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Deposit Barrier Must be Addressed to Widen Access to Home Ownership

With an average deposit of £21,000 required, the Government’s much heralded ‘First Homes’ will remain beyond the reach of a large number of aspiring homeowners. This includes the 61% of private renters who have no savings at all, those who are unable to rely on the bank of mum and dad and a high percentage of key workers whose incomes are not high enough to enable them to save.

To truly widen access to home ownership we must address the deposit barrier. Only then will we be able to open the housing ladder to those on lower incomes. The Government has proposed that a quarter of all new affordable homes will be First Homes: homes for first-time buyers sold at a discount of at least 30% of market value. Whilst the lower price will no doubt make these homes more affordable to some, there will remain a significant portion of aspiring homeowners for whom they will still be out of reach because they simply cannot raise the amount required for a deposit.

Based on the average price paid by a first-time buyer, even after the 30% discount a buyer under ‘First Homes’ would need to have saved £14,000 for a 10% deposit. With lenders dramatically reducing the number of mortgages available to buyers with small deposits it is now more realistic for a deposit of 15% or 20% to be required. This equates to £21,000 or £28,000 respectively, plus legal fees and moving costs. Factor in that just 10% of private renters aged 16-34 have savings of between £5,000 and £15,999 and this keeps the dream of home ownership beyond the reach of all but a small minority of young renters.

It’s not just the deposit which is a barrier but also the income needed for a mortgage. Lenders will generally offer four and a half times a buyer’s salary. Based on an average First Homes house costing £140,000, if the buyer did manage to save a 10% deposit they would need a mortgage of £126,000. This would require them to have a salary of £28,000. However, a newly qualified nurse starts on a salary of less than £25,000 and it would take 6-7 years’ experience until they had reached this salary threshold. What about the key workers in the care and retail sectors who have kept the country going through the pandemic on a minimum wage?

There is a home ownership model which provides a solution to these barriers. ‘Affordable rent to buy’ helps tenants to save up to buy the home they are renting. It is different from other rent to buy schemes as the tenants benefit from an affordable rent for a much longer period of up to 20 years compared to just 5, and when they are ready to buy they receive a gifted, 10% deposit which they do not have to repay.

The model does not require buyers to provide any upfront deposit to access the scheme. Instead, they undergo a financial assessment which looks at whether they will be likely to be able to buy in up to 20 years’ time. For example, for a newly qualified nurse the provider would see that within 10 years she or he would be able to afford the mortgage so they would be eligible for the scheme, even though they couldn’t afford a mortgage or deposit now. Based on their finances, they will choose to aim to buy at year 5, 10, 15 or 20. Rather than having to remain in private rented accommodation up until this time, the nurse would live in the home they know they will one day own and pay 80% market rent helping to save more each month towards a deposit with a long-term, secure tenancy.

A number of local authorities have already adopted the model. As well as helping more people onto the housing ladder, they are experiencing the model’s wider benefits including that it houses many families from the housing waiting list. 17% of the families benefitting from the scheme come from social rented homes that they no longer require freeing these up for those in greatest need. On top of this, the model is fully funded by pension funds and institutional investment so not using up any of the grant funding local authorities access from the Affordable Homes Programme to deliver homes for social rent.  

To truly help level up home ownership, the Government should ensure that models which more effectively address the barriers to home ownership are included alongside First Homes. This will encourage local authorities to consider adopting innovative models like this to address their local housing need and help make home-ownership a reality for many who otherwise can only dream of it.

<span class="has-inline-color has-accent-color"><strong>Steve Collins</strong></span>
Steve Collins

Chief Executive of Rentplus, the leading affordable rent to buy housing provider.
Steve has over 25 years’ experience in housing and development, both in private and public-sector organisations.

This includes working for the then Homes and Communities Agency where he had responsibility for the successful delivery of over 42 Government programmes with a combined value of c.£900m pa, aimed at accelerating the delivery of housing and public sector land across the country.

Steve has significant experience in the affordable housing sector where he managed the allocations of the affordable housing grant programme.

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Thatcher, ideology, and elderly home owners

Thirty-odd years ago in Haringey we had a great scheme for helping elderly home owners manage their affairs.  If it was their wish, the council would buy their family home at market value and, in exchange for a specified discount on the price, we would provide them with a home in a sheltered housing scheme or similar.
The scheme benefitted everyone.  The council now owned an asset it could invest in and rent to a family, giving up a unit for which there was less (although still substantial) demand.  The home owner was released from the burden of managing and maintaining a large house, often on a fixed income, and got a rented home with the support of a warden as well as a significant capital sum they could invest.  The policy tackled both under-occupation and overcrowding.
The scheme was, of course, brought to a halt when Meryl Streep became Prime Minister in 1979.  For ideological reasons the Tory government stopped ‘municipalisation’ and all the benefits of the scheme were lost.  Elderly home owners were deprived of the opportunity to become residents of sheltered housing, which many of them aspired to do.
I suppose I should be pleased that Grant Shapps has started to reinvent the wheel to encourage older people to ‘downsize’ in a voluntary and non-coercive way.  It contrasts sharply with Government’s bullying bedroom tax for social tenants who under-occupy.
Unfortunately the ideological objection to municipal ownership remains in his new scheme.  In what passes as a Government announcement these days, Shapps told the Daily Telegraph that, instead of selling their home to the council, the elderly home owner would move into suitable rented or sheltered housing (which regrettably is in decline following changes in the Supporting People regime) and the council will lease their property, taking responsibility for maintaining and letting the property at ‘affordable rates’ (which I presume means well above social rent levels).
Based on an existing pilot scheme in Redbridge, the council would pay the costs of moving, renovations and financial advice.  The former homeowners would receive the rental income and retain ownership of the home for their estate.  As the council does not own the home, it will be willing to take on management and maintenance costs but will not want to invest in the property for the long term.
One issue is that it remains unclear whether Shapps intends that the rent received by the former owner would be net of management and maintenance costs; this would seem obvious but the (Lib Dem) Deputy leader of Redbridge Council wrote on ConservativeHome that “The home owner retains ownership of their home which is leased to the council to provide us with additional social housing.  The owner receives all of the rent as income, as well as free property management.”  ‘All of the rent’ seems to me to be not the right thing to do, and undermines the viability of the scheme.
Another issue to be resolved is the tenancy terms on which the new tenant of the family home occupies it, and what happens to them if the owner dies and the home is part of their estate.  I assume the tenant will only be given a fixed term tenancy but they should have some reasonable guarantee of their security and period of notice.
Subject to seeing such details of how a national scheme might work, this looks like a reasonable step forward.  It’s just a pity that an entire generation of home owners wishing to downsize, and an entire generation of families wishing to rent a home, have been denied the opportunity because of Thatcher’s ideological purity.

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Generation rent

I was suitably riled listening to Grant Shapps on World at One at lunchtime today, failing to answer sensible points and questions about the housing market from Tony Dolphin and Owen Hatherley.  His ability to avoid any question and reply in ludicrous blandishments never ceases to amaze me. 
According to Shapps, house price inflation only occurs under Labour.  He must have been too young to remember the boom under Thatcher – and even worse the bust when home owners were abandoned with vast amounts of negative equity, a huge number of repossessions – and no government help.  At least when the bust came in 2007 – and never forget it was an international banking bust whereas Thatcher’s was home grown – the Labour government took a series of important steps to protect tens of thousands of home owners, and the tenants of home owners, from foreclosure and homelessness.  
Shapps simply fails to deal with the issues raised by two important reports today.  The first, the one that grabbed the headlines, was from the Halifax who coined the phrase ‘Generation Rent’ to show that people no longer feel that they will be able to buy and that half of 20-45 year olds now think renting is the norm, similar to much of the rest of Europe. 
The second, Tony Dolphin and Matt Griffith’s serious piece of work for IPPR, Forever Blowing Bubbles? takes a long hard look at housing’s role in the UK economy with a proper historical perspective.  It makes a series of recommendations for mortgage regulation and the importance of stopping borrowers from thinking that housing market is a one-way bet.  They also make a strong case for reform of the private rented sector to provide a real alternative choice for those who need to hedge their move into home ownership.  As they say, “tenure rights are weak and the sector is poorly prepared for larger families and their needs. The professionalisation of the sector is much needed to make it the natural choice for those who wish to sidestep the risks of the owner-occupied housing market.”
At one level it seems obvious, but they demonstrate the importance of looking at the housing market as a single entity and not two markets of different tenures, arguing for “reform of the PRS to make it a less destabilising influence in the UK housing market. As we have seen, BTL (buy to let)  investment has too often been speculative, volatile and a cause of pro-cyclical price pressures in the housing market. Worse still, it appears to have cannibalised existing housing stock, led to a weak response in total housing supply, distorted existing supply incentives to encourage the overproduction of small city-centre flats, and driven out large institutional investors by pushing prices up beyond sensible yields.”
Owen Hatherley, whose interesting article on home ownership and renting is also published today, put it to Shapps that people who could no longer afford to become home owners were left at the mercy of the unregulated and insecure private rented sector, and therefore faced no real choice at all.  And that secure public sector tenancies should be a genuine option.  Exit stage right for the Minister, off on another ramble about some excruciatingly complex shared ownership option he’s invented (effectively a cut-back and rebranded Labour scheme). 
The Government avoids the big questions in housing policy today, especially how the housing market – and the vast majority of people live and will continue to live in market housing – can be made to work for people on low and moderate incomes.  There is a real opportunity for Labour to build on these interesting reports and come to some radical but sensible and appealing policies of its own as the Housing Policy Review takes shape.

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We need Isambard and a tin hat

<strong><span class="has-inline-color has-accent-color">Steve Hilditch</span></strong>
Steve Hilditch

Editor and Founder of Red Brick. Former Head of Policy for Shelter. Select Committee Advisor for Housing and Homelessness. Drafted the first London Mayor’s Housing Strategy under Ken Livingstone.

As Tony suggests in his post I agree with Grant, Grant Shapps deserves (begrudging) respect for raising the importance of achieving long term house price stability, but I hope he has his tin hat on in anticipation of the reaction in some parts of the media.  The Mail has already highlighted Shapps’ own personal property dealings as they smell ‘hypocrisy’.   Of course, never one to miss a political trick himself, Shapps also tries to pretend that house price hyper-inflation came in with the Labour government in 1997, whereas all the key trends and policies, long booms followed by a sharp and damaging busts, have been in place for a couple of generations now.

The real problem is that I can’t see anything in his or the government’s philosophy that might lead to the necessary actions being taken to bring house price stability about.  The Mail quotes Shapps as saying that homeowners should no longer rely on their houses to fund their retirement and that ministers were hoping to engineer an era of ‘house price ­stability’ in which property values would gradually be eroded by ­rising earnings.  

‘Engineering’ a market seems rather at odds with everything else they stand for.

Indeed rather a lot of extremely heavy engineering projects would be required to achieve long term price stability.  We may need the housing equivalent ofIsambard Kingdom Brunel because all of them are hard to achieve. 

The first is a better balance of supply and demand, which will need policies to massively increase the rate at which new homes are built over a sustained period of time, more than a decade.  With the regional planning framework scrapped, and huge cuts in infrastructure investment, this seems a forlorn hope to me.  

The second is the stable supply of mortgage funds on sensible terms, targeted towards the cheaper end of the new build market, to encourage developers to produce more affordable homes.  This will require a stiffer attitude towards regulation than this government promises and lenders are used to. 

The third is to tackle land prices and not just house prices – the problem in many places is not the cost of construction, but the price of the land – which can probably only be done through some kind of land value tax, not natural territory for any of the main political parties. 

And fourth, we need a stronger safety net for home owners when interest rates spike or redundancy strikes – Labour’s policies during the credit crunch were a good start in this direction.  Stable or falling prices need to be accompanied by reduced risk for individual households.

At the bottom of it the hardest change to make will be in attitudes.  A good home ownership market is vitally important, but it will fail if it is regarded as the only tenure that brings status and respect, or as a get rich quick scheme or a proxy pensions market or even a place to bung the latest bankers bonus.  The core business should be about delivering reasonably-priced homes to people on reasonable incomes, and shared ownership to people on ‘intermediate’ incomes who want it.  But the market will still fail unless we have a better understanding of the relationship between tenures.  A balanced housing market needs far more renting as well as more homes built for sale, so people at all income levels have real choice at different stages in their lives and are not forced into debt that they cannot sustain.  

More care is needed with the language of ‘aspiration’, which has become synonymous with wanting home ownership.  Of course many people would like to own their own home if they can afford it, but the aspirational classes may well give higher priority in future to getting their children through college and protecting their retirement.

These are real challenges not just for Grant Shapps but also for Labour’s housing policy review when it gets under way.  It would be nice if a new consensus was emerging that enabled serious long term policy options to be discussed rationally, but I suspect the odds are against.

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What will housing look like at Christmas 2014?

<strong><span class="has-inline-color has-accent-color">Steve Hilditch</span></strong>
Steve Hilditch

Editor and Founder of Red Brick. Former Head of Policy for Shelter. Select Committee Advisor for Housing and Homelessness. Drafted the first London Mayor’s Housing Strategy under Ken Livingstone.

Just published on the Labour Housing Group website is a fascinating article by LHG Executive member Graham Martin, who tries to predict what will happen to the 3 main tenures between now and Xmas four years hence, when we will be 5 months away from the most likely date of the next General Election.  What will the Labour Party, when returned to government, be facing in housing?  Here is a summary of Graham’s conclusions (figures are for England only).   

Social Housing

Housing Associations currently own around 2.3m affordable homes.  Given the size of the stock, the overall numbers will change slowly despite the planned changes. 

  • The current (inherited and new) social rented programme will produce about 100,000-120,000 extra ‘target rented’ properties.  But between 100,000-170,000 existing target rent homes will be relet at intermediate (upto 80% market) rents.  In 2014 it is likely to be 50,000 fewer in total than now.
  • There will be around 285,000 more homes let at intermediate rents (say 135,000 relets and 150,000 new build). 
  • The debt funded/rental cross-subsidised new Intermediate rented homes will be produced mainly in London and the South East (with some in the South West and Midlands) as it is here that the maths work best.  In other parts of the country, intermediate rents will result in either a small increase or even a rent reduction, making development on the new model unviable. 
  • The biggest impact is likely to be caused by the interaction of the various benefit changes, and in particular the overall benefit cap of £26,000, restricting tenants’ ability to pay.

Council house numbers will change slowly.  There is little appetite and resources for significant stock transfers.  Some other conclusions: 

  • The reform of Housing Revenue Accounts is likely to improve councils’ financial strength and their ability to invest in their own stock.  There is a risk that there will be a smash and grab raid on HRA money (rising rents, financially more secure) to cross subsidise the General Fund.
  • The provision by councils of Intermediate rented housing is likely to be slow.
  • Management issues around benefits are likely to be the same as with Housing Associations.
  • Changes to statutory homelessness rules, and changing letting priorities will have a significant impact.

Home Ownership

Graham projects that house prices might fall another 20%, maybe 25%-30%, as measured against inflation. This will be mainly due to the long term ‘deleveraging’ of the residential mortgage market – i.e. there will not be the money to lend to home owners to buy new homes (such money as there is will go mainly to those buying the nicest properties with the biggest deposits).

Home construction for home ownership will be remain low until 2014, after which is may start to increase again (from a very low base).

The lack of affordable homes for (all but the best off) first time buyers will result in increased pressure on the rental market, and more adult children living in the parental home.

Private Rented Sector

The hardest to predict. The only certainly is that there will be big change.

The changes to Housing Benefit (and total benefit) rules will profoundly impact on the sector. Landlords may split their properties into smaller flats to respond to the benefit caps and ceilings.  Savills are projecting that the impact will be, first, large falls in demand for and rents of 1 bedroom flats (due to under 35’s now being subject to the ‘single room rate’ rule), and, secondly, increased demand for larger ‘shareable’ properties.

The new 30% centile cap on maximum HB and the plan to greatly widen the ‘Broad Market Rental Areas’ will have a big impact.  There are areas where over 30% of private tenants are dependant on HB, but will be constrained to living in the 30% of cheapest properties. 40% into 30% just does not go….

It is likely that the gap in housing (especially ‘green’) quality between other tenures and the private rented sector will grow significantly upto 2015.

Regulation and quality control are likely to be drastically reduced due to spending cuts, and there is a danger that undesirable landlord practices will increase. This is unfair to tenants but also to responsible landlords and managing agents.

There is an opportunity to promote high quality institutional landlordism, with investment available if the regulatory structure is right.  REITS – Real Estate Investment Trusts – could work well in residential letting, kick starting the UK residential construction industry, and providing high quality, long  term rented property at market rents.