Shared ownership undoubtedly works for some people some of the time. But does it work out for most people over the longer-term? This feature explores whether shared ownership is successful as a pathway to full home ownership.
A realistic pathway to full ownership
The Government says shared ownership should provide ‘a realistic pathway to full ownership’ (Making Home Ownership Affordable). But what does that actually mean?
A foot on the property ladder
The term ‘a foot on the property ladder’ appears over and over again in marketing and information materials. The inference is that the ‘property ladder’ offers step-by-step access to the dream of full home ownership. So far, so good.
Let’s take a closer look at how the property ladder works.
Homes of our own
Back in 1979 the Conservative Party were keen to define ‘Homes of our Own’ as homes that had been purchased, rather than rented.
‘We shall encourage shared purchase schemes which will enable people to buy a house or fiat on mortgage, on the basis initially of a part-payment which they complete later when their incomes are high enough’.
Conservative Manifesto 1979
The 1979 Manifesto shows that the original intention of the shared ownership scheme was for households to purchase a home outright, but in instalments. Current marketing campaigns appear to promote the same aim, albeit using staircasing terminology.
But it’s worth digging a bit deeper…. The housing sector claim that ‘you can also carry on buying shares, to own it 100%’. But they don’t necessarily mean that staircasing to 100% is ‘usual’ as in ‘likely’. Rather that, usually, there aren’t any restrictions on staircasing to 100%. Whether people can afford to staircase to 100% is a different matter entirely. (Is this particular marketing angle more than a tad misleading? It’s a moot point!).
Full ownership via staircasing to 100%
How many shared owners staircase to 100%? It’s a surprisingly difficult question to answer with any degree of accuracy. However, it’s apparent that staircasing rates are low,
‘The 2018 YouGov survey of 200 shared owners found that only 10% had increased their equity stake with 63% of respondents identifying affordability as the main factor’.
‘Existing data… suggests the number of people staircasing to owning 100% of the equity in a property is fairly low…. Around 4,300 households staircased to 100% in 2020/21, less than half of the number of households buying their initial stake in a home. The number staircasing was equivalent to 2.3% of all shared-equity homes owned by housing associations’.
Shared ownership (England) – the fourth tenure? 2021
What the 2.3% statistic doesn’t tell us is how many people staircased to 100% in a home they continue to live in (one interpretation of ‘full ownership’), and how many were obliged to undertake a costly and complex simultaneous sale and staircasing transaction purely in order to sell.
‘There is no active/widespread resale market for shared ownership homes. Rather sellers mainly rely on back to back sales – buying out the housing association share and selling the home on the market as a 100% owner occupied home.‘
Professor Whitehead & Dr WIlliams, Thinking Outside the Box, 2020
Consequently, even 2.3% is an over-estimation of the ‘success’ of staircasing as a realistic pathway to full ownership in 2020-21.
What stops shared owners staircasing to 100%?
The underlying reason most shared owners don’t staircase to 100% is that – generally speaking – house prices rise faster than wages. Subsequent shares are priced at current market value meaning shared owners can quickly get priced out of staircasing.
Additionally, other inherent features of the shared ownership model may erode disposable income, pushing staircasing even further out of reach.
- The requirement to purchase the largest possible initial share may make it harder to save for staircasing.
- ‘Upwards only’, inflation busting annual rent increases can mount up resulting in rent levels that are higher than open market rents (or even new-build shared ownership developments).
- Some shared owners find that service charges increase considerably after the first few years. Given that shared owners are responsible for 100% of all charges, regardless of the size of their equity stake, this can also make it harder to afford staircasing.
Full ownership via a gain on a starter home
In the open market, the term ‘a foot on the property ladder’ isn’t about staircasing at all. It describes the process of making a gain on sale to help fund the next home purchase. It’s an approach which has worked well for households in previous decades. But the economic environment is very different now.
“… is the property “ladder” – the idea that, in an average lifetime, homeowners will own different homes according to their needs – a thing of the past?”
Is the property ladder just a myth?, The Guardian, 7 January 2018
It’s even harder – though obviously not impossible – for shared owners to make sufficient gain on sale to transition to full home ownership.
- The shared ownership scheme places considerable reliance on new-build developments. But new-build premiums increase the initial outlay for homebuyers.
- Short leases may necessitate costly lease extensions in order to sell.
- ‘Upwards only’, inflation busting annual rent increases may necessitate costly and complex simultaneous sale and staircasing transactions to eliminate rent for the next purchaser.
- Housing associations (and estate agents) calculate sales fees based on 100% of the value of the property, regardless of the percentage share held by the shared owner. (Recent reforms reducing the minimum initial tranche to 10% will exacerbate this particular issue).
- Prohibitions on subletting mean shared owners can’t cover ongoing costs should they choose, or need, to move out prior to sale.
Is shared ownership a realistic pathway to full ownership?
In short, shared owners may discover that shared ownership simply doesn’t deliver on the promise of ‘a realistic pathway to full ownership’.
Could the shared ownership model be improved to ensure that more households do transition into full home ownership? And should Government and the housing sector be paying more attention to adverse consequences of shared owners getting stuck on the very lowest rungs of the housing ladder?
I’ve been a Shared owner since 1995. Firstly in a house that was a 50% share. Then I decided to move to the centre of town for the cultural benefits. This flat was a 30% share. I used my additional cash to buy some decent comfortable chairs and to invest small amounts of cash in Enterprise Investment Schemes on projects that I am passionate about. Culture and budget travel is a very important part of my life. I don’t have enough money to buy extra shares, and I don’t earn enough to consider a mortgage. Furthermore I retire in about one year from now. I was hoping to move somewhere cheaper – but I am in a flat that needs substantial remediation work – so moving is not possible in the near future.
Thanks for sharing your experience, Heather.
The rent increase formula for my property is RPI plus 0.5%. and there appears to be no upper limit. With the current cost of living crisis huge increases are potentially ahead on my 65% BPHA owned shared ownership property. Is this a storm in the making for all shared owners?
Also if there is no mortgage on a shared ownership property can the keys be handed in with no further liability? I appreciate that all equity would likely be given up.
I am really concerned that I am going to end up trapped in this 2 bed SO house with 91 years left on the lease. I have two children of opposite sexes.
Thanks for commenting, Kim. Unfortunately, it is quite possible that high inflation could be “a storm in the making for all shared owners”. It’s not at all clear why Homes England’s model shared ownership lease specifies an annual rent increase of RPI plus up to 0.5% (or more in previous versions of the model lease). I wrote two Open Letters to the National Housing Federation to ask whether rent charges merely cover housing associations’ financing costs, or generate surplus income for housing associations? Unfortunately, their response to both letters was not informative in this regard. What is clear is that Government and the housing sector appear to define ‘affordability’ on a more short-term basis than shared owners themselves.
As regards your question about handing back the keys, this wouldn’t in itself terminate the lease, regardless of whether or not the mortgage had been paid off. Meaning liability for ongoing service charges, rent charges, and admin charges would continue. Citizens Advice or StepChange might be able to offer advice on options.
https://www.sharedownershipresources.org/need-to-know/open-letter-nat-fed-rent/
Surely private rent would be higher? Sell? Most housing associations are capping the increases to 7%.
Thanks for your comment. Yes, it’s reasonable to assume that private rents would be higher. But it depends what you’re comparing with what.
Long-term shared owners are more likely to find their rents rising above private rent levels for comparable local properties. In fact, Joseph Rowntree Foundation analysis found that: “private sector tenants saw an average 10% increase between 2016 and 2022. Over the same time period, social rental tenants saw an average 3% increase in rent, whereas for shared owners the increase was 22%.” (https://www.sharedownershipresources.org/an-expert-on/shared-ownership-poverty)
Of course, the picture is complex and will vary according to factors including, for example, geographical location. The key point is that SO affordable rents don’t necessarily stay affordable, even if they start off that way. Not least because SO rents increase at a slightly higher rate than RPI and RPI tends to rise faster than wage inflation. Even a 7% rent increase will be unaffordable for some households, particularly given that initial affordability assessments max out affordability at the outset leaving little wriggle room for future increases in total housing costs.
Selling doesn’t necessarily help if there aren’t any affordable alternatives. There aren’t any easy answers!