JonWatsonconsulting
Strategy Planning Housing Procurement
TENURE & AFFORDABILITY OPTIONS
Many people confuse tenure with affordability. Homes for sale are not
necessarily always sold at market value. Renting is not necessarily always at
social rent or affordable rent levels.
Homes for sale may be at full market value, or at a deliberately discounted price.
The full market value of a new home for sale is dictated largely by values of
similar properties in that location. There may be a premium to reflect the fact that
the house is new and to higher standards, but the security valuation for mortgage
lending purposes is unlikely to reflect that fully.
Where the price is discounted, it is normal practice to ensure that that discount is
not solely for the benefit of the first purchaser. That is normally achieved by
selling on a shared equity basis, where the discount from full market value is
represented as a charge on the property. For instance, if the market value is
£200k and the home is sold for £150k (i.e. 75% of market value), then that
discounted value would be secured by means of a second charge on the property
after the mortgage. The effect of this would be that the owner would have to
repay the 25% discount based on the new selling price when they sell the
property. The charge can be expressed in such a way that the CLT could then
receive that cash and use it on another development at that time in the future, or
(more usually) it then agrees to provide that same equity stake to the second
eligible purchaser, and so on. That latter option means that the property will
always trade at 75% of its full market value, and thus the benefit of that initial
discount will continue in perpetuity. Whilst a simple and effective way of
improving affordability, many mortgage lenders find this approach difficult to
accept.
There has been a rapid growth in the provision of market rented housing over the
last decade, following almost a century of steady decline. The private rented
sector accounted for 9% of total stock in 1990/91, but has increased to 18% now.
This was largely driven by the Buy to Let boom, and there are now 1.5m such
landlords, the large majority of whom own only one property. Although Buy to Let
activity declined sharply after the credit crunch, there are signs of renewed
activity in that sector, which puts pressure on first time buyer purchasers.
Generally speaking, private rented homes are let on Assured Shorthold
tenancies, at whatever rent can be achieved in relation to local comparables.
Yields fluctuate dramatically, both because of volatility in local rent levels and
trends in house prices. It is a high risk sector, where much of the profit is made
by selling on the property at the optimum time, rather than because of the
underlying nett yield generated by the rental income.
JonWatsonconsulting
Strategy Planning Housing Procurement
Social rent has been the default form of rented affordable housing to date. This
comprises homes owned and managed by Registered Providers, where rent
levels have been determined by reference to the National Rent Regime.
However, the government has announced recently that the National Rent Regime
will cease to operate from 2015.
Homes are let on an Assured Tenancy basis, where the tenant has security of
tenure for an indefinite period. Most Registered Providers are local authorities
(known as Public Registered Providers) or housing associations and CLTs
(known as Private Registered Providers).
The National Rent Regime (which will continue until 2015) is based on a formula
that generates target rents, with reference to local house prices and local
earnings. The objective is for those target rents to be affordable for people in low
paid employment or dependent entirely on state benefits. Target rents can
increase at no more than RPI +0.5% per annum thereafter. This is a significant
constraint on RPs’ ability to compensate for revenue deficits or unexpected
expenditure, which represents an area of risk. On the other hand, supply of
social rented housing usually falls so far below need that there is very little
danger of properties not being readily lettable.
Homes for affordable rent are also owned and managed by RPs, but rent levels
are determined with reference to local market rents rather than the National Rent
Regime. They are let on an assured tenancy basis, although the provisions of
the Localism Bill allow RPs to let those tenancies on a fixed term basis. As such,
such fixed term tenancies are likely to be useful to households at an earlier stage
in their “housing career”, i.e. typically newly forming households who expect to
move house relatively frequently in response to job opportunities or as their
housing needs change.
Shared ownership, which is also known as HomeBuy, is a way of buying a stake
in a property where a resident cannot afford to buy it outright. There are a
number of variants of HomeBuy. See
http://www.homesandcommunities.co.uk/buyingrentingahome, but New Build
HomeBuy is relevant to CLTs.
The capital premium on the lease can be anything from 25-75% of the market
value. The rent varies in inverse proportion to the stake purchased and is usually
based on a gross yield of around 2.75-3.0% of the value. Subsidy is paid to the
Registered Provider to enable them to charge this “sub market” rent. The shared
owner can “staircase” to a higher stake at any stage during the term of their
lease. Conversely, there is no requirement for them to increase their stake at
any stage. Again, this is a product which is valuable to first time buyers and
other newly forming households who want or need to stay in a particular location.
JonWatsonconsulting
Strategy Planning Housing Procurement
Because of rent and mortgage combined costs, this product can be unaffordable
in areas of high house values.
Mutual Home Ownership is a relatively new way of owning a stake in the housing
market. It is designed to bring the bottom rung of the property ladder back within
reach of households on modest incomes, in areas where they are priced out of
the housing market. It is also designed to remain permanently affordable for
future generations. It treats living in a home and its value as a consumer durable,
rather than as a speculative capital investment. Instead of owning an individual
property or a share of the value of an individual property, residents own equity
shares in a mutual property trust owned by them and other residents.