Since 72 people lost their lives in the Grenfell tragedy on 14 June 2017, the cladding scandal has spiralled. This long-form article examines the impact on shared owners, and asks whether the building safety crisis exposes fundamental flaws in the shared ownership model.
Shared ownership and the building safety crisis
The building safety crisis has thrown into stark relief that affordability claims for shared ownership are not just ill-defined, but a false promise.
- What has gone so wrong that shared owners who placed trust in the promise of ‘affordable homes’ now face crippling bills?
- What are housing associations doing to support shared owners facing life-changing building safety remediation costs? Is it enough?
- What more can be done to help shared owners and leaseholders in dire situations?
The affordable homes promise: what’s gone wrong?
Shared ownership has been described as ‘Schrödinger’s flat’; it is simultaneously affordable and unaffordable. Government and housing associations define affordability by way of contrast to short-term costs of buying outright or renting, or access to a mortgage deposit and loan. But these definitions oversimplify and distort understanding by failing to consider longer-term costs and risks.
A 2019 Savills Spotlight report explains one aspect of the problem: ‘…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’.
Neither shared nor ownership
Shared ownership is not legally ‘ownership’; it is an assured tenancy (or an assured shorthold tenancy depending on ground rent terms). And it is clearly not ‘shared’ either. Shared owners were always liable for 100% of all maintenance and repair costs, on top of service and administration charges. Now they’re expected to pay for building safety remediation works too. Building safety issues massively compound inherent flaws and contradictions in the shared ownership model.
A foot on the property ladder?
Shared ownership is heavily promoted as a ‘foot on the property ladder’. But commentators have drawn attention to a lack of data on the outcomes of shared ownership schemes, questioning whether it is a viable route to home ownership and whether it is appropriately classified as affordable housing.
Staircasing rates were already dismally low: a mere 2.3% staircased to 100% in 2018-19. The building safety crisis means any shared owners who planned to staircase to 100% are now likely to be unable to obtain mortgages to do so in the near future.
Risk and outcomes
Shared owners who can’t staircase to 100% may find their disposable income eroded year on year. They now have to pay building safety charges, on top of annual rent increases on as yet un-purchased shares. (RPI + 0.5%-2% annual increases are typical). Which may make it harder to sell on, trapping many shared owners as hostages in increasingly unsuitable homes; unable to start a family, with inadequate space for an existing family, accept jobs in other parts of the country, or even relocate to care for loved ones.
Even bankruptcy is not necessarily a way out, as bankruptcy does not discharge mortgage debts.
Irwell Valley Homes are planning to push £100,000 bills onto leaseholders and shared owners living in one of its blocks in Salford. Although details remain sketchy, the Government has proposed a loan scheme capped at £50 monthly. At £50 per month, £100,000 would take 2,000 months, or 167 years to repay. Such charges are clearly a problem not just for this unfortunate generation of first-time home buyers, but for the next couple of generations too, perpetuating inequalities patently at odds with levelling up agendas.
(NOTE. The government has since introduced the Building Safety Act 2022 which is intended to provide leaseholder protections against excessive costs. However, due to a number of flaws in the drafting of the legislation, the Act directly creates additional problems for shared owners).
How are housing associations supporting shared owners?
Some housing associations have obtained authorisation from the Financial Conduct Authority (FCA) to offer interest-free credit to shared owners. Loans from housing associations have the advantage of being interest-free, unlike bank loans. Regardless, this option raises a number of troubling questions.
Shared owners are vulnerable to repossession of their home in the event of mortgage or service charge arrears. What confidence can they have that housing associations and lenders have their best interests at heart? Why should they believe housing associations would be flexible as life circumstances change over the potentially life-long timespan of such loans?
Such concerns are likely to be exacerbated by proposals to sell off shared ownership portfolios to institutional investors, whose primary motivation will be to maximise returns for their own shareholders and clients, not to act in the best interests of shared owners.
One suggestion is that: ‘housing associations that sold these properties on a shared ownership basis could buy the shares back from anyone who is struggling and unable to move’. Housing associations counter that they do not have the financial means to do so at scale. Whilst some housing associations express commitment to do so in ‘exceptional circumstances’ it’s not at all clear what would constitute exceptional circumstances.
Housing associations policies may subtract the cost of any known or estimated remediation costs from the buyback valuation. In which case, there may be little benefit of shared owners pursuing buyback as a way out of an impossible situation.
Jamie Ratcliff of Network Homes says: “[Reverse staircasing] may help some residents currently facing financial difficulties, but given the shared owner would remain responsible for 100% of remediation costs, with a smaller share – it is unlikely to be a solution for many”.
Back-to-back staircasing to facilitate sale
Back to back staircasing (a simultaneous staircasing and sale transaction) may be necessary in order to sell shared ownership properties. For example, where annual rent increases have resulted in rent becoming more expensive than local private rents (or rent on new-build shared ownership properties!).
Shared owners whose building doesn’t have a satisfactory EWS1 form face additional problems. Potential buyers are not currently able to obtain a mortgage due to nil valuations. To purchase a part share buyers have to meet affordability criteria; something that is highly unlikely to be the case if they are in a position to make a cash offer. Shared owners in this situation may have no alternative to back-to-back staircasing to 100% to facilitate a cash sale on the open market.
Confirmed or potential remediation costs will drastically reduce the sales price. This is particularly problematic for shared owners whose housing association has a policy requiring shared owners to pay over to them any difference between the valuation and the sales price.
Subletting is generally prohibited on shared ownership properties. Housing associations say that shared ownership properties are supposed to be the primary residence of the shared owner, and not a source of profit. This argument erroneously conflates ‘accidental landlords’ – who may need to relocate temporarily for a variety of reasons – with commercial for-profit operators.
The no-gain requirement falls away once (if) a shared owner staircases to 100%, effectively penalising shared owners who can’t afford to staircase. Or, in the case of those whose buildings are found to have safety defects, are unable to staircase due to unavailability of mortgages.
The restriction on making a gain applies only to shared owners themselves and not to housing associations, who benefit from income streams generated from shared ownership homes; nor to institutional investors eyeing up shared ownership portfolios.
When exceptional permission to sublet is given it is on a ‘no gain’ basis; with no acknowledgement of the fact that in real life it is practically impossible for landlords to plan to break-even – not least due to the unpredictable nature of shared ownership service charges (including retrospective annual adjustments).
Are housing associations doing enough?
There are clear financial challenges for housing associations in addressing the building safety crisis. Regardless, strong sector leadership is long overdue to protect shared owners from the worst consequences of a shared ownership model that has always exposed them to unlimited risk and costs regardless of affordability claims.
“We know a bill is coming… Just not when, or how much…?”(Anonymous shared owner)
The following is intended to indicate some areas where the current offering could usefully be reviewed. It is by no means an exhaustive list.
- Shared owners report that transparency and communication on building safety and related costs is poor. This is unacceptable and should be corrected as a matter of urgency.
- UKCAG research has found widespread mental health impacts due to the building safety crisis. UKCAG say: ‘There should be adequate mental health support provided for all those affected. Such support has been provided for those affected by flooding, yet still no equivalent document of support exists for the victims of this scandal. Simply directing leaseholders to LEASE is inadequate and does little to help the anguish leaseholders feel’.
- A sector-wide review of whether current provision of expert financial advice and debt counselling adequately meets identified need.
- A sector-wide published commitment to clearly identified policies to support shared owners facing building safety issues, including:
- Not to initiate possession proceedings for shared owners in arrears due to building safety remediation charges (including waking watch and increased insurance premiums).
- To waive marriage value on lease extensions (something MTVH have already committed to), and to calculate the premium on the percentage share held (where applicable) rather than total value.
- Not to charge any difference arising between the valuation and the sales price.
- Work with mortgage lenders on whatever actions are required to facilitate access to consent to let or buy to let agreements.
- Work with Government to remove, or apply considerable discretion on application of, restrictive and hard to justify restrictions on subletting, including no gain requirements and time limits.
- Withdraw any shared ownership properties with potential building safety issues from the market unless it may be evidenced that there are no remediation cost consequences arising for first-time buyers.
- Review marketing terminology to ensure buyers have full knowledge of exposure to long-term risks and costs. These should be simply, transparently and adequately explained to enable informed decision-making (in compliance with Consumer Protection from Unfair Trading Regulations 2008).
- A review of the implications of the cross-subsidy model for achievement of policy aims (affordability, fairness and transparency), and in relation to potential conflicts of interest.
What lessons can be learned?
The building safety crisis has bought into sharp focus a number of troubling aspects of the current shared ownership model.
- A vast discrepancy between expectations created by marketing strategies and real-life outcomes.
- Adverse consequences of a policy and research focus on access to shared ownership rather than on performance of that tenure over the long-term and the success of exit strategies in achieving full home ownership.
- Adverse consequences of a policy and research focus on financial risks, costs and benefits arising for housing associations and mortgage lenders rather than those arising for first-time buyers.
- Lack of ability and will of housing associations to intervene where required arising from the nature of some partnership arrangements.
- Failure of housing associations to solicit and sincerely take account of the concerns of long-term shared owners and campaigners.
- The conflict of interests which inevitably arises from the cross-subsidy model.
- Potential failure to fulfil fiduciary duties.
These matters should surely be a matter of grave concern for Boards of Trustees and likewise for regulators including the Regulator of Social Housing, the Charity Commission, the Advertising Standards Authority, and the Competition and Marketing Authority.
This is an abbreviated version of an article published on Red Brick Blog on 10 June 2021.
Thanks are due to Dr Audrey Verma (campaigner), Deepa Mistry (shared owner and campaigner), Dr Alison Bancroft (shared owner and campaigner), Ed Spencer (shared owner and co-founder of One Housing Residents Action Group) and Neil Goodrich (housing professional) for support in writing this article. Any errors are, of course, my responsibility and mine alone. I welcome feedback on the content.