First published by CaCHE, in this blog Prof. Christine Whitehead and Prof. Peter Williams explore how government sponsored and market based ‘affordable’ products have worked to date and what can be done to improve the current situation.

Affordable home ownership has been an important part of government housing policy across all four UK countries for at least forty years, especially in England. Now, access to home ownership has deteriorated to the extent that the Conservative government in England is looking to expand its provision of ‘affordable’ home ownership to help 2 million more households into ownership.

This new report for the Building Societies Association and CaCHE clarifies how government sponsored and market based ‘affordable’ products have worked to date and what can be done to improve the current situation.  The clear message is that the government needs to step up if the full potential of government and market based schemes is to be realised over the next few years.

Looking back

The three most important government sponsored initiatives have been Shared ownership (SO), introduced in 1980 (and now to be upgraded); Help to Buy brought in in 2013 and now to be phased out; and the Right to Buy also introduced in 1980 and continuing in modified form.

Government initiatives rarely have only one objective. Both SO and Help to Buy aimed both to increase owner-occupation and to expand supply – so the focus was on new build. Equally, the Right to Buy substituted private for public finance and gaining votes as well as boosting home ownership.

The specifics of SO have made it difficult to scale up and deliver on its potential; the traditional mortgage can only be secured against the proportion being bought; the purchaser must pay all repair and improvement costs; in the absence of reliable and regular data it is perceived as relatively risky for funders; increasing house prices (relative to wages) have slowed staircasing; and there is no widespread resale market for SO homes. Eligibility rules and price limits have meant that access has varied considerably between regions.

Help to Buy on the other hand has been more popular and, with no income limits and not subject to regional price limits, has had a much wider market. But it has also generated large deadweight losses as well as potential risks for purchasers and government.

Market based products have mainly addressed problems around deposits or enabling risk sharing.  Aside from mortgage indemnity guarantee schemes which support higher LTV lending, the focus has been on shared equity loans.  After the GFC a considerable gap in higher LTV mortgage provision opened up which innovators have been trying to fill within current regulatory, risk appetite and macro-prudential constraints.

Looking forward

With the removal of Help to Buy and the restrictions Right to Buy, only the modified Shared Ownership scheme remains on the government’s traditional menu to support affordable home ownership.  It is not surprising therefore that the government in England is looking to introduce two new initiatives.

First Homes is a different form of shared equity, acting as a partial replacement for Help to Buy and again aiming to support new build.  The purchaser buys 70% of the property with the other 30% paid for by developer contributions and publicly owned in perpetuity. Affordability will vary greatly across the country given variations in house prices relative to incomes. Nor is it obvious that it will be popular as earlier options.

The UK government’s recent announcements on mortgage guarantees suggests it is ready to step back to support market innovation in that area probably linked to long term fixed rate mortgages. As such it draws on the strengths of an already accepted instrument and potentially mitigates the risk of rising inflation and interest rates. However, based on their past experience, it is not an option strongly supported by some major lenders.

In the market sector, there are a number of products in the pipeline including: an investor funded top up loan blended into the lender’s main mortgage product; a Peer to Peer structure with buyers joining together to fund deposits collectively; long term fixed rate mortgages without a short-term pre-payment penalty; co-investment models linking buyers and investors; and insurance on high LTV mortgages on new dwellings.  Covid has slowed this innovation process and extended the time taken to get to market.  The question is whether such innovations will have wide market appeal? To date most borrowers and lenders focus on a limited range of more conventional products.

Conclusions

The core finding from our analysis is hardly surprising given past experience: there is no immediately obvious way of transforming the affordability picture for those trying to access and/or sustain home ownership.   And this despite the UK mortgage market being amongst the most innovative and competitive in the world and the governments across the UK being pro-active role in supporting home ownership.

While there is clear potential for market innovation, government sponsored products still sit at the heart of meeting the challenge of boosting and sustaining home ownership. However too many schemes have been short lived; have reinforced regional differences; and sometimes overlapped with one another.

Building a coherent and effective longer term affordable home ownership strategy for government requires:

◾ a long overdue and fundamental reform of shared ownership going well beyond the existing proposals in England and giving it the potential to be scaled up;

◾ looking abroad to learn more about how to use mortgage guarantees to support FTBs and working to overcome the limited appetite from some key lenders; and

◾ building a vision for home ownership in general and affordable home ownership in particular based on understanding the costs and benefits of different schemes; the risks to all participants; and the potential scale of demand, funding and supply. Doing this would itself give confidence to the market to provide further solutions.

To view the full report click here.