Housing and Planning Bill

Written evidence submitted by the Future Housing Review (HPB 89)

H ousing and Planning Bill 2015/16

Reforming Shared Ownership in England

Future Housing Review

Future Housing Review was formed in 2014 by Nigel Turner a solicitor with many years’ experience of property development and affordable housing. As well as creating models for a new tenure of home ownership, known as graduated ownership (GO) , Future Housing Review has produced standard form documents which can be used to fast-track section 106 negotiations.

In the long term, we aim to work with Government and other major stakeholders to improve housing supply and delivery by setting up an independent framework for continuous review of market, legal and planning processes involved in supply and delivery of housing.

Note on the terms ‘shared ownership’ and ‘standard shared ownership’.

The term shared ownership is used in this memorandum to apply to both shared ownership and shared equity schemes. T he term ‘ standard shared ownership ’ refers exclusively to the type of scheme currently approved by the Homes & Communities Agency and offered with grant funding.

Summary of recommendations

Here are six suggestions for reforming shared ownership:

· A review of shared ownership options should be undertaken urgently by the Department of Communities and Local Government

· Government should allow the Homes & Communities Agency to approve and fund new shared ownership schemes within the 2015-18 Affordable Housing Programme.

· Regulatory exemptions should be extended so that providers of approved schemes will not require authorisation by the Financial Conduct Authority.

· The Housing and Planning Bill should be amended to include a duty on Local Authorities to promote shared ownership schemes approved by the Homes and Communities Agency.

· Government should consider extending the Help to Buy Mortgage Guarantee to shared ownership schemes.

· Stamp duty on shared equity purchases should only be payable on the buyer’s initial percentage as is the case with standard shared ownership.

Introduction

1. The purpose of this memorandum is to highlight the potential of shared ownership and, at the same time, the deficiencies in standard shared ownership housing models currently used in England. To this end we suggest measures to improve shared ownership generally. Our campaign will be run in the context of the debate on the Housing and Planning Bill, with the help and encouragement of Iain Stewart MP. The principal objectives of the campaign are to get Government to review grant-funded shared ownership options and to amend the Housing and Planning Bill to include a duty on local authorities to promote new shared ownership models which are affordable, flexible and transparent.

2. This memorandum does not purport to be an academic treatise: it is an introduction to current issues around shared ownership, designed to stimulate discussion and debate. We welcome comments and feedback to the campaign website at www.futurehousing.org/so

3. Poor relations between local authorities and housebuilders have long been a significant barrier to productivity in housing . Initiatives are needed to promote better mutual understanding, with a view to improving cooperation in the supply and delivery of new homes. The Housing and Planning Bill proposes (at Clause 3) that there will be a general duty on Local Authorities to promote the supply of Starter Homes. Should there not be a similar duty on Local Authorities to work with providers to promote better shared ownership?

4. On the question of affordability, grant or section 106 funding is needed to ensure that shared ownership schemes allow a prospective purchaser to buy a home at less than 80% of open market value. There is good support from Government for those who are lucky enough to be able to purchase at 80% , in the form of Help to Buy Equity Loan and, in the near future, Starter Homes. However, there are relatively few schemes available for those who could afford to buy at, say, 50% of open market value.

5. Our contention is that Government should intervene and organise a review of the options for shared ownership. Introducing new models of shared ownership tenure will improve deliverability of housing in England and thereby help to ease the housing crisis. The passage of the Housing and Planning Bill gives a unique opportunity for some useful debate and for significant amendments to be tabled.

Standard Shared Ownership

7. In 2014/15 Homes & Communities Agency grants helped deliver 32,959 affordable homes in England. Of these 25,579 were affordable rent, 1,777 were social rent and 5,603 were standard shared ownership [1] .

8. The table below shows the numbers of standard shared ownership homes delivered over the last four years .

Year

2011/12

2012/13

2013/14

2014/15

Number of shared ownership homes

426

1,378

2,954

5,603

Housing Completions by Programme and Tenure, England (excluding Help to Buy and non-HCA London delivery)

Affordable Home Ownership within the Affordable Homes Programme (i.e. Standard Shared Ownership)

9. Whilst these figures do show an increase in standard shared ownership homes delivered , there were only 933 standard shared ownership starts on site in 2014/15. It therefore looks unlikely that the number of homes delivered through standard shared ownership is set to grow in the near future – this could be because of lack of provision or constraints in grant funding. In any event the overall number of homes delivered by standard shared ownership is regrettably small given the pent-up demand for shared ownership homes generally.

10. Another of the factors constrain ing delivery of shared ownership may be the strict limitation on the types of schemes that providers can use for standard shared ownership.

"You should be aware that for the current 2015-18 Affordable Homes Programme the Agency / Government has made clear that the only forms of affordable home ownership that it will be prepared to fund are Shared Ownership as defined in the Agency’s Capital Funding Guide and the Help to Buy equity loan. Unfortunately at this time the Agency is not able to consider bids from providers within the Affordable Homes Programme for products that do not conform to those described as being fundable in the 2015-18 Affordable Homes Programme prospectus."

Letter from the Homes and Communities Agency – November 2015

11. The Agency’s Capital Funding Guide refers to model leases, certain provisions of which must be used in any standard shared ownership project. As a consequence, even where a house is freehold, a new long lease has to be created, which introduces a significant level of complication, with multiple rights and obligations of which the buyer needs to be made aware. The provider also needs to understand, and to ensure the buyer understands, a complicated and restrictive framework for ownership of part of a home.

12. A review of shared ownership options was promised by the Department of Communities and Local Government back in March 2015, but we understand this has not materialised. There i s currently no scope to develop better grant-funded schemes and expand shared ownership generally unless Government allows the Agency to look at new schemes.

Shared Equity and Graduated Ownership

13. A method of intermediate affordable housing delivery that has always worked well in the private sector is the shared equity scheme. Typically the purchaser funds 75% of the market value of a property with a combination of cash and first mortgage loan. The project funder retains a second charge on the title which ranks behind that of the main mortgage lender. In some schemes, there is no interest charged by the provider on the remaining 25%, known as the deferred payment.

14. The deferred payment is repayable in the following circumstances:

· A transfer of the legal estate in the Property

· Any other disposition of a legal or equitable interest in the Property

· Breach of any provision of the second charge or of a prior charge

· The appointment of a receiver under a prior charge, or certain other default events

· Twenty Five (25) years from the date of the second charge

15. Because these provisions are extremely straightforward, the secon d charge document is short and easy to understand.

16. Crucially, unlike standard shared ownership, there is no artificial split of the legal interest in the property. The buyer is the owner of the legal estate in the whole of his or her home. No special lease needs to be created.

17. On a disposal of the property, depending on agreements in place with the provider and/or the local authority, the second charge may be repaid or renewed in favour of the next buyer.

18. In recent years there has been a move away from invariably using 75/25 split. By increasing the amount of the deferred payment to 50% or more of open market value, affordability is considerably increased. This experience leads us to suggest the graduated ownership scheme (GO) as a useful tool for providers - both public and private. Details of the scheme are on www.futurehousing.org.

19. The GO scheme would, subject to grant or section 106 funding, allow people who do not have the means to buy on the open market to become owners at different levels of participation, starting as low as 30% of open market value. It is based on the owner being able to self-fund a 5% deposit and a framework built around a restricted resale period, a method frequently used in the US, which ensures that the scheme is maintained for as long as the local authority and the provider agree.

20. We have found in recent years that Local Authorities are more inclined to consider shared equity, in partnership with private providers, as a more straightforward option than standard shared ownership. Following section 106 negotiations they may reserve the right to receive 50% or more of the deferred payment. However, this does lead to complications in drafting variations to section 106 agreements as the wheel has to be reinvented for each scheme. For this reason alone, universal acceptance of a new tenure, such as GO, would be welcome.

21. The GO scheme provides the owner with an automatic bonus (the ‘Increment’) which compensates the owner for taking on all repairing liabilities.

Help to Buy

22. Help to Buy is the Government-backed branding for subsidised home-ownership products.

On the Help to Buy East and South East website [1] the following products are offered as Help to Buy options:

· Shared Ownership (i.e. Standard Shared Ownership)

· Help to Buy Equity Loans

· Help to Buy Mortgage Guarantee

· Rent to Buy

· Intermediate Rent

· HOLD Home Ownership for people with Long-Term Disabilities

· OPSO Older People’s Shared Ownership

( Note the inclusion of Intermediate Rent, which is, by implication, being promoted as a tenure designed to achieve home ownership. )

23. Help to Buy Equity Loan is a shared equity scheme which was introduced by the Government in 2013. It is available for buyers with a 5% deposit to put towards the purchase of a new-build home worth no more than £600,000. Up to 20% of the purchase price covered by a shared equity loan.

24. There is no interest to pay on the loan for the first five years. In the sixth year, a fee of 1.75% of the loan’s value is charged and after that the fee increases every year. The increase is worked out by taking the annual rise in the Retail Prices Index (RPI) plus 1%.

25. For the purposes of Financial Services and Markets legislation, arranging government-sponsored schemes is not a regulated activity. Providers (including developers and housebuilders) and others who broker Help to Buy Equity Loans do not therefore require authorisation by the Financial Conduct Authority [2] .

26. Because of its relative simplicity, Help to Buy Equity Loan has proved considerably more popular than standard shared ownership, with 27,785 homes being delivered on this scheme in 2014/15. The maximum 20% equity loan available makes this scheme marginal in terms of boosting affordability.

 

Starter Homes

27. Starter h omes will be sold at 80% of the market value of the home with the discount being funded by a trade-off against developers’ planning obligations. The discounted price will be no more than £250,000 outside London a nd £450,000 in London. Starter h omes cannot be resold or let at their open market value for a period of five years after the initial sale.

28. Starter h omes are, of course, the subject of the first Chapter of the Housing and Planning Bill and there will undoubtedly be much debate on their usefulness (or otherwise) in easing the housing crisis. We take the view that the 20% discount for starter h omes is in es sence a promotional offer. The starter h omes scheme does not contribute significantly to affordability in the housing market over time but does, by virtue of appropriating section 106 funding, represent an opportunity cost in respect of affordable housing generally . This issue has already been picked up by the Mayor of London, who is reportedly concerned about delivering a target of 250,000 shared ownership homes in the next decade because of the impact of starter homes.

29. One of our primary contentions is that there should be as much Government funding and section 106 subsidy going into the promotion of shared ownership as there is going into the promotion of Starter Homes. Shared ownership is quite simply a better tool to guarantee affordability of initial acquisition and affordability over time.

Reasons to change standard shared ownership

30. Does standard shared ownership have a bad image? Recent headlines suggest this may be the case:

‘Shared ownership why is it not working for first time buyers?’

(Guardian - February 2014)

‘The hidden dangers of shared ownership’

(Guardian – September 2013)

‘Shared ownership dreams shattered’

(Independent - June 2012)

31. Concerns have been raised about lack of security, high service charges and what happens where prices plummet.

32. An owner under a standard shared ownership lease can face possession proceedings taken by the provider if he or she is substantially in arrears with the rent. Importantly, because of the way a standard shared ownership lease is drafted, the owner might potentially lose his or her total investment if the provider is minded to pursue legal proceedings to their conclusion. This risk arises from the law established in the case of Richardson v Midland Heart in 2008 and still causes headaches today.

33. High service charges are part of the risk of owning a flat. There is no reason why that risk should be exacerbated by the terms of a standard shared ownership lease. The service charge provisions in any residential lease are necessarily complex and have to be examined with care by a prospective buyer. Having those complex provisions in the same document that deals with complicated standard shared ownership terms, rent reviews etc is not really a good idea and can lead to misunderstandings.

34. Where there is a substantial mortgage, home ownership always entails the risk of negative equity. Whatever the shared ownership scheme, that risk should be mitigated as far as possible and should be shared fairly between the provider and the owner.

35. In practice, we have found that difficulties arise when reselling a share of a home, particularly as lenders are not always keen to lend on second-hand standard shared ownership properties. The problem of resales generally was the subject of a study by the Cambridge Centre for Housing and Policy Research in 2012 [3] . Some efforts have been made by the Department of Communities and Local Government to address the issue by removing rights of pre-emption following final staircasing. [4] This problem does not arise on shared equity schemes.

36. Standard shared ownership probably does suffer from an image problem – it is ‘affordable housing’ and, as such, it may be less attractive than owning an open-market home. Graduated ownership (GO) , on the other hand, is designed to be used for both grant-funded and open-market schemes, making it less likely to be tagged as ‘affordable housing’. It is time to dust off the old model and promote a scheme (or schemes) which have more to do with owning the home and less to do with sharing the home ownership.

The case for alternative models of shared ownership

37. It may be possible to rectify some of the problems specific to standard shared ownership leases. However, many of those problems are inherent in the legal structure whereby legal ownership is split. S hared equity schemes are simply not subject to such structural difficulties. Rather than attempting to inform buyers as to the subtle differences between the two systems, it would make sense to develop a new brand of tenure, which:

· works for grant-funded and non-grant-funded schemes

· is flexible and transparent

· has a brand identity distinct from ‘affordable housing’

38. It is our contention that graduated ownership (GO) matches the criteria given above.

39. In order to enable grant-funded shared-equity schemes, Government would need to allow its Affordable Homes Programme to be amended .

40. The Housing and Planning Bill could easily be amended to include a duty for Local Authorities to promote shared equity schemes which have been approved by the Homes and Communities Agency.

41. In the successful residential developments the ‘affordable housing’ is difficult to spot. A new tenure is needed to bridge the gap between ‘affordable‘ and ‘open-market’ tenures and to make it easier for local planning authorities and housebuilders to plan properly integrated developments.

Conclusion

42. Whilst shared ownership has great potential to make home ownership more affordable, Government needs to help by developing and promoting better tenures to achieve this. Amendments can and should be made to the Housing and Planning Bill to start the process.

43. The housing sector needs new shared ownership tenures that work for both private and public providers, for grant-funded and non-grant-funded schemes, for lenders and for prospective owners on a range of different incomes.

44. Subject to:

· implementation of the recommendations set out at the beginning of this brochure,

· support of grant or section 106 funding, and

· availability of first mortgages at reasonable rates,

a new scheme such as graduated ownership (GO) can make home ownership accessible to more people than ever and significantly help to combat declining levels of home ownership.

November 2015


[1] All figures In this section are taken from HCA Housing Statistics June 2015, Table 1

[1]

[1]

[1] https://www.helptobuyese.org.uk

[2] The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No 2) Order 2014 SI 2014 No 1448

[2]

[3] See Further Reading section for references

[4] The purchase of additional shares in the property by the owner. The term ‘staircasing’ is also sometimes applied to shared equity schemes. In graduated ownership, the equivalent term is ‘upgrading’.

[4]

Prepared 26th November 2015