The Government have announced plans for a new model of shared ownership housing, focusing on three key areas for improvement, but what does this mean for housing associations and first-time buyers alike? Can shared ownership be made more consumer friendly while continuing to be a viable option for housing associations and private sector providers?
What is Shared Ownership?
Shared ownership was first introduced into the UK housing market 40 years ago to give those on lower incomes the opportunity to achieve the British dream of home ownership. It allowed the purchase of a share of a new build home with the ability to increase this share in the future to eventual full ownership.
However, statistics show that just 27% of people aged under 35 own their own home today. This is down from 65% in the 1990s. So, what has shared ownership achieved so far? Can the Government’s changes increase the number of people owning their own home before they turn 35?
Three key areas for improvement
1. Increasing the share owned
At the point of initial sale, a shared owner will purchase a share between 25% and 75% of the full market value of the property. Ideally, the shared owner will then purchase additional shares (in increments of 10%) in the property by way of a process known as staircasing. Unfortunately, increasing house prices and maintenance costs have made this more and more difficult, with shared owners finding it difficult to save enough to buy 10% before the market value increases.
The Government proposes a model that will allow shared owners to purchase additional shares in smaller increments, as low as 1%. It is thought that this could operate in a similar way to a private sector savings product, but details are yet to be confirmed. This would mean a shared owner could purchase an additional share in their £250,000 home for £2,500, far more achievable than a 10% share for £25,000, and achievable far more often, therefore being able to take advantage of the fluctuating market.
The staircasing process can be time consuming. Generally, acting for housing associations, we only see shared owners staircase during a re-mortgage. The shared owner is therefore only increasing their share by additional borrowing and incurring various costs including valuation fees and their lender’s legal fees, through a lengthy process which requires enquiries to be dealt with. Will the new model mean that money otherwise put to these expenses can instead be used to purchase additional shares instead?
How the Government intend to simplify this process is yet to be seen, but providers will not want to see these changes result in increased administration.
2. Selling the home
A shared owner must offer their property back to the provider for an 8 week period to enable the provider to nominate an appropriate purchaser to ensure the property remains as affordable housing. This is a ‘pre-emption’ provision contained in past and present models of shared ownership leases.
Historically, the ‘pre-emption period’ did not end until 21 years after the shared owner had staircased their ownership in the property to 100%. In 2015 the Government advised that the pre-emption period should end on the date that the shared owner staircases to 100%. Now, once fully staircased the homeowner can sell their property on the open market without recourse to the provider. However, until such time as final staircasing has been achieved, the current model of shared ownership lease requires the shared owner to comply with the pre-emption provisions.
The Government is proposing that the new model has a further change in pre-emption to give the landlord a ‘right of first refusal’ to repurchase the property and resell it as shared ownership. This is likely to be a much shorter period of time compared to the current 8 weeks to give shared owners more flexibility and control over the process. Whether the provider will still have the option to nominate a purchaser is not clear. Could a right of first refusal be too limited? Will we share a reduction in shared ownership stock if providers do not have the means to repurchase a property within the ‘right of first refusal’ period?
3. Standard model
Homes England has a model shared ownership lease which is the standard lease used by the vast majority of shared ownership providers, particularly housing associations who have grant funded properties. Lenders have become increasingly more open to the Homes England model form of shared ownership lease, however for those purchasing via a different model from the private sector securing mortgage funding can be far more difficult, adding unnecessary stress at what is already a very stressful time.
Can the Government produce a model which works, and is used by, housing associations and the private sector alike?
The new model
Changes to shared ownership will be welcomed by those desperate to get on the property ladder, and those wishing to increase the shares in their home as quickly and often as possible. However, the new model seems heavily focussed on the consumer, rather than the provider. Allowing the purchase of smaller shares and a shorter ‘pre-emption’ period is excellent news for shared owners, but for shared ownership providers this could become a far more burdensome model of shared ownership with increased admin costs outweighing the benefit of receiving additional capital sooner and more frequently.
The Government’s consultation remains open until 23:59 on 29 September 2019 for responses to the discussion paper.
We will be keeping a close eye on the progress of this proposed shared ownership model in order to work with our shared ownership provider clients to prepare for future changes.
For more information on shared ownership, please contact our specialist Social Housing team on 01206 764477.
Statistics from “Making Home Ownership Affordable Discussion Paper”