ARE HIGH VALUE SHARED OWNERSHIP UNITS ETHICAL?
I’ve been fortunate enough to work with 3 large (12,000 to 36,000 units) dynamic housing associations in recent years. All the organisations had skilled finance and development teams capable of delivering quality units that served a clear social purpose time after time. However, what was starkly different was their approach and attitude towards so called high value shared ownership units. Why would independent teams of similar skill and geographical position (they were all London based HA’s) come to such different conclusions?
DEFINITION: Over ½ a million? Vs. The Rental Cap
The first inescapable difference was how they defined “high value”. One of the teams arbitrarily decided that high value shared ownership units were those with a market value of over £500,000. Despite the arbitrary nature of this decision, it’s understandable – many people could comprehend that it felt about right. People would righteously claim that, “units worth over half a million shouldn’t attract grant –should they?” Some would argue that we shouldn’t be subsidising units that many consider mansions. It’s also clear to see where these ideas are born – half a million pounds in outer Essex buys you a six bedroom house with double garage and a kitchen you could happily play cricket in and we clearly shouldn’t be subsidising such lavish living.
However, my task was to decide if subsidising high value units was ethical and the answer I came to was…. “Possibly.” I found that some people were failing to see that within some London boroughs, £550,000 barely buys you a two bedroom flat. If it has a waterside view of the Thames, many flats top £650,000. These are not luxurious duplex apartments despite what the glossy sales brochures would have you believe, these are modest two bed flats with a combined kitchen dinner and ¾ sized wardrobes. Therefore in my mind, I put the matter of subsidising mansions to bed, as it simply wasn’t what I was seeing in the scheme appraisals run past my team(s).
I understand that not all will come to the same conclusion; many argue that there should be an element of social cleansing. Many of the working class in Londoners are relatively highly paid compared to the rest of the nation, and it can be argued that their standard of living wouldn’t be much different if they were encouraged to move outside London and commute into work as opposed to residing in London within subsided social units. But again, I’d argue that it’s important that many skilled workers such as teachers and nurses are at least offered social housing close to their place of work. I wouldn’t want to encourage swathes of society to change career or place of work because we can’t justify offering social housing where it would suit them.
The alternative definition of high value shared ownership was one that focused on the rental element. You see; the maximum that any housing association can charge upon the unsold equity element (the bit the tenant doesn’t own) is 2.75%. And for many years, housing associations have happily applied this 2.75% to the unsold element to calculate how much rent is owed annually but, with high valued shared ownership, there is a problem.
All social units, and especially shared ownership units are constrained by affordability criteria. There are GLA guidelines as to what is deemed affordable, but boroughs often have their own interpretation. One borough in particular stipulates that the mortgage + rental element + service charge should not come to more than 45% of the gross take home pay of a couple with a combined earning total of £66k. As I’m sure you’ve already noticed, as units become more expensive, the more likely you’ll see the mortgage, even if only on 25% of a property, increase – putting pressure upon that 2.75% rental figure.
It’s unfortunate that the 2.75% rental figure is the only variable available to compensate for the increase in both mortgage payments, and to lesser extent service charges, as unit values rise. By my calculations, all units worth over £560,000 are likely to be forced into a position where the rental percentage is reduced. This will vary depending on annual service charge payments and I’ve even seen £475,000 2 bed flats having their rental element reduced all the way down to 0.4%. That’s a remarkably low figure and fundamentally changes the dynamic of shared ownership as a product.
If people staircase in order to stop paying out “dead money” in rent, then it’s reasonable to assume that substantially decreasing the rental charge reduces the pressure on people to staircase. However, this is a hypothesis, scouring the internet reveals that there has been little study put into how high value shared ownership tenants tend to behave in terms of staircasing. This leads many HA’s to calculate the worth of shared ownership properties conservatively as they are certain that rents will be reduced, and uncertain as to when residents will staircase.
It’s clear from the above why many housing associations are put off by the complications high value shared ownership brings to the table. However, London is building. A quick look across the skyline reveals Nine Elms is a focal point. The flats along the Thames near the iconic Battersea power station are taking shape, and even the old PowerStation herself has had one tower completely taken down in preparation for her revamp. And whilst London is building, section 106’s (forced elements of large schemes that are set aside for “affordable housing”) are being touted about far and wide to any housing association that will listen.
As housing associations engage with developers offering section 106’s, they are often asked to submit a bid – how much would the housing association be prepared to pay for these units – that in this example contain a big bag of high value two bed shared ownership units? Well, as many housing associations factor in, the reduced rental element, high service charges and the uncertainty of how much money they’ll receive from staircasing in the future, the number submitted as a bid is often much lower than the market value of those units. I’ve seen housing associations successfully bid for and win high value shared ownership units with bid between 40-50% of market value. This is remarkable and in business terms this is comparable to someone offering you a ten pound note for about four pounds thirty pence.
I believe that this has to be a good deal for social land lords! I agree that the value is locked away within the equity stake that remains un-sold, but given time this will be sold and the super profits released. It turns out that some housing associations are switched on to this ‘once in a generational opportunity’ to build up their pot of “family silver”.