Memorandum by SHAL Housing Limited (SRH
04)
EXECUTIVE SUMMARY
1. In this submission it is argued that
high house price inflation encourages people to jump on to the
home ownership ladder and so further encourage more house price
inflation.
2. Shared ownership merely fans the embers
of house price inflation whilst social housing for rent provides
decent homes at a relatively low cost without affecting the housing
market.
3. It is the opinion of the writer that
government should subsidise more housing for rent in preference
to shared ownership.
BRIEF INTRODUCTION
4. This submission is made by John Thomson,
Chief Executive, SHAL Housing Limited. I am a Fellow of the Chartered
Institute of Housing and have worked in "social" housing
for over 30 years.
5. In addition to my general role as Chief
Executive, I am particularly charged with the development of new
housing.
6. SHAL Housing Limited is a Registered
Social Landlord based at 2 King Square, Bridgwater, Somerset.
It operates in the districts of Sedgemoor and Taunton Deane and
owns 586 properties, 90% of which are family homes.
7. Currently, SHAL lets its properties on
assured tenancies, at an average rent of £67 a week. SHAL
is currently considering the merits of shared ownership.
FACTUAL INFORMATION
8. House prices in Sedgemoor have typically
been lower than in Taunton Deane. This submission, therefore,
looks at the position in Sedgemoor. The typical "first time
buyer" house for a family, and the typical house in SHAL's
rented stock, is the terraced house.
9. The following chart shows the average
sale price of a terraced house as recorded by the Land Registry
over a six year period.
10. In January to March 2000, the average
sale price was £54,250. In the same period in 2006 it was
£132,576, an increase of about 2 and a half times. Percentage
increases, as recorded from real sales by the Land Registry were:
Terrace House Price Inflation Sedgemoor
| 2000 | 3.09%
|
| 2001 | 25.65% |
| 2002 | 33.65% |
| 2003 | 17.94% |
| 2004 | 7.31% |
| 2005 | 11.54% |
| |
| Average = 16.53% |
11. Median earnings for employees in Sedgemoor in 2005
were £21,5591[1] A
person earning this, requiring a 95% mortgage to buy the average
house of around £133,000 would require a mortgage of nearly
six times income, which would cost 47% of that person's gross
annual income.
12. We have calculated that purchase of a 50% share of
that same house would cost nearly £7,000 a year, or only
32% of income.
13. By comparison, renting that house from SHAL (our
average rent is £67 per week) would cost 16% of income.
14. This data has led me to believe that house price
inflation cripples families financially, preventing them from
buying clothes, holidays, educational visits etc whilst at the
same time preventing many families from creating wealth. The following
scenarios illustrate what I mean.
Scenario 1
15. In an era of low house price inflation, (eg the year
2000) property purchased for £66,500 would, over a year,
rise in value by £2,055 (3.09%). Over the same time a mortgage
of 6% would see capital of £1,184 repaid. At the end of the
year the purchaser would see they owned £3,239 (ie £2,055
+ £1,184) or 4.72% of the equity. Table 1 illustrates this.
| End of Year | Property Value
| Principal | Interest
| Total
paid | Cumulative Total
| Equity
held | % of
equity
|
| 2006 | 68,555 | 1,184
| 3,958 | 5,142 | 5,142
| 3,239 | 4.72% |
| 2007 | 70,673 | 1,257
| 3,885 | 5,142 | 10,283
| 6,614 | 9.36% |
| 2008 | 72,857 | 1,334
| 3,807 | 5,142 | 15,425
| 10,132 | 13.91% |
| 2009 | 75,108 | 1,417
| 3,725 | 5,142 | 20,566
| 13,800 | 18.37% |
| 2010 | 77,429 | 1,504
| 3,638 | 5,142 | 25,708
| 17,624 | 22.76% |
| 2011 | 79,822 | 1,597
| 3,545 | 5,142 | 30,849
| 21,614 | 27.08% |
| 2012 | 82,288 | 1,695
| 3,446 | 5,142 | 35,991
| 25,775 | 31.32% |
| 2013 | 84,831 | 1,800
| 3,342 | 5,142 | 41,132
| 30,118 | 35.50% |
| 2014 | 87,452 | 1,911
| 3,231 | 5,142 | 46,274
| 34,650 | 39.62% |
| 2015 | 90,154 | 2,029
| 3,113 | 5,142 | 51,415
| 39,380 | 43.68% |
| 2016 | 92,940 | 2,154
| 2,988 | 5,142 | 56,557
| 44,320 | 47.69% |
| 2017 | 95,812 | 2,286
| 2,855 | 5,142 | 61,698
| 49,478 | 51.64% |
| 2018 | 98,773 | 2,428
| 2,714 | 5,142 | 66,840
| 54,866 | 55.55% |
| 2019 | 101,825 | 2,577
| 2,564 | 5,142 | 71,981
| 60,496 | 59.41% |
| 2020 | 104,971 | 2,736
| 2,405 | 5,142 | 77,123
| 66,378 | 63.23% |
| 2021 | 108,215 | 2,905
| 2,237 | 5,142 | 82,264
| 72,527 | 67.02% |
| 2022 | 111,559 | 3,084
| 2,057 | 5,142 | 87,406
| 78,955 | 70.77% |
| 2023 | 115,006 | 3,274
| 1,867 | 5,142 | 92,547
| 85,676 | 74.50% |
| 2024 | 118,559 | 3,476
| 1,665 | 5,142 | 97,689
| 92,706 | 78.19% |
| 2025 | 122,223 | 3,691
| 1,451 | 5,142 | 102,830
| 100,061 | 81.87% |
| 2026 | 126,000 | 3,918
| 1,223 | 5,142 | 107,972
| 107,756 | 85.52% |
| 2027 | 129,893 | 4,160
| 981 | 5,142 | 113,113
| 115,809 | 89.16% |
| 2028 | 133,907 | 4,417
| 725 | 5,142 | 118,255
| 124,239 | 92.78% |
| 2029 | 138,044 | 4,689
| 452 | 5,142 | 123,396
| 133,066 | 96.39% |
| 2030 | 142,310 | 4,978
| 163 | 5,142 | 128,538
| 142,310 | 100.00% |
Table 1: Property purchase for £66,500, interest 6%, house
price inflation 3.09%.
16. At the end of 25 years in this fictional calm and
stable period of history the value, and what the purchaser has
paid, are similar. The mortgage has cost £5,142 a year, or
24% of the average income. It compares favourably with renting—for
a little more effort you create wealth. It takes 11 years to own
half the equity.
Scenario 2
17. Compare the above with the same picture if the average
house price inflation of the past six years were to subsist for
the next 25. Using the same property cost and the same mortgage
rate of 6%, at the end of the first year again £1,184 of
the capital borrowed would be repaid. But the value would have
increased substantially. By the end of year 4 the purchaser would
already be worth nearly what was borrowed and own 50% of the equity.
Table 2 illustrates this in full.
| End of Year | Property
Value
| Principal | Interest
| Total
paid | Cumulative Total
| Equity
held | % of
equity
|
| 2006 | 77,492 | 1,184
| 3,958 | 5,142 | 5,142
| 12,176 | 15.71% |
| 2007 | 90,302 | 1,257
| 3,885 | 5,142 | 10,283
| 26,242 | 29.06% |
| 2008 | 105,229 | 1,334
| 3,807 | 5,142 | 15,425
| 42,504 | 40.39% |
| 2009 | 122,623 | 1,417
| 3,725 | 5,142 | 20,566
| 61,315 | 50.00% |
| 2010 | 142,893 | 1,504
| 3,638 | 5,142 | 25,708
| 83,088 | 58.15% |
| 2011 | 166,513 | 1,597
| 3,545 | 5,142 | 30,849
| 108,305 | 65.04% |
| 2012 | 194,038 | 1,695
| 3,446 | 5,142 | 35,991
| 137,525 | 70.88% |
| 2013 | 226,112 | 1,800
| 3,342 | 5,142 | 41,132
| 171,399 | 75.80% |
| 2014 | 263,488 | 1,911
| 3,231 | 5,142 | 46,274
| 210,686 | 79.96% |
| 2015 | 307,043 | 2,029
| 3,113 | 5,142 | 51,415
| 256,269 | 83.46% |
| 2016 | 357,797 | 2,154
| 2,988 | 5,142 | 56,557
| 309,177 | 86.41% |
| 2017 | 416,941 | 2,286
| 2,855 | 5,142 | 61,698
| 370,607 | 88.89% |
| 2018 | 485,861 | 2,428
| 2,714 | 5,142 | 66,840
| 441,955 | 90.96% |
| 2019 | 566,174 | 2,577
| 2,564 | 5,142 | 71,981
| 524,845 | 92.70% |
| 2020 | 659,763 | 2,736
| 2,405 | 5,142 | 77,123
| 621,170 | 94.15% |
| 2021 | 768,822 | 2,905
| 2,237 | 5,142 | 82,264
| 733,134 | 95.36% |
| 2022 | 895,908 | 3,084
| 2,057 | 5,142 | 87,406
| 863,304 | 96.36% |
| 2023 | 1,044,001 | 3,274
| 1,867 | 5,142 | 92,547
| 1,014,672 | 97.19% |
| 2024 | 1,216,575 | 3,476
| 1,665 | 5,142 | 97,689
| 1,190,722 | 97.87% |
| 2025 | 1,417,675 | 3,691
| 1,451 | 5,142 | 102,830
| 1,395,512 | 98.44% |
| 2026 | 1,652,016 | 3,918
| 1,223 | 5,142 | 107,972
| 1,633,772 | 98.90% |
| 2027 | 1,925,095 | 4,160
| 981 | 5,142 | 113,113
| 1,911,011 | 99.27% |
| 2028 | 2,243,313 | 4,417
| 725 | 5,142 | 118,255
| 2,233,645 | 99.57% |
| 2029 | 2,614,132 | 4,689
| 452 | 5,142 | 123,396
| 2,609,154 | 99.81% |
| 2030 | 3,046,248 | 4,978
| 163 | 5,142 | 128,538
| 3,046,248 | 100.00% |
Table 2: Property purchase for £66,500, interest 6%, house
price inflation 16.53%.
18. Of course today you cannot buy a house for £66,500,
although this was possible in 2000 or 2001. But "half"
a house bought on shared ownership is possible.
19. With most of the population today priced out of home
ownership as a first time buyer, shared ownership offers a way
of "climbing the ladder". The press suggests that the
home ownership market is kept buoyant by:
— Purchases part funded by parental contribution;
and
— Well-off first time buyers.
20. Anyone who can, it seems, is anxious to get onto
that "ladder". And with the large capital gains it can
be seen why.
RECOMMENDATION
21. Shared ownership offers an opportunity to many who
are precluded from accessing the full market. With shared ownership
based on market value, this additional stock just fuels demand
and sales and adds more people to the home ownership population
with an interest in price rises.
22. Contrast this to the situation of social housing
built for rent. These homes have no effect on the "for sale"
market. Government controls rents charged through the rent restructuring
regime. Letting at below market rents allows families to have
a good quality of life because they have less to pay in housing
costs. There is a significant demand, true, but their construction
and letting has no effect on house prices. As the figures in paragraphs
12 and 13 show, a shared ownership house will cost 32% of income,
to which must be added the cost of repairs and insurance. Social
housing, on the other hand, will cost 16% of income, and no repairs
or insurance. It is true that a family in social housing will
not create wealth for themselves, but, on the other hand, they
will have more of their income to spend on matters which will
improve their quality of life.
23. If most people are priced out of home ownership as
a first time buyer then prices will stagnate. Over time property
will again become affordable to people as incomes rise with normal
inflation. Production of shared ownership now will just fuel the
embers of the home ownership bandwagon and house price inflation.
I would, therefore, argue that use of government funds to encourage
more housing to rent, rather than shared ownership, will benefit
society more.
1
Source: Annual Survey of Hours and Earnings-Resident Analysis. Back
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