percentage than shared ownership rent rises in only two years out of ten. In the other eight years, earnings lagged behind rent increases, effectively leaving shared owners worse off. Secondly, between 2012 and 2021 most shared ownership rents increased by around 31.5%, whereas the average earnings increase was only 18.4%.

How would a 17.7% RPI rise affect shared owners?

We’ve already mentioned that the National Institute of Economic and Social Research has issued a forecast that RPI could rise as high as 17.7% this year. Will salaries increase by 18.2% (17.7% plus 0.5%)? Probably not for the vast majority of shared owners! So an 18.2% rent increase is going to hurt… Especially as the ‘upwards only’ clause means monthly rent won’t come down again even when RPI goes back down.

What might a 17.7% increase in RPI mean for Chloe, Mikhael and Sahira? The Office for National Statistics (ONS) state that average salaries are the same in May 2022 as in December 2021. So, as well as assuming a 17.7% rise in RPI, we’ll assume that salaries in 2022 are the same as in 2021 (though the monthly salary figure is slightly different due to updated tax calculations in 2022).

Table - Monthly rent on landlord share

What this scenario tells us is that the annual rent review policy of increasing rent by RPI plus 0.5% increases the ratio of rent as a percentage of net income by a relatively small amount over the years. Or at least so long as – and this is an essential proviso – rises in RPI and average salary increases are more or less in line.

Though even small increases will add up over the decades if shared owners don’t – or can’t – staircase to 100%.

But once RPI starts to race ahead of average salaries, rent increasingly eats into household income. Sahira bought only a 10% share, so she is most exposed to the risk of high rent increases. In fact, this table shows that her rent has increased from 22% of her net salary to 28%. For a 10% share in equity!

Homes England’s policy is to require shared owners to purchase the maximum initial share they can afford. If total housing costs (rent, mortgage costs, and service charges) amount to, say, 40% in the first year then any significant increase in rent payable could push some shared owners over affordability benchmarks as defined by Homes England (total housing costs as 25%-45% of net income) and the GLA (40% of net income).

What can I do if I can’t afford my shared ownership rent increase?

This is another difficult question.

Young woman looking out the window
Image: iStock

Generally speaking, contracts are legally binding. Homes England are clear on this point in their guide for housing providers.


‘Shared Ownership leases are assured tenancies and as a result are not subject to rent control under the Rent Act 1977. The setting of rents for Shared Ownership is a matter for the provider to agree with the leaseholder at the point at which the lease is granted’.

Homes England Capital Funding Guide , Section 4.1.1

‘Once the method of setting increases has been decided on and written into the lease, then the provisions of the lease will be binding’.

Homes England Capital Funding Guide , Section 4.2.1

Could housing associations impose a lower rent increase? It’s not at all clear. As shared owners would be unlikely to object, it’s possible that housing associations could voluntarily apply discretion in setting annual rent increases. However, this could potentially breach their grant funding conditions, or conflict with charitable objectives that require them to raise income for social rent homes.

Housing associations may offer support to shared ownership households on a case-by-case basis. But it’s hard to know exactly what such support might look like, or who would be eligible for support. One senior source in a large housing association told me:


“Most housing associations will be looking at some kind of relief to shared owners in financial difficulties. I’m sure there will be differences in approach – not least because many of us have different rent clauses in different leases”.


However, support on a case-by-case basis may not offer much comfort to shared owners. Many already consider that the housing association sector have not been particularly supportive when it comes to bills for building safety remediation and related costs such as insurance and waking watch.

One housing association, Orbit, suggest two options for shared owners who aren’t happy with their rent calculation: contact Citizen’s Advice or appeal to the Government’s First Tier Tribunal.

Orbit Housing Association screen shot - What if I don't agree with my new rent?

But it’s apparent from Orbit’s website that shared owners can dispute whether their rent increase has been correctly calculated, but not whether it is fair or affordable.

In conclusion….

The current cost of living crisis is concerning to a great many shared owners. Rents will increase substantially at precisely the moment household income is being eroded by unprecedented prices for energy and household essentials. In fact, it’s questionable whether annual rent reviews for an Affordable Homes Programme scheme should be pegged to a volatile (not to mention discredited) inflation measure such as RPI.

This feature has, of necessity, used indicative scenarios and various assumptions to illustrate problems arising for shared owners when RPI rises faster than average earnings. (There’s a decided lack of published research on the issue!). But, of course, every household is different. A one-person household may face different challenges than a two-person household. A two-adult household with children may face different challenges than a two-adult household with no children. And so on.

Shared owners What are your personal experiences or concerns? Please consider sharing via the Comments box below this article.


With many thanks to Self Invested for review and comments. Self Invested is a YouTube platform focused on financial literacy and personal development. You can find them here.


SHAC (Social Housing Action Network) is currently campaigning against unaffordable rent increases for social rental tenants and shared owners. Click here for more information.


Featured image: Lifestylememory – www.freepik.com

7 Comments

  1. Owen
    August 31, 2022
    Reply

    Thank you for this article!

    I am a shared owner and my lease has a clause for rent to be increased by RPI + 2% every year based on RPI in November. So I may be looking at a rent increase of 19.7%!

    Cannot believe this isn’t being covered more so in the media given the government talk of rent in the social rented sector being capped at 3, 5 or 7%.

  2. Alice Wright
    September 25, 2022
    Reply

    We bought a 25% share of a house under the then DIYSO scheme in 1994. We have never been able to afford to staircase. We have been refused help by our housing association for an action against our neighbours who carried out building work on their property without notice under the Party Wall Act and without Building Regs approval. Their work has damaged our house. The repair is not covered by the insurance provided by the HA as it has been caused by our neighbours. The HA have told us that we must take our neighbours to court and/or pay for the repairs ourselves. We have already spent almost £20,000 trying to put things right. The HA say that if we cannot afford to repair our house we will have to sell. I am 66 and have MS.

    • Sue
      September 25, 2022
      Reply

      I am so sorry to hear about your experience. It sounds incredibly distressing.

  3. Jane
    September 29, 2022
    Reply

    Thank you for highlighting this. We are a family with three adult disabled children. Our shared ownership house has been adapted for wheelchairs. I am worried how we will be able to afford the rent when my husband retires. The rent was manageable when we bought the house 15 years ago, but each year the rent increases and now it is set to jump and become unaffordable. And with the increase in energy to keep three disabled adults warm, it is going to become very worrying. It seems that shared owners have been forgotten.

    • Sue
      September 29, 2022
      Reply

      Thanks for your comment, Jane. Your situation sounds very worrying. Unfortunately, it does often appear that shared owners are overlooked..

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