This autumn’s comprehensive spending review will answer one of the most pressing questions of the moment: how does the government intend to help low and middle income families house themselves?
We’re campaigning hard to persuade George Osborne to boost grant funding for genuinely affordable rented homes – but the government have so far made it clear that the focus will be on homeownership. This means that the range of alternative schemes for supporting homeownership are coming under increasing scrutiny. Shared ownership is likely to be in the mix. This makes sense as an offer for those households who could afford and be able to service a mortgage but have been priced out by runaway house prices. But Chris Walker from Policy Exchange has floated the intriguing idea that it could be a tool to reduce the housing benefit bill too.
Writing for Inside Housing he argues that a powerful way to reduce housing benefit expenditure is to take low income households out of paying rent all together by moving them into affordable home ownership.
‘Affordable home ownership’ covers a number of schemes. Of these, we recently demonstrated that starter homes, where homes are discounted to 80% of their market value, do not work for households on lower incomes – 98% of the country will be unaffordable for those earning the government’s proposed ‘national living wage’. Help to Buy mortgage guarantees are even more of a non-starter as low income households cannot afford to borrow 95% of the market value of a home. And previously we found that the Help to Buy equity loan, although better than the above, still does barely anything to help lower income households get on the ladder.
Which leaves shared ownership from the current menu of affordable home ownership options. Shared ownership, where households purchase 25-50% of their home and pay a social rent on the rest, can work for some low income households particularly in areas with lower housing costs. Previous research by Shelter estimated that 58% of the country would be affordable to a household from the lowest income decile purchasing a 25% share on a three bedroom home. But we also raised big caveats about the need for improvements to aspects of shared ownership, should it be expanded.
But even from this optimistic starting point, can it do what Chris Walker hopes and meet the needs of those on housing benefit?
The first flaw is that shared ownership doesn’t meet his objective of stopping social tenants paying rent all together. They still have to pay rent on the share they don’t own and crucially the lower a household’s income, the smaller the share they would be able to purchase and the higher the remaining rent. But that purchased share does effectively give the DWP a discount on the housing benefit payable, so there are still some savings to consider.
However, when Shelter analysed shared ownership we found that even a 25% share – currently the lowest on offer – is unaffordable for many lower income households and to go truly mainstream shares would have to be reduced to around 12% – leaving a very large rented portion. However, no lender is yet willing to lend on such a low share and there are big questions about whether they could be persuaded to do so.
With micro shares the tenant gains very little from any increase in the value of equity, and yet is wholly responsible for repairs and maintenance (a significant burden to those on low incomes). At this point it has to be asked whether shared ownership still functions as affordable homeownership or if it has become a way for households to purchase a secure tenancy.
This also speaks to the bigger question of whether households that are reliant on housing benefit could actually access a mortgage to purchase a share of any size at all. This is problematic, particularly given the welcome introduction of the mortgage market review, which ensures that any household taking on a mortgage can afford to repay it. Lenders need confidence that the household has a reliable income that can service mortgage repayments, which will likely exclude out of work households or anyone with very low or unpredictable earnings. And at present housing associations don’t generally allocate a shared ownership home to someone who will need housing benefit to pay the rental share.
So shifting investment away from social rented housing to shared ownership seems unlikely to be a silver bullet to lower the housing benefit bill. To become affordable, it requires a substantial rental portion for low income households and the need for mortgage finance creates real access problems even with the smallest of shares.
Expanding shared ownership at the expense of genuinely affordable rented housing will instead shift those on the lowest incomes into the far more expensive private rented sector – with expensive implications for housing benefit. In light of this it’s not yet time to give up on the conclusions from Capital Economics – investment in social rented housing can bring about long-term reductions in housing benefit and meet the needs of low income households.