In 2021 Homes England announced a number of reforms to the shared ownership model. Why were reforms necessary? Do they go far enough? And what would success actually look like? This article takes an in-depth look at these questions.
(For a more concise summary of recent reforms, take a look at HomeOwners Alliance – Shared ownership changes: what do they mean for homebuyers?).
Who is shared ownership for?
‘Shared ownership is aimed at helping people in housing need who are unable to afford to purchase a property suitable for their needs on the open market‘.Homes England, Capital Funding Guide
Why were reforms necessary?
A key focus of Government housing policy is to get people ‘on the property ladder’. But property prices continue to rise faster than wages. Consequently, outright purchase is out of reach for many people. But so, increasingly, is shared ownership. Some households can’t afford the mortgage deposit required for a part share. And those who do get into the shared ownership scheme may find that the cost of staircasing rises faster than they anticipated. This can make it challenging to purchase additional shares. And many have criticised the fact shared owners are liable for 100% of all costs, regardless of the size of their equity share.
Shared ownership reform: what has changed?
The new shared ownership model incorporates four fundamental changes.
- The minimum initial share was 25%. Now it’s 10%.
- Previously shared owners had to increase their existing share by a minimum of 10% each time they staircased. Reforms allow them to staircase in 1% increments each year for 15 years.
- Housing associations now have to contribute to some repair and maintenance costs. Previously shared owners had to pay 100% of all charges, regardless of the size of their share.
- The nomination period (during which housing associations have the exclusive right to sell a shared ownership property) is now 4 weeks, reduced from 8 weeks.
Additionally, new model shared ownership leases specify a lease length of 990-years. (The minimum shared ownership lease length was originally 99-years, later increased to 125).
Reforms published by Homes England in 2021 apply to all new build shared ownership homes delivered through the Affordable Homes Programme (AHP) 2021- 2026. (It’s worth bearing in mind that reforms aren’t retrospective so won’t apply to many of the shared ownership homes currently on the market).
Do reforms go far enough?
Reducing the size of the minimum initial share may well encourage more homebuyers to enter the shared ownership scheme. But what happens once shared owners are on the ladder? Is shared ownership a viable route to full home ownership? And is it genuinely affordable? There are two key issues.
Firstly, the available evidence suggests that, whilst shared ownership undoubtedly works for some households, a significant number find themselves stuck on the lower rungs, or even back to square one.
Secondly, the position of shared owners confronted with 100% liability for building safety remediation costs, waking watch and massively hiked insurance costs – regardless of the size of their share – shines a spotlight on the limited extent of the affordability promise. But it doesn’t necessarily take a building safety crisis for housing costs to spiral upwards.
Do recent reforms address these problems? Or do they exacerbate them?
10% initial share: how low should you go?
A smaller initial share requires a smaller mortgage deposit, potentially opening up the scheme to more households. But is that such a good idea?
Shared ownership marketing campaigns heavily promote subsidised rents, set initially at 3% of the market value of shares still held by the housing association. But that’s not the whole story. Homes England’s model lease allows housing associations to increase rent annually. Rent reviews use an inflation measure (the Retail Price Index, often referred to as RPI) adding up to 0.5% on top of inflation. (Some older versions of the shared ownership lease allow RPI plus up to 2%). Moreover, annual rent review is on an ‘upwards only’ basis. So shared ownership rents tend not to go down or even remain static, regardless of whats happening with open market rents.
Shared owners with a 10% share will be much more exposed to the possibility of ‘rent burn’ on the share still held by the housing association (90% in this case) than owners with a larger initial share.
If households can only afford 10% should they even consider shared ownership?
Over time rising rent charges could erode disposable income, perhaps diverting hard-earned cash from other equally vital necessities such as childcare, healthcare, pension contributions, or education and training. Unfortunately, the lower the initial share they can afford, the more likely households won’t be resilient to longer term financial challenges.
If households can only afford 10% in the first place, should they be encouraged to consider shared ownership?
1% increments: climbing the property ladder, or still stuck on the lower rungs?
Staircasing to 100% is significant for a number of reasons. In law, shared owners are simply assured tenants (albeit tenants with a relatively long lease and an option to purchase more shares over time). Shared owners have fewer rights and more burdens than leaseholders more generally, unless and until they staircase to 100%.
A key risk for shared owners is the risk of possession – with no reimbursement of any equity – should they fall into arrears. This is clearly of concern. Particularly given that recent research by the Cambridge Centre for Housing and Planning Research (CCHPR) found repossessions are on the rise.
But it’s extremely unclear how a gradual 1% staircasing model will transition households to full ownership. Say a first-time buyer purchased an initial share of 10% and took advantage of the opportunity to purchase an additional 1% each year for 15 years. They would still have only a 25% share. In other words it would have taken 16 years to achieve the previous minimum share of 25%. And they’d still be exposed to above inflation annual rent increases on the remaining 75%.
Would households be able to generate a sufficient gain on selling such a small share to buy a home outright? Or would they simply be back to square one, perhaps renting or entering another shared ownership scheme?
Repairs and maintenance: when shared doesn’t mean shared
The fact that shared owners are liable for 100% of all service and administrative charges is widely perceived as unfair. The reforms require housing associations to make a contribution to costs.
But an entitlement of up to £500 maximum per annum for ten years isn’t the ‘repair-free period’ it’s described as. Additionally, any fixed limit has two problems. Firstly, it will quickly go out of date unless adjusted for inflation. Secondly, a fixed limit bears no relationship to either the total value of specific properties or the % share held by shared owners. Should larger properties have an increased entitlement? Should shared owners with a smaller share get more assistance with costs?
And, of course, households remain liable for 100% of costs after the initial 10-year period, whether they’ve staircased to 100% or not.
Shared ownership resales are reported to be less attractive to homebuyers than new-build homes.
There are a number of reasons why this might be the case. For example, short leases on older flats may necessitate costly lease extensions. (Or, in the case of houses, staircasing to 100% to obtain the freehold).
Over time, inflation-plus annual rent reviews can result in specified rent charges becoming more expensive than open market rentals, or new-build shared ownership schemes. Consequently, shared owners hoping to sell may find themselves obliged to undertake complex and costly simultaneous sale and staircasing transactions to eliminate the rent component.
Reducing the nominations period from 8 weeks to 4 weeks does little, if anything, to address these particular problems.
990-year leases: who benefits and who loses out?
Future homebuyers will benefit from 990-year leases which remove the need for costly lease extension. But there’s a price to pay. This reform is likely to disadvantage existing shared owners by making older shorter leases even more unattractive in the market place.
Shared ownership reform: what would success look like?
The policy focus is on encouraging more prospective homebuyers to consider shared ownership. Will reforms achieve the aim of more entrants to the shared ownership scheme? Only time will tell! But getting onto the property ladder is just the start of the story.
Shared ownership is positioned as an affordable pathway to full ownership.
But national monitoring statistics don’t capture ongoing affordability, or the total long-term costs of shared ownership for shared owners. There’s also little data on transition to full ownership (whether defined as staircasing to 100% or via a gain on sale).
Will Homes England’s reforms make shared ownership genuinely affordable? Will they make shared ownership a viable route to full home ownership? Or will tomorrow’s shared owners find themselves stuck with a tiny equity share? Could they end up trapped in a starter home that is increasingly expensive and unsuitable as time goes on? And – in the absence of robust national metrics to monitor and evaluate long-term exit strategies, outcomes and impact – how will we ever know?