Making Housing more Affordable: The role of intermediate tenures (Real Estate Issues)

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Making Housing More Affordable The Role of Intermediate Tenures

Edited by Sarah Monk Deputy Director Cambridge Centre for Housing and Planning Research Department of Land Economy University of Cambridge UK

Christine Whitehead Director Cambridge Centre for Housing and Planning Research Department of Land Economy University of Cambridge and Professor of Housing Department of Economics London School of Economics and Political Science UK

This edition first published 2010 © 2010 Blackwell Publishing Ltd Blackwell Publishing was acquired by John Wiley & Sons in February 2007. Blackwell’s publishing programme has been merged with Wiley’s global Scientific, Technical, and Medical business to form Wiley-Blackwell. Registered office John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom Editorial office 9600 Garsington Road, Oxford, OX4 2DQ, United Kingdom 2121 State Avenue, Ames, Iowa 50014-8300, USA For details of our global editorial offices, for customer services and for information about how to apply for permission to reuse the copyright material in this book please see our website at www.wiley.com/wiley-blackwell. The right of the author to be identified as the author of this work has been asserted in accordance with the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners. The publisher is not associated with any product or vendor mentioned in this book. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold on the understanding that the publisher is not engaged in rendering professional services. If professional advice or other expert assistance is required, the services of a competent professional should be sought. Library of Congress Cataloging-in-Publication Data Making housing more affordable : the role of intermediate tenures/edited by Sarah Monk, Christine Whitehead. p. cm. — (Real estate issues) Includes bibliographical references and index. ISBN 978-1-4051-4714-9 (hardback: alk. paper) 1. Low income housing—Great Britain. I. Monk, Sarah. II. Whitehead, Christine HD7287.96.G7M35 2010 363.5’820941—dc22 2010018326 A catalogue record for this book is available from the British Library. First edition typeset in 10/13pt Trump Mediaeval by MPS Limited, A Macmillan Company, Chennai, India Printed in Malaysia 1 2010

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The Royal Institution of Chartered Surveyors is the mark of property professionalism worldwide, promoting best practice, regulation and consumer protection for business and the community. It is the home of property related knowledge and is an impartial advisor to governments and global organisations. It is committed to the promotion of research in support of the efficient and effective operation of land and property markets worldwide.

Real Estate Issues Series Managing Editors Stephen Brown John Henneberry K.W. Chau Elaine Worzala

Head of Research, Royal Institution of Chartered Surveyors Department of Town & Regional Planning, University of Sheffield Chair Professor, Department of Real Estate and Construction, The University of Hong Kong Professor, Director of the Accelerated MSRE, Edward St. John Department of Real Estate, Johns Hopkins University

Real Estate Issues is an international book series presenting the latest thinking into how real estate markets operate. The books have a strong theoretical basis – providing the underpinning for the development of new ideas. The books are inclusive in nature, drawing both upon established techniques for real estate market analysis and on those from other academic disciplines as appropriate. The series embraces a comparative approach, allowing theory and practice to be put forward and tested for their applicability and relevance to the understanding of new situations. It does not seek to impose solutions, but rather provides a more effective means by which solutions can be found. It will not make any presumptions as to the importance of real estate markets but will uncover and present, through the clarity of the thinking, the real significance of the operation of real estate markets.

Books in the series Greenfields, Brownfields & Housing Development Adams & Watkins 97806320063871 Planning, Public Policy & Property Markets Edited by Adams, Watkins & White 9781405124300 Housing & Welfare in Southern Europe Allen, Barlow, Léal, Maloutas & Padovani 9781405103077 Markets and Institutions in Real Estate & Construction Ball 978140510990 Building Cycles: Growth & Instability Barras 9781405130011 Neighbourhood Renewal and Housing Markets Edited by Beider 9781405134101 Mortgage Markets Worldwide Ben-Shahar, Leung & Ong 9781405132107

Economics, Real Estate & the Supply of Land Evans 9781405118620 Development & Developers Guy & Henneberry 9780632058426 The Right to Buy Jones & Murie 9781405131971 Housing Markets & Planning Policy Jones & Watkins 9781405175203 Mass Appraisal Methods Kauko & d’Amato 9781405180979 Economics of the Mortgage Market Leece 9781405114615 Towers of Capital: Office Markets & International Financial Services Lizieri 9781405156721

The Cost of Land Use Decisions Buitelaar 9781405151238

Making Housing More Affordable: The Role of Intermediate Tenures Monk & Whitehead 9781405147149

Urban Regeneration in Europe Couch, Fraser & Percy 9780632058412

Global Trends in Real Estate Finance Newell & Sieracki 9781405151283

Urban Sprawl Couch, Leontidou & Petschel-Held 9781405151238

Housing Economics & Public Policy O’Sullivan & Gibb 9780632064618

Real Estate & the New Economy Dixon, McAllister, Marston & Snow 9781405117784

International Real Estate Seabrooke, Kent & How 9781405103084

Economics & Land Use Planning Evans 9781405118613

British Housebuilders Wellings 9781405149181

Forthcoming Urban Regeneration and Social Sustainability Colantonio & Dixon 9781405194198

Urban Design in the Real Estate Development Process Tiesdell & Adams 9781405192194

Transforming Private Landlords Crook & Kemp 9781405184151

Real Estate Finance in the New Economic World Tiwari & White 9781405158718

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Contents Contributors Foreword by Lord Richard Best, OBE Acknowledgements Glossary 1

Introduction Sarah Monk and Christine Whitehead

SECTION A

WHAT IS INTERMEDIATE HOUSING?

ix xiii xvii xix 1

15

2

Intermediate housing tenure – principles and practice Christine Whitehead and Judith Yates

19

3

International experience Kathleen Scanlon

37

SECTION B

MEASURING THE PROBLEM

57

4

Methods for estimating need for intermediate housing Alan Holmans and Sarah Monk

63

5

Modelling the take-up of low-cost home ownership Alex Fenton

81

SECTION C

SECURING INTERMEDIATE HOUSING

97

6

Intermediate housing and the planning system Tony Crook and Christine Whitehead

101

7

Securing key worker housing through the planning system Nicky Morrison

120

SECTION D

8

WHO BENEFITS FROM INTERMEDIATE HOUSING?

Different tenures, different households? Youngha Cho and Christine Whitehead

135 141

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9

Contents

Targeting groups: key workers’ needs and aspirations Kathleen Scanlon

165

10 Shared ownership: does it satisfy government and household objectives? Anna Clarke

183

11 Working with government policy in the East of England: a case study of implementation Sarah Monk

201

SECTION E

225

INTERMEDIATE HOUSING AND THE ECONOMY

12 Intermediate housing products and the housing cycle Michael Jones 13 The impact of the economic downturn on low-cost home ownership in the UK Gemma Burgess

229

247

14 Conclusions Sarah Monk and Christine Whitehead

261

Appendix 1 The products Appendix 2 Definitions of intermediate housing for use in negotiating planning obligations References Index

277 281 283 299

Contributors Gemma Burgess received her PhD from the University of Cambridge and is now a Research Associate at the Cambridge Centre for Housing and Planning Research, University of Cambridge. Her research interests include the delivery of affordable housing through the planning system; issues relating to gender equality, housing and planning; and housing and ageing. She has recently been researching the impact of new gender equality legislation on planning policy and practice and the relationship between domestic violence and homelessness. Other recent research has focused on the intermediate housing market and the delivery of affordable housing through the planning system, particularly on the low-cost home ownership sector. Youngha Cho received her PhD from LSE and worked at the Cambridge Centre for Housing and Planning Research for a number of years. She is now a Senior Lecturer in the Department of Real Estate and Construction, Oxford Brookes University. Her research interests include micro analysis of housing markets and the house building industry, affordability issues, intermediate housing tenure and residential mobility. She continues to extend her expertise into other countries such as USA and Singapore, and has recently carried out an international research project funded by the Korea National Housing Corporation. She has been working with several institutions in South Korea and Asian countries as a visiting fellow in the Research Institute for Human Settlement (KRIHS) since 2005. Anna Clarke is a Research Associate with the Cambridge Centre for Housing and Planning Research. Her research interests include housing need, homelessness, demand for social housing and low-cost home ownership. Her recent works include work on future demand and aspirations for affordable housing, work on domestic violence and homelessness legislation, and an evaluation of Emmaus Communities. She is currently involved in a nationwide evaluation of enhanced Housing Options schemes, which aim to improve the housing options of those seeking social housing. She is also writing a book on the history of homelessness in Cambridge. Tony Crook ADH (Tony) Crook is Former Pro Vice Chancellor at the University of Sheffield and Professor of Housing. In addition to maintaining an active research programme, especially on planning obligations and on the supply side of the private rented sector, he is also active in the worlds of policy and practice, having served and chaired boards of several housing organisations. Currently he is Chair of the Board of Trustees of Shelter and a Trustee of the Coalfields Regeneration Trust, a Board member of the National Tenant Voice and of the Orbit Housing Group.

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Alex Fenton is a Researcher at the University of Cambridge. He has carried out research on family life in urban areas, the regeneration of social housing estates and the long-term trajectory of deprived neighbourhoods. He has a particular interest in novel uses for administrative and census data in the analysis of housing policy, including regeneration, low-cost home ownership, and race and ethnicity. Alan Holmans was formerly Chief Housing Economist in the Department of the Environment. He was subsequently a Research Associate with the Cambridge Centre for Housing and Planning Research until he retired in August 2009. He continues to work with the Centre particularly on issues associated with his specialist areas of household formation and household projections, methods of estimating future demand and need for housing, and house values. Michael Jones After reading architecture at the University of Cambridge, Michael worked in local government housing and construction departments at Senior and Chief Officer level, before returning to Cambridge to join the Centre. Since then, he has worked on a wide variety of research projects mainly in the context of social housing and housing finance, including the project A Review of Low Cost Home Ownership Policies in Wales, for Welsh Assembly Government, upon which his chapter is based. He has also been involved in a range of projects relating to planning in Cambridge and chairs a London-based ALMO. Sarah Monk is a Senior Research Associate in the Department of Land Economy and Deputy Director of the Centre for Housing and Planning Research. She is particularly interested in the relationship between the planning system and the provision of housing, including estimating future housing requirements and the use of Section 106 to secure additional affordable housing. She retains an interest in housing and labour markets, and has more recently been involved in a number of literature reviews – housing supply and affordability, urban renaissance, the capacity of the planning system to deliver the government’s housing targets, reducing carbon emissions from housing, and the economic and social impacts of housing investment – as well as several large-scale policy evaluations. Nicky Morrison is a Lecturer in Housing and Urban Planning at the Department of Land Economy, University of Cambridge and an Associate of the Cambridge Centre for Housing and Planning Research. She is a Director of Cambridge City Centre Partnership Ltd and a Board Member of a Cambridge-based housing association. She teaches courses on housing and urban policy and planning. She has worked with the Centre for many years, specialising in planning for housing and intermediate markets and

Contributors xi

key worker issues. Her interests in urban form and regeneration, especially the potential for compact cities, have involved collaboration with colleagues in the European Union as well as within the UK. Kathleen Scanlon is a Researcher at LSE London, a research group within the London School of Economics. She specialises in urban and housing issues, particularly housing finance and social housing. She recently returned to London after three years in Copenhagen, where she was a Guest Researcher at the Danish State Building Research Institute. She co-edited volumes I and II of Social Housing in Europe. Other recent publications include Mortgage Product Innovation in Advanced Economies: More Choice, More Risk (with Jens Lunde and Christine Whitehead), which appeared in the European Journal of Housing Policy in June 2008. Christine Whitehead has been Director of the Cambridge Centre for Housing and Planning Research since its inception. She is also Professor in Housing in the Department of Economic, at the London School of Economics. She is an internationally respected applied economist whose research is well known in both academic and policy circles. Major themes in her recent research include analyses of the relationship between planning and housing, notably with respect to the S106 policy; housing affordability and forecasting; the role and financing of social housing; shared equity and shared ownership; and the application of economic concepts and techniques, including cost-effectiveness and cost–benefit analysis to questions of public resource allocation. Judith Yates is currently an Honorary Associate Professor in Economics at the University of Sydney, after a career in academia, interrupted by occasional secondment to the Australian government to work on its National Housing Strategy and to serve on an Inquiry into Local Government Finance. Her research interests are in the fields of housing economics, finance and policy. She was appointed to the newly formed National Housing Supply Council in 2008. In 2009, she was given an award for her outstanding contribution to housing research by the Australian Housing Research Conference.

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Foreword If timing is the key to achieving policy relevance, then this book is a sure-fire success. With home ownership remaining stubbornly beyond the reach of most new home seekers and social housing increasingly confined to the poorest and most vulnerable, there is intense interest in how to house Middle Britain’s ordinary new households on middling incomes. More and more younger people now remain with their parents into their 30s, postpone starting a family and suffer the anxieties of not knowing when, or if, they will settle in a home of their choosing. The private rented sector grew by 1 million homes in the 2000s, often with right-to-buy purchasers outbidding first-time buyers. But private renting does not offer the security needed by those who want stability for family life, who want to settle their children in local schools and put down roots in an area. The physical conditions in privately rented property remain poor; and while sharing a flat may be fine for the young and mobile, the need for space – and even a small garden – becomes more urgent as time goes by. As tenants, occupiers have neither the independence to put their own time and money into improving their home nor the opportunity to build up a debt-free asset for their later years. So the search is on for something better to fill that middle ground: the quest for suitable ‘intermediate’ housing has become a major priority. This book, edited by Sarah Monk and Christine Whitehead, makes a major contribution in analysing the problem and defining the key questions for policy makers. It reports on an impressive body of research over the years much of which has been supported by the Joseph Rowntree Foundation. They show how the range of intermediate housing initiatives over the last 40 years have achieved modest positive results but that policies can suffer from pursuing too many – potentially conflicting – objectives simultaneously. The motivation of housing associations – the providers of most intermediate housing – has often been to make profits that can be ploughed back into rented housing: this strategy has proved a risky one with the arrival of the credit crunch and has helped put the intermediate market at risk at the current time. Even so, I see compelling reasons why the housing association sector could take this story forward and significantly extend its offer to embrace households in work and on average earnings, alongside those without jobs and with the lowest incomes: First, providing this mix of occupiers in all new developments built by ‘registered providers’ of social housing removes the stigma – which can ruin life chances – of living in ‘social housing ghettos’.

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Second, at a time of public spending constraints, provision of intermediate housing produces many more homes for a given level of public subsidy: this increases overall supply and addresses the shortages that remain the underlying cause of the UK’s housing problems. Third, the different forms of part ownership provide a way of obtaining a higher contribution from occupiers who are not in poverty which can be reinvested immediately: they may be paying more than their tenant neighbour but this is not a penalty for achieving a reasonable income since they gain a comparable benefit with a foot on the ownership ladder. And I would add that part ownership options can also mean salvation for struggling buyers who face financial difficulties: this can prevent the catastrophe of homelessness through the ‘flexible tenure’ route of enabling owners to ‘staircase down’. The alternative to housing associations– talked about but not yet a reality – is a private rented sector supported by the major institutional investor. Since these companies want a long-term investment that will produce a steady income stream, rather than capital gains, they can offer greater security to the occupier as well as the prospect of professional, good quality management. While at the Joseph Rowntree Foundation, I attempted to persuade the City institutions that residential lettings could prove a sound investment. We built City-centre Apartments for Single People at Affordable Rents (CASPAR projects) in downtown Leeds and Birmingham. We showed that open-market renting to young, mobile, singles could produce decent returns. But market conditions then favoured individual buy-to-let investors who were particularly attracted by likely capital gains. Today the institutions see yields from market renting in a more favourable light although not without support: e.g. AVIVA, the big insurance company, is working with the Homes and Communities Agency to invest, perhaps, £500 million over the next five years. Meanwhile, some housing associations are equipped to accept the risks of market renting to generate profits for other activity, just as many took on the role of building for market sales. They could be exemplars for the pension funds and insurance companies and have a role in supporting the growth of the new-look, unsubsidised rental market, acting as the agencies – for development and for ongoing management – for those institutional investors. This text helps to clarify the range of options, with and without direct subsidy, that could be used to fill the gap between social rented and market housing. It discusses why, even in uncertain times, a form of owneroccupation may be best for many types of households. But it also examines the complexity of real-world options and the pitfalls faced by government.

Foreword

xv

On these – and so many other – aspects of the intermediate housing debate, this book sheds important light. I conclude with congratulations to the authors: their book will raise the quality of discussion on this hugely important topic at exactly the moment when politicians and practitioners need the evidence and the analysis to decide where next to go with tomorrow’s ‘intermediate housing’. Lord Richard Best, OBE Chair of the Local Government Association

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Acknowledgements Gemma Burgess would like to thank the housing associations, developers, lenders and other stakeholders interviewed for the research on which Chapter 13 is based. Youngha Cho and Christine Whitehead would like to thank the Statistics Department of Oxford Brookes University for their help and expertise in interpreting the modelling results. Anna Clarke wishes to thank the shared owners who completed the surveys and telephone interviews for her research underpinning Chapter 10. Tony Crook and Christine Whitehead wish to acknowledge the many colleagues at both Cambridge and Sheffield who have collaborated with them on a large series of projects on planning gain and affordable housing. Much of the work cited and discussed in Chapter 6 is drawn from papers and reports written with these collaborators and their involvement in the current work is gratefully acknowledged. Alex Fenton would like to thank the Department for Communities and Local Government for commissioning the research on which Chapter 5 is based, and Youngha Cho for the econometric modelling. Sarah Monk wishes to thank the steering group for the East of England work whose members provided information on the HomeBuy schemes in the region. Kath Scanlon wishes to thank Judy Yates and Vivienne Milligan of the University of New South Wales for their help with Chapter 3 and Martin Crookshank and Ben Castell of Llewelyn Davies for their input to the key worker research in London (Chapter 9). The editors wish to thank all the authors for their impressive contributions and all those who have helped bring the book to completion (including long suffering partners).

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Glossary Affordable housing The UK government defines affordable housing as including both social rented housing provided by local authorities and housing associations, and low-cost home ownership usually provided through housing associations but recently (2009) extended to include newly built housing provided by private developers. Community Infrastructure Levy (CIL) This is a new instrument for securing a developer contribution towards the costs of infrastructure provision. It has been enabled by legislation but no guidelines on how it will work in practice have yet been issued (2009). It could operate as a roof tax (see below). Community land trust A local community-controlled non-profit organisation set up to own and manage land and other assets in perpetuity for the benefit of the community. Assets may include affordable housing, agricultural facilities, commercial outlets or community facilities. A house purchaser may buy a proportion of the asset value (e.g. just the building) with constraints on resale (first refusal to the trust). Cost renting (also known as intermediate renting) Property let at sub-market rents set so that costs are just covered, with no profit element. At the present time, cost renting involves rents at below 80 per cent of market value. Deed restricted homes Homes subject to legal covenants that bind current and future owners. In the context of intermediate housing, deed restrictions can oblige the owners to sell or rent the home only to eligible intermediate households. Do-it-yourself shared ownership Household finds a property on the open market which is then purchased on a shared ownership basis with a housing association buying the other share. The government began to phase this out in the late 1990s. HomeBuy and later Open Market HomeBuy Purchaser finds a property on the open market and buys 75 per cent of the home with a conventional mortgage and obtains a 25 per cent interest-free equity loan repayable on sale. The equity loan mortgagee receives 25 per cent of any capital gain. Similar schemes included the Starter Home Initiative and Key Worker Living (aimed at public-sector groups such as teachers, nurses and police). Now replaced by schemes given below. HomeBuy Direct This scheme for new-build homes has been introduced to help private developers suffering from a loss of sales in the recession. Purchasers receive a 30 per cent equity loan part provided by government and part by the developer that is interest-free for the first five years. Housing association A not-for-profit housing provider that is regulated by a government agency (the Tenant Services Agency, formerly the Housing Corporation). Also termed affordable housing provider (AHP).

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Glossary

Intermediate housing/intermediate market This term includes both low-cost home ownership and sub-market renting, also termed intermediate renting, where prices and rents are above social rents but below private-sector rents and market prices. Intermediate renting Property let at sub-market rents, usually 75–80 per cent of the market rent, often with zero profit but also at below market with some profit for the landlord. See also cost renting. Key workers Normally defined as providers of essential local (usually public) services whose pay cannot be adjusted to reflect variations in the local cost of living – particularly in the cost of housing. Essentially publicsector workers on national pay scales; most commonly teachers, nurses and police officers but who is included can vary between authorities. Key Worker Initiative This involved direct grants to particular groups of workers in specific parts of the country of between £10,000 and £20,000. It was a short-lived scheme and was replaced by Key Worker Living. Key Worker Living This is a package of assistance with house purchase aimed at key workers, notably police, nurses and teachers, including equity loans of up to £50,000 (plus loans of up to £100,000 for some teachers in London) and shared ownership. It also includes intermediate rent. Limited (or zero) equity cooperatives Housing cooperatives with contracts or covenants containing restrictions on resale values, which ensure that housing remains affordable into the future. Usually residents collectively own the building, rather than each member owning their own flat or apartment. Low-cost home ownership This term refers to a range of products aimed at low-income purchasers who cannot afford to access home ownership without some form of subsidy. The products include both shared equity and shared ownership. In England these have been packaged as elements of HomeBuy. Material considerations The factors to be taken into account by local planning authorities when determining planning permission (consent) for development. If these factors are not forthcoming the application can be refused. Affordable housing is a material consideration. MyChoice HomeBuy The purchaser finds a home on the open market and buys 50 per cent with a conventional mortgage and receives a 50 per cent government loan with a 1.75 per cent interest charge. The scheme was introduced in 2008 and discontinued in 2009 because of funding problems. New Build HomeBuy A low-cost home ownership scheme whereby, on a new build home, the purchaser buys a share of 25 per cent or more, purchases the rest with a traditional mortgage and pays up to 3 per cent as a charge or ‘rent’ on the rest of the equity owned by the housing association. It replaced shared ownership (see below). OwnHome HomeBuy A partnership between a housing association and a bank whereby purchaser finds a home on the open market and buys 60 per cent with a conventional mortgage and the housing association

Glossary

xxi

provides a 40 per cent equity loan that is interest-free for the first five years after which interest gradually rises to 3.75 per cent after 11 years. Introduced in 2008, discontinued in 2009 because of funding problems. Planning obligations (or ‘S106 agreements’) are private agreements negotiated, usually in the context of planning applications, between local planning authorities and persons with an interest in a piece of land, and intended to make acceptable development which would otherwise be unacceptable in planning terms. This includes affordable housing as it has the status of a material consideration. Rent to HomeBuy A pilot scheme introduced in response to recession. The tenant pays intermediate rent – no more than 80 per cent of current market rent on a new-build home – for up to five years. The tenant may purchase equity in the property at any time but is expected to complete their purchase within the five-year time frame. Right to Buy Under the Right to Buy, some 2 million local authority-owned units have been transferred at a discount to sitting tenants. Originally, the discount was an increasing proportion of the price depending on length of tenancy. The discounts have now been capped and reduced to as low as £16,000 in some areas – making it worth very little in the context of high priced areas. Right to Acquire gives similar rights to some housing association tenants, depending on when the house was built, how it was financed and whether or not the association is a charity (charities were exempt). Section 106 (S106) agreement Section 106 of the Town and County Planning Act 1990 enables local planning authorities to negotiate obligations in cash or in kind from developers to mitigate the impact of development, including making contributions towards necessary infrastructure and help meet a community’s need for affordable housing. Planning Policy Statement 3 on Housing states that affordable housing includes social rent and lowcost home ownership but not low-cost market housing, unless the price is discounted. The developer contribution to affordable housing can take the form of free or cheap land, cheap dwellings or a financial contribution. Shared ownership The original intermediate market scheme. Available on specific new-build homes and those that have since come up for resale. Buyers purchase a share (usually between 25 and 75 per cent) with a mortgage and the remaining share is owned by a housing association charging a regulated rent. Buyers usually have the right to increase the share purchased to a maximum of 100 per cent. Shared equity Most commonly available on existing open market property, this term refers to a range of products that effectively reduce the down payment element of house purchase by providing an equity loan in addition to a traditional mortgage. Typically the loan is between 15 and 30 per cent of the value. Sometimes interest is paid on the equity loan,

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sometimes not, but in all cases the loan is repaid on resale of the property if it has not been paid back earlier. See also HomeBuy Direct, a shared equity scheme on specified newly built property. Shared ownership for the elderly This was previously called leasehold schemes for the elderly (LSE) and they often involve specially adapted housing. Social HomeBuy For social tenants only. Social tenants can buy a minimum of 25 per cent share in their home at a discount of £9,000–16,000 depending on location. They can also buy outright as in Right to Buy/Acquire. Again, given the small discount it is worth very little in high-priced areas. Social rented housing Housing provided by local authorities and housing associations for rent at below-market rents. Since the mid-1990s, these rents have been regulated in line with capital values and local incomes. Staircasing The purchase of additional shares in a shared ownership property. Thus for example a shared owner may staircase up to 100 per cent ownership. Staircasing down is also sometimes used to denote the sale of shares to the housing association, e.g. if the purchaser is struggling to meet housing costs. Starter Home Initiative A low-cost home ownership scheme announced in April 2000 and introduced in two rounds in 2001 and 2002. Targeted at key workers defined as health workers, teachers, police and ‘others’, including social workers, cleaners and support workers, and bus drivers in London. Replaced by Key Worker Living in 2004.

1 Introduction Sarah Monk and Christine Whitehead

Shared ownership, low-cost home ownership, equity loans for first-time buyers, key worker housing; cost renting – these buzzwords have been around in the UK for several years now, along with deed restricted homes, limited or zero equity cooperatives, community land trusts in the USA and equivalent terms across the world. Equally the term affordable housing – as distinct from local authority, municipal and even social housing – has taken on new meaning in both policy and analysis over the past decade. All these terms relate to the movement away from traditional rented approaches to meeting the housing needs of those on modest incomes – a movement that began in the inflation-ridden 1970s but has taken on new momentum in the latest economic cycle. What are these terms? What do they mean? Why have they become so important over the past decade? And who are they for? Are these intermediate tenures simply a response to the specific problems arising from rapid house price rises across much of the industrialised world? Or do they have the potential to play a longer-term role in achieving sustainable housing markets? This book aims to answer some of these questions by clarifying the principles on which the development of affordable housing and intermediate tenures has been based, analysing the policy instruments used to implement these ideas, and making a preliminary assessment of their longer-term value to households and governments alike. It also brings together an evidence base for researchers and policy makers as they assess past experience and work to understand future options. It draws mainly on experience of the

Making Housing More Affordable: The Role of Intermediate Tenures, edited by Sarah Monk and Christine Whitehead © 2010 Blackwell Publishing Ltd.

2

Making housing more affordable: the role of intermediate tenures

intermediate housing market in England and also on examples of policies that have been implemented across the world. It aims to clarify both the challenges and the achievements of governments in providing a well-operating intermediate market that can help meet the fundamental goal of ‘a decent home for every household at a price within their means’.

Explaining the title Intermediate housing tenure is a term which has entered into the mainstream discussion in the new century, although the ideas have been around for over 30 years. The main reason for this has been that, from the mid-1990s until late 2007, the UK, like many other western economies, experienced an unprecedented period of increasing housing and land prices. This in turn created growing problems of affordability across the housing system, particularly for those trying to become homeowners. At the same time, increasing costs put pressure on traditional government funding sources both to provide additional affordable housing and to support households with their housing costs. This in turn stimulated the use of a range of old and new mechanisms that were mainly about levering in private sector funds to help provide additional affordable homes by ‘stretching’ public resources to increase the value for the public purse. Affordable housing and intermediate housing tenures are both rather unspecific terms. In the policy literature, they are often used almost interchangeably to cover any approach which is not part of the traditional tenure forms of social rented housing, market renting and owner-occupation. In the UK, the intermediate market encompasses shared ownership, shared equity, low-cost ownership and discounted market rental housing as well as cost renting. It is usually, although not exclusively, provided through a housing association (a non-profit housing provider whose main objective is subsidised rental housing for those in need) and it is aimed at those who could afford to pay more than the typical social rent but still cannot afford to access full-price open market housing. In the UK, the vast majority of instruments – and funding – have concentrated on ownership products rather than extending rental provision (see Appendix 1 for the details), while in other countries there has been more emphasis on rental products. The term affordable housing is often interpreted as covering the same range of policy instruments, but it is also used more broadly to include social rented housing, private renting with income-related subsidies and even the lower end of the owner-occupied market. In this text, we are taking the narrower definition and looking specifically at policy-driven provision that lies between social renting and owner-occupation. Taking this definition as a starting point, intermediate housing tenures may be broadly defined as mechanisms or products designed to enable

Introduction

3

households who cannot otherwise afford home ownership or high-quality rented housing to access it with the aid of some kind of limited subsidy. These mechanisms can take many forms, but a key aspect is that they are targeted at particular types of households, generally younger working households on below-average incomes who are currently living in the private rented sector, sharing with friends or still living with family, although there is also a growing interest in targeting older households with specific needs. The policy instruments employed in the UK in recent years are generally not new. Most of the instruments that have been introduced in the new century had precursors in the 1970s and 1980s (Booth and Crook, 1986; Appendix 1). Policies that had been developed over the decades have been refocused and extended to enable them to play a larger role, both because of the extent of the affordability crisis and of limited resources. As a result of these pressures, the intermediate market has become a core element in UK government policy, particularly since the turn of the century. In this context, Homes for a World City (GLA, 2000) provided the first guesstimate of the requirement for intermediate housing in London. Thereafter, both central government and independent commentators looked to identify and measure the extent of the need, based on the number of households who could not obtain social rented housing but could not reasonably afford owner-occupation in their area (see Chapter 4). The ideas associated with affordable and particularly intermediate market housing in the UK are thus heavily grounded in specific policy instruments. The process has thus been incremental rather than the outcome of a structured analysis of objectives, gaps in provision and the exact nature of what should be provided (Munro et al., 2005). The instruments have often been developed in response to particular circumstances and political priorities – by no means all of which have been housing specific. However, one very particular housing objective has been to concentrate these instruments on owner-occupation because of the government’s broader commitment to a property owning democracy (Bramley et al., 2002). The current economic and housing market crisis has brought to the fore many more fundamental questions about what the role and position of an intermediate market ought to be – notably whether these products have particular risks associated with them, which make them less desirable in less inflationary housing market conditions than those that have prevailed since the late 1990s to 2007. The intermediate market – as a tenure between social rented and owneroccupation – is often seen as problematic in the UK, although it is unremarkable in many other countries. In Europe, the market generally provides affordable housing for poorer working households without direct public subsidy (Freeman et al., 1996). Such housing is usually for rent, and is often small and of poor quality. In the UK, the private rented sector has been smaller and less flexible, while, overwhelmingly, people aspire to owner-occupation which is also actively promoted as a policy goal. The market has provided low-cost

4

Making housing more affordable: the role of intermediate tenures

market housing particularly at times of rapid increases in house prices, usually in the form of small ‘starter homes’ and one-bedroom flats for firsttime buyers. Even these may be unaffordable to working households in high-priced areas, and clearly they cannot meet the needs of families. Access problems arise during each economic upswing when house prices increase faster than earnings, making home ownership unaffordable to increasing number of working households. But in the past the social rented sector in the UK was larger than that of today and aimed to house a broader range of working households, including both public- and private-sector employees. As home ownership has become more important, the social sector has only housed those in priority housing need which usually means those on the lowest incomes, such as pensioners, single parents and unemployed families with children. The choice for many lower-income non-vulnerable households is therefore private renting, which often cannot meet longer-term aspirations.

The context: where does intermediate housing fit in? Starting from the immediate post-war period, tenure has been particularly strongly delineated in England and more generally in the UK – with different access, different attributes, different financing and taxation regimes, and often quite different types of dwellings available. In the 1950s and 1960s, those who had secure incomes and were able to obtain finance from the highly regulated special circuit of housing finance became owner-occupiers. Achieving owneroccupation meant that households benefited from a generous tax regime as well as from below-market interest rates (Munro, 2007). In part, because of these benefits, the proportion owning rose from under 30 per cent in 1951 to 53 per cent in 1971, but many others who were able to afford to buy were excluded from doing so by limited access to mortgage funds. Over the next decade, these constraints were reduced and owner-occupation continued to grow quite rapidly to 60 per cent of a much larger stock. However, some 20 per cent of households in 1951, rising to nearly 30 per cent by 1980, lived in social rented housing mainly provided by local authorities. Tenants included large number of lower and indeed middleincome employed households, and there was considerable overlap in terms of household characteristics between social renting and owner-occupation (Holmans, 1970). Social sector rents were based on historic costs and inflation had been rising quite rapidly; so these households also received large benefits through low rents. Within the private rented sector, the majority of households lived in rent controlled accommodation so were also ‘subsidised’, but by their landlords. Those trying to get into private renting had very limited options and the quality of what was available was often both poor and expensive. Moreover,

Introduction

5

the size of the private rented sector declined rapidly, from 52 per cent in 1951 to 11 per cent in 1981. There was thus a major crisis in terms of access to adequate housing: If you were excluded from social renting and home ownership where did you go? Options for government to improve the situation were highly constrained: the costs of increasing the size of the social sector were too high, and changes in the regulatory regime aimed at expanding the private rented sector did not stem its decline, but there was beginning to be some positive movement in the mortgage market. It was in this context that the first attempts at intermediate housing were introduced during the 1970s – including cost rent and shared ownership products, as well as mortgage instruments that offset the effect of front loading associated with rapid inflation on access to home ownership (Booth and Crook, 1986). At this point the government was looking to (i) produce additional housing, (ii) enable the available subsidy to go further, (iii) help meet the aspirations of those facing high access costs – particularly associated with continuing inflation – and therefore direct assistance at those who could ultimately afford to own to get a foot on the ladder, and (iv) more generally support the government’s objective of a property-owning democracy. The first national policy instrument introduced in the 1980 Housing Act, shared ownership, met all of these criteria in that it applied only to new construction, involved lower subsidy through the rent charged on only part of the property, allowed households to get on the property ladder, and expanded home ownership by bringing in new groups of households. Although shared ownership has remained part of the package of policy measures ever since 1980, it was not the most important policy instrument introduced in the 1980 Act. This was aimed at expanding home ownership and realising public assets through the Right to Buy. This enabled some 1.6 million households to become full owner-occupiers at a subsidised price and reduced government outgoings. However, the receipts were mainly used for other purposes than adding to the affordable housing stock. Thus, at this stage the government’s objective was simply to increase owneroccupation – and to limit the direct financial cost to government – rather than to build an intermediate market per se. The big shift towards encouraging an identified intermediate tenure started in the late 1990s as house prices rose more than incomes and outgoings increased rapidly. Thus in 1997, at the bottom of the affordability cycle, average mortgage payments as a proportion of first-time buyer income were 17.9 per cent with the deposit requiring only 11 per cent of annual income. In 2004, these ratios rose to 22 and 21 per cent, respectively – and equally importantly the incomes of those who actually managed to enter owner-occupation had risen faster than average, while the number of firsttime buyers fell and more and more households were unable to afford to buy.

6

Making housing more affordable: the role of intermediate tenures

Access and affordability became increasingly important political issues as households found themselves unable to achieve their expected housing goal of owner-occupation – and saw established owner-occupiers benefiting from capital gains. This scenario led to the introduction of HomeBuy in 1998 – a shared equity product where purchasers received a 25 per cent, zero interest, equity mortgage to reduce their access costs. This took the emphasis off new build and enabled slightly better off households to purchase a home from the existing housing market. Again the political arguments were about achieving aspirations, overcoming financial constraints, providing shallow subsidies (indeed ex post maybe no subsidy at all if prices rose rapidly) and freeing up scarce highly subsidised social housing. Throughout the 1990s, another opportunity was developing as a result of two things: the introduction of S106 in the 1990 Town and Country Planning Act and the increasing awareness of the problems associated with single tenure social housing estates. S106 made it possible for local authorities that could demonstrate housing need to require a proportion of each larger residential development to include affordable housing. As the number of local authorities using the S106 powers increased and the proportions of affordable homes that they required rose – and as more emphasis was put on the mixed communities agenda – shared ownership became an increasingly important part of affordable provision, accounting for nearly 40 per cent of new affordable output in 2007. Since 2000, there have been many variations on shared ownership and shared equity instruments as well as varying interest in cost rent products, but the government’s objectives have remained fairly stable: to expand the stock of affordable housing, to support aspirations to home ownership, to make better use of limited social housing stock by enabling better off tenants to leave the sector, to encourage mixed tenure communities and to reduce reliance on government funding. As can be seen from this short history, like most government policies, the process by which new policy instruments for intermediate tenure provision have been developed has been incremental and responsive to external pressures rather than the outcome of strategic thinking (Stephens et al., 2005). In many ways, the intermediate market ‘just grew’ over a 30-year period. In particular, there is little evidence that the government has ever consciously aimed at a stable long-term intermediate market by which future generations of households can benefit from this investment in affordable housing. Some schemes of this sort do exist – e.g. Community Land Trusts, especially in National Parks – but these are tangential to the core policy instruments. There has also been no attempt to build up a second-hand market in partial ownership – the only option is to sell back to the housing association. This raises issues as to whether intermediate market policies have simply been ‘documents of their time’ that may become irrelevant in the current

Introduction

7

recessionary environment and indeed in future scenarios. That depends on whether there are more fundamental benefits that support this type of approach – an issue we discuss in Chapter 2.

Understanding the issues The scale of the problem Every UK government since 1945 has embraced the liberal policy goal of a decent home for everyone at a price within their means. For government, however they may choose to intervene, there is a cost attached. The problem then is how to provide a decent home for all at a price they can afford in the most cost-effective way for the taxpayer. This involves identifying the relevant household segment that requires assistance and the extent of the subsidy required if they are to obtain good-quality housing and the government is to achieve value for public money. In this context, the intermediate market can be defined in terms of the people who can afford more than social rented housing but who cannot access full home ownership or good-quality private renting. This identifies a gap between those who can afford to access market housing and those who are eligible for housing subsidies. Ideally, this gap would be small or non-existent, as successive governments have adopted the policy goal of ‘a decent home for all at a price within their means’ (Hills, 2007), which implies that those who cannot afford such a home will be subsidised. But in practice there are many lower-income employed households who are able to pay more than the subsidised public housing rent yet are unable to access market housing without assistance. These households may be seen as comprising or filling the ‘gap’ between social and market housing. This gap can be conceptualised in terms of housing costs as Figure 1.1 illustrates. 250.00 200.00 OO 150.00

PR

100.00

HA LA

50.00

/9 9 99 /0 20 0 00 / 20 01 01 / 20 02 02 / 20 03 03 / 20 04 04 / 20 05 05 / 20 06 06 / 20 07 07 /0 8

/9 8

19

98

19

97

19

19

96

/9 7

0.00

Figure 1.1 Comparative housing costs in England, 1998–2008. OO: owner occupation; PR: private renting; HA: housing association renting; LA: local authority renting.

8

Making housing more affordable: the role of intermediate tenures

Figure 1.1 shows that in recent years (until the credit crunch collapse in 2008) the access costs into owner-occupation have soared, while since 2002/03 private rents have risen much less rapidly. Even so, there is a clear gap between private rents and housing association rents (which are themselves higher than local authority rents reflecting the differences in financial mechanisms and the age of the stock). Moreover these are private rents accepted for Housing Benefit purposes, so they reflect the lower half of the market. Obviously these are average figures, but the reality underlying the graph is that because of this gap many households are living in unsatisfactory conditions – sharing, young people remaining with their parents or staying with friends, or simply being overcrowded or living in the poorer end of the private rented sector. In meeting the housing objectives of ‘a decent home for all at a price they can afford’, the very existence of this gap demonstrates that for a significant number of households this objective has not been achieved. Most importantly, the size of this group has increased greatly since the turn of the century. Moreover, large proportions of those in the gap aspire to home ownership, and while they usually end up renting from a private landlord, they expect to be able to access a home of their own ‘some day’. These pressures have been the main drivers of government intermediate tenure policy.

The definition of intermediate housing Surprisingly, given how much emphasis has been placed on this approach there are very few clear definitions of the terms intermediate tenure and affordable housing. At the national level, the main approach has been to identify target groups that determine whether or not a particular household is eligible for intermediate market housing. These eligibility criteria have been regularly revisited. Initially allocations were left to the housing association and so tended to concentrate on those who were already in social rented housing or were on the waiting list. In 2009, when they were first fully defined by central government they included: • • • •

existing social tenants; key workers as defined by government; first-time buyers; previous homeowners who cannot now afford to buy (perhaps because of separation or divorce).

These are national criteria and regions are asked to add their own priority groups. The first of the recent schemes, the Starter Home Initiative introduced in the Housing Green Paper (DETR, 2000a), was targeted at key public-sector workers in areas where recruitment and retention had become a problem, and it was thought that the inability to afford local housing was

Introduction

9

a contributing factor. Employers were asked to contribute funding to the scheme, and to a large extent this determined which groups were actually included (Morgan et al., 2005). Thus for example in the East of England region, firefighters were eligible in Hertfordshire because the county council decided to contribute, whereas in Bedfordshire the police were excluded because the chief constable refused to contribute. Employers have not been involved with subsequent schemes and the eligible groups have evolved from the original criteria almost through custom and practice. Existing social tenants are always included as a priority group, no doubt in part because this would allow another, needier, household to receive the social housing subsidy. However, other criteria have become more and more determined by income rather than groups identified by other attributes. At the time of writing, the normal criterion is an income of less than £60 000 in schemes in the south of the country – an income level which is far above the average for the region but which reflects the difficulties facing new entrants to owner-occupation. A more formal government definition which looks more towards policy instruments can be found in Planning Policy Statement 3: Housing (PPS3) (DCLG, 2006a) and its accompanying Advice Note (Delivering Affordable Housing, DCLG, 2006b). It concentrates not only on which households should be eligible but also on how to achieve long-term value from the subsidies provided and is reproduced in Box 1.1 (more detail is given in Appendix 2).

Box 1.1 The definition of affordable and intermediate housing for planning purposes Affordable housing includes social rented and intermediate housing, provided to specified eligible households whose needs are not met by the market. Affordable housing should: – meet the needs of eligible households including availability at a cost low enough for them to afford, determined with regard to local incomes and local house prices; – include provisions for: (i) the home to be retained for future eligible households; (ii) any subsidy to be recycled for alternative affordable housing provision if these restrictions are lifted. Social rented housing is rented housing owned and managed by local authorities and registered social landlords (RSLs), for which guideline target rents are determined through the national rent regime. The proposals set out in the Three Year Review of Rent Restructuring (July 2004) were implemented as policy in April 2006. It may also include rented housing owned or managed by other persons (continued )

10

Making housing more affordable: the role of intermediate tenures

and provided under equivalent rental arrangements to the above, as agreed with the local authority or with the Housing Corporation as a condition of grant. Intermediate affordable housing is housing at prices and rents above those of social rent but below market price or rents, and which meet the criteria set out above. These can include shared equity (e.g. HomeBuy) and other low-cost homes for sale, and intermediate rent. Source: Delivering Affordable Housing (DCLG, 2006b, paragraphs 30–32).

The two basic forms of intermediate housing in UK policy have been shared ownership and shared equity. The first, introduced in 1980, enables the household to buy a part of a new or renovated home on a traditional mortgage and to rent the rest of the property from a landlord who owns it. That landlord has normally been a housing association and the rent in the early stages was sent as a social rent although later it has been determined as a proportion of capital value. Households are eligible for Housing Benefit on the rental element if their income falls. It is thus strictly a shared ownership product with a rent payment to the other owner. This basic model has remained relatively unchanged except for its name over the 30-year period from 1980. The delivery of new affordable housing has been heavily supported through the land use planning system. S106 agreements allow planners to extract some of the ‘planning gain’ – the increment in land values that occurs when permission to develop or redevelop is given – for community purposes, including affordable housing. The discount on the land can be added to central government grant to provide a larger discount on the open market price of the completed dwelling, or can be substituted for grant in varying proportions in order to ‘stretch’ public funding further. Equally private developers can provide similar products when there is no need for central government grant. A shared equity product, HomeBuy, was added in 1999 as the affordable crisis worsened. This had two defining attributes: the purchaser bought the whole dwelling – making it easier for financial institutions to lend; and 25 per cent of the value of the property was funded by an equity mortgage provided by central government through a housing association – so the purchaser gives up their right to any capital gains on that 25 per cent until they have repaid the loan. The loan is secured as a second charge on the property, repayable on the sale of the property at the same percentage of the sale price as of the original purchase price. HomeBuy has been popular because it allows people to choose a house on the open market, just as they would if they did not need subsidy to help them. Since its introduction however there have been a

Introduction

11

large number of changes in the detail of this shared equity product in relation to the proportion that can be taken as an equity loan, the extent to which the loan is funded by central government, and latterly whether the product should be restricted to new dwellings. The third main product has been that of intermediate renting, which involves a social landlord letting property at above social rents but below market rents. This option has always been available as long as it is consistent with the housing association’s legal responsibilities. However, it has normally formed a very small part of intermediate provision – in part because government grant has not been made available except for very specific schemes – e.g. for short-term lettings. At the present time, the option has risen up the agenda as one response to the recession and the difficulties of selling intermediate home ownership products. The delivery of all of these products has depended heavily on housing associations which have benefited significantly from providing intermediate tenure housing. Moreover, when the purchaser buys any part of the property, whether with their own equity or through a traditional mortgage, the housing association keeps the proceeds. They are expected to use this funding to provide additional affordable housing. In this way government subsidy is recycled. While the basics of these products are quite straightforward, the details have changed rapidly in the face of changing economic and political circumstances – as indeed have the titles by which they are known. Shared ownership is currently called New Build HomeBuy; while shared equity has had so many names, it is difficult to remember them. The latest is HomeBuy Direct which is a shared equity product involving developer finance for new-build property. In addition, there have been other initiatives such as first-time buyer grants which have had different mixes of attributes. All the product details that have been employed in England over the past few years are set out in Appendix 1, while the details of the definitions to be used where planning obligations are involved are set out in Appendix 2.

International experience The mechanisms observed in England are examples of how one government has tried to meet its objectives of a decent home for all at a price they can afford, enabling households to meet their aspirations for home ownership, achieving mixed tenure and potentially mixed communities on new development sites, and securing value for money of public subsidy. While they may not be exactly transferable to other national contexts, the issues they raise and the problems they are trying to address will be relevant to other countries facing housing affordability problems.

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Making housing more affordable: the role of intermediate tenures

Australia, Canada, the USA and Scandinavia have all developed a range of models – private sector, partnership and public sector based – to meet the needs of lower-income employed households often in a local context. European models have often been more concentrated on developing public/ private development partnerships mainly involving new build or regeneration. The majority of approaches have used publicly owned or highly regulated land as a means of subsidising new provision and are often strongly based on – and constrained by – planning law. Other models have aimed to expand the role of private financial institutions in taking on risk and providing institutional finance for a broader range of rental options. Analysis of these initiatives provides an understanding of both what has happened elsewhere and also of how the UK approaches might be improved.

The structure of the book The objective of this book is to bring together in one place a range of research on why and how intermediate tenure policy instruments have operated to address issues of affordability for lower-income employed households and others with specific needs that require some level of government support. The text draws on many different methodologies setting out an economic framework for analysis, using secondary and survey data to identify both the categories of needs and the households currently being assisted, interview surveys of the main stakeholders, and focus groups and individual discussions. The chapters are organised in five main sections together with this introduction and the conclusions. The first section– overview – outlines the principles and practice of intermediate housing and examines the instruments and mechanisms by which intermediate housing has been provided internationally. The next section comprises two chapters on estimating who might benefit from being in intermediate housing and projecting who will take up the different products in the future. Then the supply-side story is examined: Chapter 6 looks at the delivery of intermediate housing through the planning system in general, while Chapter 7 illustrates how the system works in a particular case study of one major employer who used the system to ensure that a significant proportion of the affordable housing on a large development would be intermediate rather than social rented. The fourth section introduces some case studies of who gets what. In this section, Chapter 8 looks at how the profile of households differs between the two main intermediate products and variations in take-up between more and less pressured housing markets. Chapter 9 provides a case study of the key worker model in the London context. Chapter 10 examines the sustainability of the shared ownership

Introduction

13

model for households who took it up in recent years. Finally Chapter 11 examines the regional perspective through a case study of the process of implementing central policy in complex local situations. The final section looks at how effectively the intermediate market operates over the economic cycle – looking first at a case study over the decade of growth in Wales, followed by an examination of what has been happening to intermediate housing in the recent credit crunch and downturn in the English housing market. The concluding chapter summarises the lessons that can be learned from this UK experiment and asks whether it has been a success or a failure.

Conclusions In policy terms the broadest definition of affordable housing may include all housing that is within the means of lower-income employed households. It can include lower-priced – and lower-quality – market housing as well as provision involving some element of subsidy, whether it comes from government or from landowners and developers. In the UK, however the definition is often much narrower, excluding social renting housing at one end of the scale and unsubsidised market provision at the other. This brings the definition of affordable housing into line with that for intermediate tenures which aim to meet the needs of those who cannot afford market housing but can pay more than social sector rents. A further issue specific to the UK is the extent to which this definition may be extended by including all those who cannot afford to buy – as opposed to paying a market rent for adequate accommodation. The scale of the potential intermediate market can be defined in terms of the ‘gap’ in the overall housing market between the cost of a low-priced home or a market rent and rents in the social sector. This gap has been increasing significantly over the past decade, and this affordability gap is the main reason for the recent growth in interest in intermediate markets and particularly in low-cost home ownership. There are at least three rationales for concentrating assistance on this specific group, who are by no means the most vulnerable. First on equity grounds, lower-income employed households have little or no access to the benefits of social renting and Housing Benefit on the one hand and owner-occupation on the other. Shallow subsidy that enables households to purchase at least part of their home might be regarded as reasonable given the help available in other tenures. Second, there are political and social benefits to helping people achieve their reasonable aspirations, especially when circumstances have become more difficult. Third, this may be the cheapest way for government to ensure ‘a decent home for every

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Making housing more affordable: the role of intermediate tenures

household at a price within their means’ and to limit their expenditure on pensions and care among older age groups. Delivery of intermediate housing through the planning system has a rather different rationale in that it is a mechanism for ensuring that land is available at the same time as allowing additional subsidy to come from the private developer and landowner. At the same time, it helps to meet mixed communities objectives as well as supporting households who cannot afford full ownership to get a step on the housing ladder. The intermediate housing market has been an important aspect of planning, a new housing provision and a growing element in the British government’s agenda to meet households’ aspirations to achieve sustainable home ownership. Policies with similar objectives have been introduced in many other countries, although usually at local level. Clearly the emphasis and the details of the instruments have and will change, but the fundamental problems being addressed will not go away. Analysis of this relatively new area of policy is therefore relevant to a range of stakeholders including developers, real estate financiers, retail lenders, housing providers of all types, those involved in regeneration projects – as well as to every level of government, to housing market analysts more generally and particularly to the households facing affordability problems. The book is equally relevant to other countries facing similar problems and looking at different ways of trying to provide housing that is affordable to working households on modest incomes.

Section A What is intermediate housing?

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Introduction to Section A: The starting point

Chapter 1 has made clear that the terms affordable and intermediate housing are usually defined in relation to government policies that aim to assist those on modest incomes. It is not surprising that these definitions are so policy based and therefore value laden. In the marketplace it is usually assumed that any price that people are prepared to pay is affordable – even if it means that the households involved go without some of the other necessities of life. In the policy context, however, it is generally used in the context of ‘a decent home for every household at a price they can afford’. It therefore carries with it the assumption that those households whose housing circumstances fall below that level either in terms of housing access and quality or being able to afford the other necessities of life require some form of government intervention. This can take the form of regulation or income support as well as directly provided subsidised housing. Similarly the idea of intermediate tenures is inherently policy based as the range of tenures available in any given country depends upon the legal framework with respect to property rights. In the UK, the legal framework has been particularly constrained – especially in the context of private renting and financial regulation. The development of intermediate tenures therefore requires both policy and legal changes. A final policy issue relates to land allocation and taxation. The main reasons why housing becomes unaffordable relate to the increasing cost of land and the difficulties of accessing land for development, especially where this involves providing for poorer and disadvantaged households. Again policy decisions are required to make both land and finance available. In this section, we provide an overview of both the economic logic of intermediate housing provision and the range of instruments that have been used

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Making housing more affordable: the role of intermediate tenures

across the world. In Chapter 2, Whitehead and Yates look at what in principle we might expect to be provided if markets were working effectively – and how English policy instruments match this typology. Not surprisingly, there is a big gap between principle and practice, but the analysis helps to clarify how policy might better achieve a fuller range of options. In Chapter 3, Scanlon reviews the range of policy instruments that have been used across the industrialised world. These initiatives are far more likely than in the UK to be local and particularly to be concentrated on the price and allocation of land to enable affordable homes to be provided into perpetuity. The two chapters together provide a starting point for the following sections which examine the growth of interest in intermediate markets and experience with particular instruments in England.

2 Intermediate housing tenure – principles and practice Christine Whitehead and Judith Yates

What is intermediate housing? Intermediate housing was defined in Chapter 1 in terms of policy initiatives and subsidy and regulatory arrangements which support the provision of affordable housing, as well as in terms of income and other groups to be targeted. In particular, in England, it covers instruments that aim to help lower-income employed households to obtain accommodation that falls somewhere between social renting and full owner-occupation, with an emphasis on achieving at least partial ownership. There are obvious political reasons for emphasising intermediate tenures for government. However, if we want to assess the value and sustainability of such policies, we need a clearer understanding of the more fundamental reasons for developing these tenures – and indeed exactly what we mean by the term intermediate housing tenure. Is it just about partial ownership? Clearly not, as many of the instruments employed provide full ownership even in the initial stages. Is it just about subsidy? Clearly not, as some instruments are based on regulation rather than funding and others involve market prices. Is it enough to say ‘we know it when we see it’? Clearly not, since policy definitions, at least, have changed and, in any case, such a definition does not provide a reasonable basis for analysis. This chapter therefore looks more analytically at what is meant by intermediate housing. This allows us to ask questions about the reasons why such housing should be provided: whether it needs government intervention and

Making Housing More Affordable: The Role of Intermediate Tenures, edited by Sarah Monk and Christine Whitehead © 2010 Blackwell Publishing Ltd.

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Making housing more affordable: the role of intermediate tenures

particularly whether it should concentrate mainly on instruments that provide elements of owner-occupation. In turn this makes it possible to suggest what might be desirable attributes of intermediate products, and to determine whether current instruments provide these attributes. It also allows us to examine other ways of achieving basically the same aims and to ask why these have been far less evident in the policy lexicon.

Locating intermediate housing on a spectrum It is often suggested that intermediate housing lies midway along a spectrum: indeed it is this which leads to it being called intermediate (Wilcox, 2005; Pinnegar et al., 2008; Whitehead and Yates, 2010). However, it is not always obvious exactly on which spectrum it lays. This suggests there are a number of contenders for the spectra or dimensions along which intermediate housing might be defined. Three dimensions are highlighted in this section and others emerge in later discussion. One key dimension is household income. Intermediate housing aims to meet the needs of those whose incomes are too low for them to be able to afford owner-occupation but too high for social rental. Income has become an increasingly relevant dimension, as social renting has become even more concentrated on the lowest-income groups, and house prices have risen more rapidly than incomes excluding many more employed households from owner-occupation. A related dimension is the extent of direct subsidy. Extensive supply subsidies are provided to social rented housing; more targeted demand subsidies exist for low-income households in both social and private renting, but only very limited direct subsidies are available to certain mortgagors. The role of intermediate housing on this spectrum is to use shallow subsidy to improve access to affordable, adequate housing. However, it should be stressed that this is a narrowly based definition of subsidy that includes only direct financial contributions from government and takes no account of tax benefits which generally favour owner-occupation. The third, and possibly the most obvious, dimension is that of tenure. This spectrum runs something like social rented housing, cost rented housing, private rental, partial ownership, mortgaged full ownership and outright ownership – with different forms of intermediate housing being located between the two extremes. In this case, the segment being filled by intermediate housing is made up of a different set of property rights to those available in existing tenures. In particular, it provides some of the benefits of ownership without such a large commitment to the asset on the part of the household. These three dimensions have been combined in Figure 2.1 to provide an illustration of the way in which intermediate housing can be regarded as

Intermediate housing tenure – principles and practice

21

Tenure

Social rental including cost rental

Market rental

Assisted home ownership and partial home ownership

Increasing explicit subsidy Very low income High support needs Low-income families and the elderly

Unassisted home ownership

Reducing explicit subsidy

Singles, young Mobile households Low-income households (with assistance)

Low-paid workers Key workers Low and moderateincome families

Higher-income households Households with assets

Target groups

Figure 2.1 A continuum of affordable housing options.

truly intermediate. Variations on this representation for initiatives in the UK and elsewhere can be found in many papers, notably in Yates et al. (2004), Wilcox (2005); Jacobus and Lubell (2007) and Pinnegar et al. (2009). Figure 2.1 locates the main intermediate housing products currently available in England clearly at the home ownership end of the tenure spectrum. One question Figure 2.1 raises is why the policy emphasis has been so much on filling the gaps through low-cost home ownership products rather than on variations based on rental tenures. In the past, especially before the removal of rent controls, private renting in the UK could not play its normal role of providing easy access to a full range of attributes and locations (Whitehead and Kleinman, 1986). However there is no reason, at least in principle, why it could not build on the private rented sector’s existing benefits of flexibility, low transactions costs and limited management responsibility, and thus provide many of the benefits claimed for intermediate housing. The most usual explanation given for concentrating on different forms of home ownership is that the vast majority of households aspire to owner-occupation, so the political pressure is to extend that tenure as far as possible (Elsinga and Hoekstra, 2005). In the past, this could be justified on the grounds that imperfections in the finance market excluded many households able to afford to own – an issue which is re-emerging. It could also be justified on the grounds that lifetime subsidy requirements might be lower and so provide better value for government. In this context, the

22

Making housing more affordable: the role of intermediate tenures

objective of introducing low-cost ownership products is to target those with incomes high enough to afford owner-occupation with the help of limited subsidy and beneficial financial arrangements. This brings the three dimensions – income, subsidy and tenure – together. This chapter suggests that a more fundamental rationale for developing intermediate products should be based on a clearer understanding of why owner-occupation is the aspirational tenure for such a large proportion of households. It should also take into account the wider costs and benefits to government and society from increasing ownership. Finally, it should address the question whether partial ownership can provide enough of the benefits of full or mortgaged ownership, either to the individual or government. A rather different question is whether current rental tenures could be modified to provide additional benefits if perhaps to a different range of households. Modifications might involve better contractual arrangements and property rights through improved regulatory arrangements as well as possibly shallower subsidies that limit government commitment into the longer term. Some intermediate rental housing products have been developed, especially in the USA (Davis, 2006; Jacobus and Lubell, 2007), but in England, initiatives have been limited to small-scale attempts to provide cost rental housing by non-profit organisations. For 30 years or more, the emphasis has been on ownership including low-cost home ownership (Booth and Crook, 1986). One way of addressing these quite fundamental questions about the range of tenures that might be appropriate is to look in more detail at the attributes of each of the main tenures. An appreciation of their advantages and disadvantages provides a starting point in understanding how intermediate tenures might help meet the objectives of both individuals and government.

Rationale for intermediate tenures for the household An examination of the attributes of owner-occupation (and, by implication, the attributes of other tenures) serves to identify which of its characteristics contribute to its status as a generally preferred or aspirational tenure. This provides a benchmark for understanding how intermediate tenures might meet the objectives of both individuals and government. The one fundamental attribute of owner-occupation is that you are your own landlord and, by the same token, your own tenant. Integration of these two roles enables congruence of objectives, costs and benefits between the landlord and tenant, and dispenses with the complexities and formalisation of a contractual relationship – in other words you know what you want

Intermediate housing tenure – principles and practice

23

as both landlord and tenant and can maximise the benefits that can be achieved from the integrated product. As such, the potential benefits and costs of owner-occupation are aspects of the far broader issue of the comparative efficiency of market versus administrative relationships (Coase, 1937; Williamson, 1975). In more practical terms, substituting integration for a landlord/tenant contract allows owner-occupiers to have control over the use of their dwelling; to gain a sense of security; to have flexibility with respect to non-essential outgoings, giving them a better match between expenditure and income; to be protected from unanticipated increases in rents; and to benefit from lower recurrent costs as there are no agency relationships involved. A broaderbased approach would further stress the ontological and psychological benefits of owning one’s own home (Saunders, 1990; Hiscock et al., 2001). Although in perfect markets it should be possible to buy and sell almost any of these attributes, the inability to do so suggests that a key rationale for owner-occupation is to address market failures and to reduce the transactions costs involved in contractual relationships. The relative importance of some of these issues are the result of the specific legal and policy framework in which the housing system operates many of which have been discussed in the context of the privatisation debate. Others, however, relate to the complex and multi-dimensional nature of housing (Yates, 1992; Whitehead, 1993). A second major area of contractual failure relates to housing as an asset and therefore to the relationship between the ownership and funding of that asset. The benefits of ownership usually include easier access to funds to purchase the owner-occupied housing asset as compared to other assets, and to lower interest rates arising from the reduced risks associated with integration of roles (Bridger and Alter, 2006). Asset accumulation through owner-occupation also often benefits from tax advantages especially in the context of rising house prices. In this context, owner-occupation provides most households with a relatively safe form of debt-financed wealth accumulation as well as the benefits of housing equity as a buffer if circumstances change (Benito, 2007; Wood and Nygaard, 2010). Social tenants have property rights over the use of the asset, but generally have no capacity to realise housing wealth. Private tenants only gain from the benefits of house price rises through lower rents because of potential capital gains. Instead, tenants must invest in the stock market or other often less tax advantaged forms of saving and are generally excluded from including property in their portfolio except to the extent that they become landlords. Full owner-occupiers have all the rights to wealth accumulation and to realise that wealth – as well as the risks associated with such a lumpy investment. As such, a wider range of options are available to them than those in other tenures.

24

Making housing more affordable: the role of intermediate tenures

A third range of reasons for favouring owner-occupation in many contexts relates to the choice of housing (Whitehead, 1979). Again, in principle, any set of attributes and any location could be made available in any tenures. However, constraints on access to the social rented sector and differences in the costs of management of different types of dwelling – notably with respect to single-family homes versus apartment blocks with communal areas – mean that tenure is strongly related to dwelling type and thus, often, to location. Most obviously, where only three out of every ten dwellings are in the rented sector, as in England, there are likely to be gaps in rented housing provision. A summary of the argument helps to clarify the elements that need to be included in any typology. The attributes of home ownership that are usually identified as generating benefits to the individual include the following: • control over the dwelling and the use of that dwelling, which is limited for tenants by contract and by asymmetries between what is good for the landlord as compared to the tenant; • a sense of both psychological and ontological security, which brings independence and belonging, and cannot readily be achieved by time limited contractual relationships; • lower costs of managing and maintaining the dwelling, and maybe even lower financial costs over time because of lower risks; • protection from risks of increased housing costs that impact on increased rents; • flexibility with respect to outgoings – so that households can better match their incomes and expenditure both in the short term by, for instance, putting off repairs, and in the longer term when mortgage repayments stop on retirement; • greater opportunities for wealth accumulation, both because of greater capacity to borrow than tenants and because of the possibility of unexpected capital gains. This also gives a greater capacity to realise equity when necessary and to pass wealth on to the next generation(s), which has both financial and intangible benefits; • a wider choice of dwelling types, standards and locations. As a result of these attributes, home ownership is generally associated with security, freedom, independence, responsibility and involvement (Elsinga and Hoekstra, 2005). These are seen as the main reasons why owner-occupiers choose that tenure and appear to be more satisfied with their homes than tenants across a wide range of countries. Other outcomes, such as improved health, education and labour market, are also sometimes presumed to derive from the security and stability that stem from control and contribute to owner-occupation being a preferred tenure (ODPM, 2005b, c).

Intermediate housing tenure – principles and practice

25

Not all of the attributes of owner-occupation generate net benefits. The costs inherent in home ownership include: • higher transactions costs associated with buying and selling both the asset and its use together; • lower residential mobility arising from these costs which restrict job flexibility and other adjustments; • the responsibilities of asset management; • the risks associated with changing interest rates, income loss and house price reductions; • the stresses associated with meeting mortgage payments, the possibility of possession, changes in asset values arising from neighbourhood change and more general concerns about the housing market. Most importantly, the costs of owner-occupation are likely to be higher the more stretched the household is when they purchase and the more they face other uncertainties in life, such as those surrounding job and family circumstances (Burrows and Wilcox, 2000). Equally, the benefits of owneroccupation are likely to be less, the less secure the household’s position. More generally, many of the benefits are strongly related to income distribution and the stability of that income or to the benefits of affordable, secure and adequate standard housing rather than to owner-occupation per se (Wilkinson, 1996; Whitehead, 1998). These costs of owner-occupation point to the factors that can make private rented housing more suitable to a range of households, including ease of access to the market, greater flexibility, less financial commitment and fewer management responsibilities. Social rented housing plays a very different role as it is administratively provided. Its main attributes include security and stability, controlled rents and a paternalist landlord. These are closer to those of owner-occupation than they are to private rental. Access to social rented housing, however, is highly constrained, making it no longer an available option for most households. Table 2.1 sets out a selection of the main positive and negative attributes for each of the three main tenures and ranks them on a high, medium or low scale according to the extent to which the attribute is present. It illustrates the potential advantages and disadvantages of these tenures and helps to explain why any individual household might prefer one over another depending on the importance they attach to different attributes. What Table 2.1 makes obvious is that the three main tenures that currently exist in England do not cover all possible mixes of the attributes identified. This in itself is a reason for suggesting that at least some

26

Making housing more affordable: the role of intermediate tenures

Table 2.1 The major attributes of tenure for the individual. Owner-occupation Private renting Social renting

1. Control 2. Security/stability 3. Wealth accumulation 4. Choice 5. Protection from rent risk 6. Financial flexibility 7. Ease of access and exit/mobility 8. Protection from house price risk

H H H H H M L L

L L L M L L H H

L H L L M L L H

types of intermediate tenures might be desirable. Moreover, it is clear from even the limited list in Table 2.1 that no established tenure dominates on all of the attributes listed. This suggests that intermediate tenures have the potential to offer attributes, or combinations of attributes, that might be more valuable than existing tenures to certain groups of households. Table 2.1 also points to the extent to which desirable attributes may be available in principle but inaccessible to groups who could benefit because of constraints on access to particular tenures. For example, with respect to security of tenure, both social housing and owner-occupation can offer lifetime security, yet both exclude many households who would value and benefit from that security. Private renting for new tenants in England, however, provides nothing other than a three-month contract. Both cost rental and partial ownership, at least in principle, can offer longer-term security and rights more consistent with social renting and owner-occupation. Intermediate tenures can thus help to fill gaps, which may not be inherent but are often the outcome of particular circumstances. The next step is therefore to look at the attributes that different types of intermediate tenure might provide. Figure 2.2 uses the categorisation of attributes spelled out in Table 2.1 to exemplify how different tenures might provide different mixes of characteristics to suit different groups. It provides a visual representation of the characteristics listed in Table 2.1, both for the three existing tenures and for the three hypothetical intermediate tenures. The representations of the three intermediate tenures are based on plausible combinations of characteristics, but are not intended to represent specific policies that are currently in place. Most importantly, Figure 2.2 highlights the enormous range of possibilities that could exist, based on different mixes of characteristics. The hypothetical mixes set out in Figure 2.2 highlight the extent to which intermediate ownership could reduce the risks associated with house prices while enabling some wealth accumulation, but at a cost of less

Intermediate housing tenure – principles and practice

Traditional tenures

Owner-occupation

Private rental

1 8

3

7

6

Intermediate tenures

Social rental 1

1 8

2

8

2

2

3

3 7

7

4

6

4

6

4

5

5

5

Intermediate ownership

‘Strict’ intermediate

Intermediate rental

1

1

1

8

8

2

3

7

4

6

8

2

2

3 7

7

4

6

5

27

3

4

6

5

5

Key: 1. Control/property rights 2. Security/stability 3. Wealth accumulation/access to capital markets/access to tax concessions 4. Choice 5. Protection from rent risk 6. Financial flexibility 7. Ease of access and exit (low transaction costs)/mobility 8. Protection from house price risk

Figure 2.2

A hypothetical set of tenures.

flexibility and choice. However, intermediate renting can provide greater security and stability compared to private renting, but has less choice than owner-occupation or private renting and no direct access to wealth accumulation. The most obvious question to ask at this point is why these intermediate tenures are not provided by the market. There are three main possible reasons: 1. Legal, regulatory and taxation/subsidy arrangements constrain the range of options available. 2. Market failures in relation to intermediate tenures make them too costly to provide. 3. Inadequate consumer demand means that it is not worthwhile for the market to offer.

28

Making housing more affordable: the role of intermediate tenures

First, government policies and legal frameworks favour traditional tenures and exclude many intermediate options. In particular, contractual possibilities with respect to security of tenure are highly restricted; both owneroccupation and social renting are favoured by taxation and subsidy policy; leasehold arrangements can be complex in the intermediate tenures that currently exist; and financial regulation makes it difficult to develop appropriate instruments to fund intermediate products. With respect to the second possibility, intermediate tenures inherently involve new mixes of characteristics which have not been envisaged in existing frameworks. These can, depending on the specifics of the instrument, generate problems of asymmetric information, relative power and moral hazard which increase costs and limit the development of new markets (including secondary finance markets) (Whitehead and Yates, 2010). Given both the political environment and the potential for large-scale market failures, it is perhaps unsurprising that there has been little market appetite for filling the gaps. If intermediate products are to exist in the current climate, government almost certainly has to intervene to support their provision and demonstrate their viability. Similar issues arise with respect to the third possibility – inadequate consumer demand. Consumers inherently have little experience of these tenures and thus have limited exposure to the combination costs of market failures. As a result they cannot make well-informed choices. Yet the benefits discussed above suggest that there may be strong reasons for individual households to aspire to owner-occupation as well as more fundamental reasons why they may want different mixes of attributes. This is a classic situation in which government intervention to develop new markets is seen to be desirable.

Rationale for intermediate tenures for government and society In addition to the benefits to households of expanding the combination of tenure attributes available by the introduction of intermediate tenures, there may be broader economic, social and political reasons for increasing the range of tenure options available. If this is the case, governments may wish to ensure the provision of particular mixes of attributes in order better to achieve both greater efficiency and equity. There are three main groups of fiscal and social benefits: 1. immediate and longer-term benefits to public finances; 2. more effective maintenance of the dwelling stock and associated benefits to neighbourhoods and communities; 3. benefits to the stability of the economy and society.

Intermediate housing tenure – principles and practice

29

The core issues for government relate to their own finances and to their future commitments. First, increasing household’s equity enables the substitution of private for public debt and ensures that people able to pay for their own homes do so. Second, if people pay off their mortgages, owneroccupation puts households in a stronger position when their income falls at retirement. As their outgoings fall, pensions go further and less public support should be required. Third, individual households can borrow against or even sell the housing asset to pay for health care and other necessities making them more self-sufficient. Finally, the privatisation of social housing through, for example, the Right to Buy enables assets to be realised and public debt to be reduced – although this may of course engender additional costs in the longer term when social housing has to be replaced. The second group of benefits relate to the impact of ownership on maintaining and improving dwellings and neighbourhoods resulting in less reliance on government support. The evidence suggests that people will both treat the property better and do more themselves – generating costeffective maintenance at least into older age. Owners also have an incentive to ensure the quality of the neighbourhood to maintain the value of their assets – and because they are likely to remain in the area longer, they also tend to support community activity, notably education – all of which can generate savings to the public sector (Dietz and Haurin, 2003). Moreover, to the extent that owner-occupiers take a longer-term view of housing investment than landlords, their decisions are likely to be more congruent with social objectives that emphasise social rather than private discount rates (Whitehead, 1993). The final group relates to the potential savings to government from broader health, education, housing and labour market benefits. These are seen to arise, inter alia, from the commitment of mortgagors to their jobs because of the need to pay the mortgage, their general level of involvement in community linked back to their greater security (and higher costs of moving), and the more stable family environment owner-occupiers provide for their children. These benefits may well be as much associated with length of tenure and hence with the stability and security that ownership provides rather than with ownership per se (Dietz and Haurin, 2003). At the limit, the benefits relate to preparedness to vote and support a property owning democracy (Whitehead, 1993; DiPasquale and Glaeser, 1999). An important aspect of these potential social benefits is their congruence with household aspirations – which is why governments can see the possibility of political gain and social stability at the same time as reducing public expenditure (DETR, 2000a). However, there are also potentially significant costs to government particularly when large-scale tax benefits are provided to owner-occupiers and when the benefits are inadequate to ensure that the next generation can support owner-occupation themselves. These also include

30

Making housing more affordable: the role of intermediate tenures

the loss of productivity associated with labour immobility, the reduced possibility of using the existing housing stock more effectively through rental options and the greater difficulties of achieving large-scale regeneration. These governmental and social benefits and costs can be specified in a similar way to the categorisation of tenure attributes based on individual household benefits shown in Table 2.1– although with much less certainty, because of the lack of empirical evidence arising primarily from the failure of analysts to control for potential explanatory variables given that many of the identified benefits may well relate as much to age, income and other relevant variables as to tenure. Moreover, the benefits to government depend heavily on specific institutional and financial arrangements. This categorisation is done in Table 2.2. In broad terms, the attributes listed relate directly to tenure attributes of control, stability, wealth accumulation, financial flexibility and to the costs arising from immobility and transactions costs shown in Table 2.1. Columns 1–3 in Table 2.2 provide an indication of the differential benefits to government of the attributes listed based on ‘traditional views’ about the value of the three main tenures. Columns 4 and 5 provide similar indications of the potential benefits of intermediate ownership and rental. These estimates are less certain than those for the traditional tenures because of the limited evidence on the benefits of long-term partial ownership and because the benefits of intermediate ownership may well depend on whether households achieve full ownership or remain as part owners.

Table 2.2 Potential net benefits to government.

Immediate benefits to government finances through short-term savings to government (i) direct subsidy (ii) tax benefits Longer-term benefits to public finance Dwelling quality/maintenance Dwelling utilisation Neighbourhood and community Social and political economic stability Labour mobility

Owneroccupation

Social renting

Private renting

Intermediate ownership

Intermediate renting

H L H

L H L

M H L

M M M/H

M H L

H

L

L

M/H

L

L H?

L M?

H L?

L M/H?

L M?

H?

L?

L?

M/H?

M?

L

L

H

L

L

Intermediate housing tenure – principles and practice

31

The first and second rows cover the immediate and longer-term public finance implications. The first includes the benefits of freeing up social housing as well as enabling new affordable provision with shallow and sometimes no direct subsidies. The identified benefits in the second row depend heavily on how pensions and housing support are structured. On dwelling maintenance, there are clear problems as owner-occupiers grow older – but a reasonable argument is that this does not increase overall resource costs but simply modifies timing as the purchaser improves the dwelling. The L (low level) for private renting relates to evidence that rents in England are not strongly related to maintenance. The position with respect to intermediate tenures depends on the household’s financial constraints and its capacity to move to full ownership. Relatively poor utilisation of the stock in the owner-occupied and intermediate sectors is seen to be dependent on the costs of moving and security of tenure. The queries for neighbourhood and social stability in the final three rows relate to the extent to which these may relate to length of stay and income as much as the attributes of the tenure (Whitehead, 1998; Dietz and Haurin, 2003). The evidence on labour mobility, although somewhat clearer, potentially also suffers from methodological issues (Battu et al., 2008). The fact that, again, no tenure dominates on all of the attributes listed reinforces the case for providing alternative, intermediate tenures with different mixes of attributes to meet different requirements. The estimates in Table 2.2, however, do suggest that there is a case for government supporting the introduction of intermediate tenures. They also help to explain why governments might emphasis partial, and ultimately full, ownership. A question that this discussion has not addressed is whether the potential benefits to government and society generate a case for subsidy to support the development of intermediate tenures, as opposed to a case for enabling them to be provided by the market through legal and regulatory change. In efficiency terms, the case for subsidy depends, first, on the extent to which societal net benefits exceed private and, second, on the relative costs of different approaches to achieving the more fundamental objective of ensuring adequate affordable homes. One particular benefit may be the greater capacity to share risks between the individual and the government through intermediate tenure instruments particularly where government has some responsibility for these risks as in the case of large-scale regeneration projects. Another, currently much to the fore in political debate, relates specifically to the benefits of mixed communities and so are dependent on the range of tenures available in a particular location – rather than from tenure per se. This may best be achieved by ensuring that younger aspirant as well as social tenant households can live in higher cost areas. Again, however, the evidence is not straightforward (Cheshire, 2007).

32

Making housing more affordable: the role of intermediate tenures

In reality governments tend to work incrementally, so they respond to the potential for reducing public costs and improving value for money for the public sector not in the optimal but in the easiest and most politically acceptable way in a highly constrained world. In this context, the strongest political rationale for intermediate tenure may well be simply that it can avoid higher government outlays in the short run.

How do specific schemes fit the typology? As Chapter 1 makes clear, there have been many different intermediate market schemes introduced in England over the past three decades. Most are variations of four core types: shared ownership, shared equity, partial Right to Buy (named Social HomeBuy) and cost renting. Table 2.3 provides an attempt to map these generic schemes on to the typology set out in Table 2.1. Shared ownership, now called New Build HomeBuy, has been available nationally since 1980. It was introduced to provide a stepping stone to full ownership in a period of inflation and high interest rates. It was also intended to help free up social housing so that it could be allocated to households in greater need. In the main it does provide intermediate (M) levels of the identified attributes. It is a strict partial rent, partial own tenure with the right to staircase to 100 per cent. As such, in principle, it provides proportional benefits as compared to owner-occupation and social renting. Chapter 10 indeed suggests that purchasers see these as more than proportional. Even so, as compared to mortgaged ownership, it has two main limitations: the choice of property is restricted to new build and there are

Table 2.3 The attributes of particular schemes. Shared ownership

1. Control 2. Security/stability 3. Wealth accumulation 4. Choice 5. Protection from rental risk 6. Financial flexibility 7. Ease of access and exit/mobility 8. Protection from house price risk

Shared equity

Social HomeBuy

Cost renting

M M M

H M M

L H L

L M L

L M

H H

L M

L M

M

M

L

L

L/M

M

L

M

M/H

M

M

H

Intermediate housing tenure – principles and practice

33

potential difficulties associated with moving on if the household is unable/ unwilling to staircase to 100 per cent because of the lack of a second-hand market for partial ownership. Shared equity, now called Open Market HomeBuy, is an equity mortgage that covers part of the household’s funding to enable full purchase. As such it gives households the capacity to choose from all the dwellings available on the market. It also makes it easier to obtain a higher loan to value ratio traditional mortgage. It also shares the house price risk between government and the household in a very direct fashion as the mortgage cost is determined by changes in capital values. The outcome is a product much closer to mortgaged ownership, which can therefore be argued to provide more of the benefits of ownership to the individual and government. However, the financial costs and commitment made by the individual are higher – and as a result it is usually those with somewhat higher incomes that can access this option – and very few social tenants have been able to afford the option. Social HomeBuy is only available to those in the social housing sector who wish and can afford to buy their own homes, so there is little increase in flexibility or choice. Aspects such as wealth accumulation and access to the general owner-occupied market depend on the proportion purchased and the capacity to staircase – e.g. with family help. At one extreme it may be similar to the Right to Buy, i.e. subsidised full ownership; at the other, the proportion purchased may be too little to have much effect (Whitehead et al., 2006). However, the smaller the proportion purchased, the greater the right to Housing Benefit if household income falls. Finally a small amount of cost renting is provided by RSLs, usually on new build sites. It helps provide access into secure and affordable housing while maintaining the household’s access to Housing Benefit. Rents are generally significantly above social rents, and therefore involve lower direct subsidy. However, borrowing requirements are much higher than low-cost home ownership as no household debt is involved. These initiatives can be summarised in terms of the three spectra identified earlier: income, subsidy and tenure. In terms of income, shared ownership and shared equity are clearly targeted at a subset of households with incomes too low for mortgaged full ownership but usually well above the incomes of those eligible for social housing. The same tends to apply to cost renting. Only Social HomeBuy directly addresses the aspirations of low-income employed social tenants. The two shared ownership/equity products both involve much shallower subsidy than social housing. Indeed in some circumstances ex post neither may involve subsidy to the consumer as the RSL and government benefit from capital gains. Also both heavily restrict access to incomerelated subsidies. However, they give the purchaser some access to the tax benefits associated with owner-occupation, which is a longer-term cost to

34

Making housing more affordable: the role of intermediate tenures

government. Cost renting usually involves rents below market and maintains access to income-related benefits. The subsidy to Social HomeBuy is more complex and depends heavily on the proportion purchased. Finally in terms of tenure, the shared ownership/equity products provide different mixes of the whole set of attributes including, in particular choice, control and wealth accumulation. Cost renting provides a different mix of property rights to social and private renting, but provides no scope for wealth accumulation through access to the housing asset and relatively little choice and control.

Using the typology: a better range of options? As much of the rest of the book will show, most of the intermediate tenure initiatives developed in England have been aimed at providing partial ownership as a stepping stone to full ownership and therefore on overcoming access and affordability problems for marginal buyers, rather than promoting longer-term intermediate products. As economic circumstances developed in the mid-2000s, the costs of providing access to even partial ownership have increased at the same time as the benefits of owner-occupation have started to be re-assessed. More practically, high house prices meant that many more households could no longer access home ownership even though increasingly favourable lending criteria enabled others to buy through much higher debt to income and house price ratios. However, this potentially unaffordable debt threatened the perception that security was a key attribute of owner-occupied housing and raised significant questions about the desirability of extending home ownership too far down the income scale. At the same time, increased house price volatility added to uncertainty about the benefits of wealth accumulation and stability, traditionally associated with home ownership. These concerns have become even more important as the credit crunch and recession have both worsened access and adversely affected the housing market. These changes brought to the fore the question of whether at least some of the attributes of home ownership that contributed to it being the aspirational tenure for most households could be achieved more effectively by different intermediate tenure forms. The two most obvious possibilities – which, based on the typologies developed above, appear to be beneficial – are long-term (even lifetime) partial ownership and improved rental products. The main rationale for generating instruments that can provide permanent rather than short-term partial ownership is that it can ameliorate the risk of price variation in owner-occupied housing which cannot normally be addressed efficiently by individual households. Owner-occupation

Intermediate housing tenure – principles and practice

35

involves investment in a single asset which is large relative to the overall assets of most households. House prices are volatile and subject to specific risks because of the dwelling’s attributes and particular location. Owner-occupation also has high transaction costs and potentially has timing difficulties associated with realising the asset. These problems are enhanced when a significant proportion of the purchase price is funded by debt, since high gearing increases the impact of price variation on the individual household. Under a potentially permanent partial ownership solution, the homeowner transfers some of the risks of owning the particular asset to others better able to meet it, including financial institutions and large-scale investors or, as is the case with the short-term partial ownership solutions currently in place, the public sector. Such a transfer of risk would provide greater financial flexibility for the household and release funds from the housing asset that could be invested in other assets, thus spreading their risks. At the same time, shared equity can still provide the capacity to release equity for consumption. Older people may wish (or need) to supplement their pensions by running down their investments, but may not wish to move house to release funds. The alternative is to realise part of the asset by borrowing against it, or by transferring part of the value to another entity that wishes to invest in owner-occupied housing. Shared equity products enable this transfer, while the primary owner remains living in their home. Thus the product could in principle be appropriate for a much wider market than first-time buyers (Whitehead and Yates, 2010). The second set of intermediate tenure options relate to modified or simply better forms of private or social renting which can provide greater stability and security than the private rented sector as currently perceived. Three of the most important attributes that were identified in Table 2.1 as underpinning a preference for home ownership as a tenure and, hence, which are desirable as an integral part of an intermediate rental tenure were greater security, better delineation of rights and responsibilities between landlords and tenants, and greater control over the use of the dwelling. In principle, both social landlords and regulated private investors could offer intermediate products that provide a far wider range of attributes than the very limited private and cost rent options currently on offer in the UK. Examples of intermediate tenures that are closer to rental than ownership tenures options are deed restricted homes, community land trusts and limited or zero equity cooperatives. Such schemes are far more widespread in other countries. These generally offer occupants greater control (in the form of rights and responsibilities) than is the case in private or social rental in the UK and provide significant protection from rent risk. However, in order to retain the value of government subsidies provided (and so limit demands on government budgets in the long run), they restrict the

36

Making housing more affordable: the role of intermediate tenures

extent to which occupants are able to benefit from any capital appreciation in order to accumulate wealth. Others involve tenants paying a deposit which gives them both some control and responsibility but also a stake in the asset which can be transferred to other similar units. A primary goal of such products is to facilitate the supply and preservation of affordable housing, rather to provide a stepping stone into full home ownership. Details of their operation in the USA can be found in Davis (2006) and Jacobus and Lubell (2007). Pinnegar et al. (2008) provide a useful overview of these and other examples. The two broad examples highlighted here – long-term partial ownership and better rental products – and the hypothetical options outlined in Figure 2.2 suggest there is a strong case for a wider range of intermediate tenures than is currently available in England in order to meet the varying requirements of households in different circumstances. These would lie between full ownership and insecure private renting and would assign different weights to the various attributes of tenure such as those identified in Table 2.1. They would also need to take into account various public and social costs and benefits identified in Table 2.2. In conclusion, many of the problems faced by owner-occupiers and by private or social rental tenants might be met by continuing to improve the regulatory and contractual frameworks to reduce failures in the finance market, improve arrangements between landlords and tenants, and by modifying the range of options available in the social sector. Even so, their inherent attributes suggest that traditional tenures are unlikely to provide households with options that both meet all individual and social needs and are cost effective for government. Intermediate tenures, in principle, have an important role to play in enabling households to gain some of the benefits of ownership without overextending themselves or bearing unacceptable levels of specific risk. They should also be able to provide some of the benefits of social renting while reducing the public costs currently associated with that tenure.

3 International experience Kathleen Scanlon

Introduction The problem of providing affordable housing for middle-income households is by no means confined to the UK. Sustained house-price inflation in advanced economies over recent years has brought the issue to the fore in many countries. This chapter provides an overview of the sorts of policy approaches that have been used internationally to deal with the problem. Analytically, we categorise intermediate-housing policies according to whether they target demand or supply, and by the type of policy mechanism used. In each category, we describe a selection of important or innovative intermediate-housing programmes, taking examples from several countries, including the USA, Denmark, Germany and Ireland. We also discuss eligibility and funding mechanisms. The list of programmes is illustrative rather than exhaustive: in the USA alone there are thousands (although most are very small). Much of the information in this chapter, including the typology, is based on research carried out in 2002 by CCHPR for the Department of Transport, Local Government and the Regions into fiscal policy instruments to promote affordable housing (Holmans et al., 2002).

International definitions of the intermediate market The term ‘intermediate housing’ is not universally understood; other terms such as workforce housing, next-generation housing and middle-income housing are also used. The British definition of the intermediate-housing

Making Housing More Affordable: The Role of Intermediate Tenures, edited by Sarah Monk and Christine Whitehead © 2010 Blackwell Publishing Ltd.

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Making housing more affordable: the role of intermediate tenures

market encompasses those who earn too little to afford market housing but too much to be eligible for social housing or housing subsidies. In England, 18 per cent of households live in social housing and 17 per cent of households receive housing benefit (there is a large overlap). Thus the intermediate market’s lower bound can be roughly located between the third and fourth income deciles. In most of Europe, the problem is defined in much the same way as in the UK, but since tenure patterns (and in particular the supply of social housing) differ across countries, the boundaries of the intermediate market vary as well. In France, as many as 89 per cent of households are eligible for housing built with ‘upper social housing’ subsidies, which is targeted squarely at what in the UK would be the intermediate market. In Ireland, however, less than 10 per cent of households live in social housing, so the lower bound of the intermediate market in terms of household income is well below that in the UK. The situation in the USA, which is perhaps the country with the largest number of targeted intermediate-housing programmes, is more extreme than that in Ireland. The US supply of social housing is so small (it accommodates only the very poorest 3 per cent of households) that it can be difficult to draw the line between intermediate housing and more traditional low-income housing (Scanlon and Whitehead, 2002; Sheridan et al., 2002). Local policy makers may regard even fairly low-income households, who would in other countries normally have access to social housing, as part of the intermediate market. Given these disparities across countries, and the wide variety of terminology used, it can be difficult analytically to ensure that we are comparing like with like. The American debate encompasses affordable housing for all middle-income households. Target households can include not only typical ‘key workers’ such as police officers, teachers, bus drivers and nurses – but also those in ‘workforce jobs’ such as light manufacturers, retail salespeople and waiters (Maxfield Research Inc. and GVA Marquette Advisors, 2001). In addition to key workers, there is concern about those who need to live close to their work – e.g. ‘first responders’ to emergencies such as firefighters and police officers. (The fact that so many key workers cannot afford housing is somewhat surprising from a UK perspective, given that their wages are set at state or local level in the USA and might therefore be expected to reflect local costs.) In the USA, there is generally thought to be an affordability problem in a particular housing market if households earning up to 120 per cent of area median income (AMI) cannot afford market housing. The US and Australian affordability calculations are based on the assumption that households should spend no more than 30 per cent of their gross incomes on housing. In Ireland, the figure is somewhat higher – the current definition of housing unaffordability is when households must spend 35 per cent or more of their gross weekly income on mortgage and rent payments (Norris et al., 2007).

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Types of policy Governments employ a variety of measures to enable intermediate-market households to access housing. Occasionally governments provide intermediate housing directly, but for the most part they adopt measures to encourage or force the private or non-profit sectors to do so, or to help affected households financially. From an economic perspective, the policies can be divided into two broad categories: those that target demand (giving financial help to target households without affecting the supply of housing) and those that target supply (aiming to increase the number of dwellings available to the intermediate market). Broadly, three types of policy instrument are employed: subsidies, tax concessions and regulatory or contractual measures. On the supply side, subsidies and tax concessions provide economic incentives for the voluntary provision of social housing, while regulatory approaches (usually planning-based) make it mandatory. Planning provisions are, in many countries, the principal means of providing affordable housing or preserving affordability. Table 3.1 summarises the possible policy types with examples.

Table 3.1 Typology of intermediate-housing policies. Tax measures

Targeting supply

Targeting demand

Examples 1. Tax relief on investment in construction of intermediate housing 2. Preferential tax treatment for employerprovided housing

Subsidies

Regulation

Examples 1. Grants or subsidised loans for construction or renovation of intermediate housing 2. Provision of cheap/free land for construction of intermediate housing Examples 1. Subsidised mortgages for intermediate market 2. Grants for house purchase 3. Rental subsidies 4. Government as partner in sharedequity mortgages

Examples 1. Require developers to supply intermediate housing as condition of planning permission 2. Require employers to provide housing Examples 1. Permit shared ownership, shared-equity mortgages

Source: Adapted from Whitehead and Scanlon (2007).

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The intermediate market may also be a beneficiary (intentionally or not) of policies directed at other parts of the market. For example, mortgageinterest tax relief does help those intermediate-market households who manage to enter owner-occupation, although it is targeted more broadly. Many urban-regeneration programmes include incentives for middle-income homebuyers, or include an element of intermediate housing, in an effort to improve social mix. In addition, some policies used to provide housing for low-income families could also or instead be targeted at the intermediate market. Intermediate housing can be provided as either rental or owner-occupied housing. Programmes giving access to owner-occupation are probably more popular with target markets: research shows that across countries most households – particularly two-adult households with children – prefer owneroccupation. In addition, it is an explicit goal of housing policy in many countries to increase home ownership. Nevertheless, intermediate-housing programmes may target rental housing, because it is more flexible and, crucially, it is easier to enforce conditions that ensure the dwelling remains available to the intermediate market. Solutions to intermediate-housing problems often employ creative approaches to housing tenure, such as shared equity (where the occupier purchases only a proportion of the equity in a dwelling) or community land trusts (CLTs) (where the occupier owns the building but rents the land, which has use restrictions). These contractual measures are discussed in more detail in the following sections.

Supply-side versus demand-side measures The question as to whether price subsidies should be directed at demand or supply has been a matter of much academic and policy discussion. In principle, in well-operating markets, the question is irrelevant: both the impact on output and on the price paid by the consumer will be the same. However, reality is likely to be different because of the transactions and adjustment costs involved, as well as because of the relevant institutional framework. In the USA, the presumption in the literature has been heavily in favour of demand-side subsidies for efficiency reasons, in particular because they allow people to move up into higher-quality sub-markets (Housing Studies Special Issue, 2002). Experts from outside the USA (see, for example, Yates and Whitehead, 1998), argue for greater agnosticism as to their relative effectiveness, pointing out that the US market was not typical of most housing markets, especially European ones. The particular context in which markets operate, the specific design of delivery mechanisms – in particular the role of the

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social sector – and the potential effects on social segregation all need to be considered. There can also be political reasons for favouring a reduction in taxes (targeting demand) over an increase in public expenditure (targeting supply). Even so, there is no guarantee that supply subsidies delivered through bureaucratic procedures will necessarily be more effective, since administrative failures are just as prevalent as market failures (Maclennan and More, 1997). What therefore is most important is not the debate about demand versus supply subsidies per se, but an examination of what prevents either from achieving its goals.

Supply-side measures Supply-side policies aim to provide homes available exclusively to target households in the intermediate market. There is often a lock-in period after which the dwellings can be released into the wider market. Governments may (rarely) build new homes themselves; more often the private sector (developers or employers) or non-profit organisations do so. Government can encourage private developers to supply intermediate housing with economic incentives, as discussed later, or require them to build or finance it as a condition of receiving planning permission (discussed under the heading ‘Regulatory and contractual measures’).

Subsidies to private developers Intermediate-housing subsidies often take the form of preferential loans. This is the principal instrument of intermediate-housing policy in France. There, state-owned banks distribute subsidised loans, mainly to housing associations, for the construction of new social housing. Most of the money is disbursed as PLUS loans (Prêt locatif à usage social), which finance ‘normal’ social housing. But recently, an increasing percentage has been loaned under the PLS (Prêt locatif social) and PLI (Prêt locative intermédiaire) programmes, which finance construction of housing for the intermediate market. Households with incomes up to 1.3 times the PLUS maximum are eligible to live in PLS-financed housing, while the upper limit for PLI-financed housing is even higher – 1.5 times the PLUS limit. These limits are generous; up to 89 per cent of French households are eligible for PLS- or PLI-financed housing (Levy-Vroelant and Tutin, 2007). The dwellings are subject to a low rate of VAT, and no land or property taxes are payable on them for the first 25 years. As a condition of the loan, the landlord must agree to respect affordability guidelines for a 15- to 30-year period (Oxley, 2009). Case study 3.1 discusses the Mitchell-Lama Program in the USA, which employed both subsidised loans and tax breaks.

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Case study 3.1: New York City’s Mitchell-Lama Program The story of New York’s Mitchell-Lama housing demonstrates that the problem of housing for the intermediate market is not a new one. More than 50 years ago, this programme was set up to provide intermediate housing in New York City, historically the most expensive housing market in the USA. In 1955, the New York State legislature enacted the Limited Profit Housing Companies Law (better known as the Mitchell-Lama Law). This law authorised the state or its municipalities to provide low-interest mortgage loans, as well as real-estate tax exemptions, to developers of housing for people with incomes too high for traditional forms of public housing but too low for private housing. The bill’s provisions were used most extensively in New York City; the city’s target groups were as follows (note the mention of key workers): • Families with children • Families likely to migrate to the suburbs for lack of moderately priced housing in the city • Households relocated by public or private action • Ethnic minorities subject to discriminatory treatment in the private housing market • Groups with special needs • Hospital and university staffs (Woodfill, 1971). From 1955 to 1968, private developers built 32,000 units (both rental and cooperative) under New York City’s programme (about 8 per cent of new home construction over the period).1 Prospective residents applied to the owners of the units, who were required to house eligible families on a first-come, first-served basis; need was not considered. Income ceilings were set at 6–7 times annual rent; the rents in turn reflected the project’s development and operating costs and loan terms. There were no minimum incomes set by law, although the city’s administration considered that a minimum income of 4 times rent was necessary. The programme’s operation was at odds with the targeting, according to a 1971 study, which found that about half of Mitchell-Lama households were in the wealthiest 30 per cent of New Yorkers, and half had only one or two members (Woodfill, 1971). The programme’s cost-based eligibility criteria (which were required by law) tended to bring in higher-income households. Households whose incomes rose above eligibility limits were surcharged, but few were ever evicted, and the income verification procedures were weak (the original requirement that tenants regularly submit copies of their federal income tax forms was replaced with spot checks). In addition, the first-come, first-served rule for allocation didn’t necessarily result in the desired tenant mix. The city’s intermediate-housing problems have become much more serious since the early days of the Mitchell-Lama Program. In the early 1960s, there was such low demand for some units that developers were permitted to rent large apartments to small families in order to fill them. Now, however, waiting lists are (continued )

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often years long; at most projects the lists are closed, and when a list does open it is filled through a lottery. When the development has paid off its mortgage and met certain other conditions (as early as 20 years after construction), its owners may apply for release from Mitchell-Lama regulations. They can then charge market rents or sell units at market prices, if the development is a co-op (although many buildings built before 1974 are still subject to city rent control).2 Mitchell-Lama construction ended in 1978. By 2004, there were 66,997 cooperative and 57,994 rental units of Mitchell-Lama housing in New York City. As of 2004, 24,000 units (mostly rental) had come out of regulation, and the increasing pace of these ‘buyouts’ was causing alarm in housing circles in New York (City of New York 2004). In order to slow the pace of buyouts, the city introduced a programme to allow owners of Mitchell-Lama buildings to refinance their mortgages at lower interest rates, if they agreed to keep the units affordable for a further 15 years.

Tax relief on construction of affordable housing Rather than providing money subsidies, governments can offer tax relief. Tax incentives can be given to investors in housing to be let at sub-market rents for a specified period, or sold at sub-market prices, to eligible intermediate-market households. The tax incentive reduces the net cost of the housing, and so enables the developer to earn a commercial return at lower rents than would otherwise be required. The use of property-tax concessions is illustrated by the ‘Homes within Reach’ programme in Seattle, which provides tax exemptions for developments incorporating affordable housing. The tax-break period is either 8 or 12 years, depending on the amount and type of housing required. Household income limits for this programme are particularly generous; to qualify for the 12-year tax break, developers must ensure that 20 per cent of units are affordable for households on incomes up to 150 per cent of the area median (Gurran et al., 2008). Another important US example of this policy is the Low-Income Housing Tax Credit (LIHTC), which is now the principal federal subsidy for lowincome housing. The subsidy is provided through the federal tax code but administered through state government agencies, who allocate tax credits to developers through a competitive process. The total amount of tax credits available in each state is a function of its population. LIHTC are tradeable instruments; the developers sell them on to investors, who pay between 60 and 95 per cent of face value for them. The developer may claim credits only against housing units occupied by income-eligible households. At least 20 per cent of the units must be occupied by households whose income is below 50 per cent of the metropolitan area’s median family income, or at

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least 40 per cent of the units must be occupied by households who earn less than 60 per cent of the area’s median family income. States can impose their own criteria for how long the dwellings must remain affordable – the minimum is 15 years, but many states require longer periods, some up to perpetuity (Holmans et al., 2002).

Government provision of land for intermediate housing Public-sector owners may provide cheap land to developers on condition that they build intermediate housing. In France, local authorities are authorised by law to sell land at below-market price for affordable low-cost home ownership schemes targeted at low-/middle-income households (Salem-Sermanet, 2007). In the USA, the city of Seattle and surrounding King County have sold surplus land for housing at less than market price (Gurran et al., 2008). In Germany there is now no federal involvement in housing policy, so individual Länder and municipalities have developed their own approaches. Under the ‘Munich model’, the local authority sells land at favourable prices for the construction of homes for middle-income families. Other local authorities have teamed up with Baugruppen, or self-build groups. These innovative grass-roots organisations, often with roots in the ‘alternative’ realm, bring together households (predominantly, but not exclusively, from the intermediate market) and architects to construct or renovate buildings for housing. Some local authorities actively participate in their activities, while others supply them with land or redundant buildings, such as military barracks, at below-market prices (Knorr-Siedow, 2009). In Ireland, local authorities and the Office of Public Works provide land to enable new houses to be built and sold at affordable prices to eligible lowerincome employed households. When households sell on their homes within 20 years, a declining proportion of the gap between the buying and selling price is returned to the local authority (Affordable Homes Partnership, 2009). This is not possible everywhere; in some countries local authorities are legally obliged to seek the highest price for any land they sell – see, for example, Case study 3.2.

Assessment of supply-side measures The strongest argument for supply-side measures is that they can help target households without adding to inflationary pressures in local housing markets. Intermediate-market pressures are often a function of tight housing supply generally, so increasing supply is a better long-term solution than addressing (and effectively increasing) demand. However, supply measures are more expensive than demand subsidies per dwelling or household assisted, and increasing supply is a slow process. Supply-side measures are also less flexible; once built, housing will remain

International experience

Case study 3.2: 5000 homes for 5000 kroner: the case of Copenhagen The 2005 election of Copenhagen mayor Ritt Bjergaard was attributed largely to her campaign promise to provide 5000 new homes that would rent for 5000 kroner (about £450) per month to middle-income households. Copenhagen had experienced a 210 per cent increase in house prices in the preceding five years, and house prices and rents were no longer affordable for many wage earners. The original proposal included a sizeable public subsidy in the form of provision of local-authority land at below-market prices. However, this proved to be impossible given legal constraints, and efforts to redesign the programme so that no subsidy was required were unsuccessful – the policy, which had been a huge vote-winner, was in practical terms a failure. Paradoxically, it was not feasible for Danish social housing providers to produce the new units. By law, they were required to charge rents that covered their costs, and the cost of building new housing in Copenhagen (particularly the acquisition of land) was such that cost rents for new housing would be well over the 5000-kroner goal. A solution therefore was sought elsewhere. The city first proposed to sell land at below-market prices to developers who would assemble prefabricated units on it to enable the target rents to be met. However, the courts decided in early 2007 that such a sale would be unlawful. The focus then shifted to the development of complex financing instruments. These involved cross-subsidising the 5000-kroner homes with profits from market-price homes on the same sites, but also relied on the use of balloon mortgages, on which no payments (of principal or interest) would be made for the first 10 or 15 years. Critics pointed out that these risky loans were one of the causes of the sub-prime mortgage crisis in the USA. The housing was to be provided by a non-profit fund. Although its stated aims were to provide housing at rents that were affordable to key workers such as teachers, policemen and nurses, the formal eligibility criteria did not limit access by profession. Households with qualifying incomes (which were rather high – DKK 700,000 or £63,700 for couples and half that for singles, both in 2005 prices) could enter a lottery; those who were currently living in inadequate accommodation would have an extra lot drawn. The 5000-kroner homes proposal was originally supported by most of the seven political parties represented in Copenhagen’s city hall, but political support gradually ebbed away, particularly after an ambitious plan for building 2000 units on a green area in the south of the city aroused fierce local opposition. By mid-2009, it was clear that the programme was dead. Only 12 homes had been built, with 180 more in the pipeline. The case demonstrates the need to design measures that work within the local legal framework, and also suggests that a ‘no-subsidy’ model, while politically attractive, is difficult or impossible to implement successfully.

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for decades or even generations. Governments that build large amounts of dedicated housing for the intermediate market run the risk that it will become a white elephant when housing market conditions change. Increased supply is often politically unpopular, and NIMBY opposition to new construction can be strongest in the tightest housing markets.

Demand-side measures Demand-side measures are policies that enhance a household’s ability to afford a home. For the most part they are government subsidies (direct or indirect) to target households, designed to enable them to pay for housing that they could not otherwise afford. The target market is often fairly narrowly defined – there are many programmes for teachers, for example.

Subsidised mortgages Ireland focuses on owner-occupation for the intermediate market, and has a longstanding programme of local-authority housing loans that provide mortgage finance to low-income households who are unable to access commercial mortgages. Subsidised mortgage and down-payment programmes run by local authorities are also popular in the USA. Such programmes are easily understood by target households and can be set up on a small scale, with criteria and features tailored to local conditions. A 2002 analysis of northern California programmes concluded that income ceilings needed to be fairly high: given the area’s house prices, very lowincome households would not be able to afford housing even with subsidised loans. Maximum loan amounts needed to be high as well, reflecting the level of required down payments in high-cost areas. While some programmes set a maximum house price, most allowed buyers to purchase what they could afford (Sunnyvale (California) City Council, 2002). Similar issues have arisen in Ireland, where there has been a decline in the use of subsidised mortgage schemes since 1990, as income limits and maximum loan amounts have not kept pace with incomes and house prices (Norris et al., 2007). Subsidised mortgages are a widespread policy with many permutations. There are several ways a loan can be structured to provide an element of subsidy, including: • • • •

no down payment required; no payments required during an initial period; no payments required until the dwelling is sold or the mortgage refinanced; gradual forgiveness of the loan (usually on condition that the buyer remains in a particular employment).

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Two examples of mortgage-subsidy programmes are given below: • Example 1: Oakland, California, offers down-payment assistance to police, fire officers and teachers, earning 120 per cent or less of AMI. The city loans up to $10,000 over 10 years at 6 per cent interest. No principal or interest payments are due during the first five years; the remaining balance is due after 10 years, or when the home is sold or refinanced if earlier. • Example 2: In 2000, the state of California created the Extra Credit Teacher Home Purchase Program (ECTHPP) and authorised it to issue tax-exempt bonds; the money from the sale of these bonds funded low-cost mortgages for teachers. The programme was administered through local school districts and was designed to help staff serving in low-performing schools buy a home. Teachers could apply for either a first or second mortgage; the first mortgages were 30-year loans at a fixed (below-market) rate and second mortgages were available for up to $7,500 at 0–5 per cent interest. The interest was forgivable if the borrower remained employed at a lowperforming school continuously for five years (Polonsky, 2003). Some subsidised loans are effectively grants. Loans may be entirely forgiven after a certain number of years, or a percentage forgiven each year. In one US city the charity United Way worked with private-sector employers to provide their workers with 0 per cent – interest loans to help cover closing costs or down payments. For each year the employee stayed with their employer, 20 per cent of the loan was forgiven (Sullivan, 2004). Some authorities offer outright grants to eligible households, which are usually meant to apply to the down payment on owner-occupied housing. New York City, for example, gives its teachers up to $5,000 towards a down payment on the purchase of a dwelling (Herszenhorn, 2006). Similarly, some US school districts offer rental subsidies or loans for security deposits to their teachers.

Shared equity/ownership Shared-equity mortgages allow a household to purchase a proportion of the equity in the house, while the government or lender owns the remainder. The buyer may or may not pay rent on the proportion owned by the lender, and may or may not be permitted to increase their equity stake.3 Shared equity has yet to reach critical mass anywhere, and in some countries the legal framework does not allow it. Nevertheless, increasing concerns about affordability have led governments and private lenders to look with interest at the concept. In most shared-equity schemes, the government holds the share of the property not held by the homeowner, and in so doing provides an implicit subsidy. In Ireland, for example, individuals have since 1991 been able to

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purchase part-shares of social homes, while the local authority retained the balance of the equity (Norris and Winston, 2004). Thus far there are only some small-scale examples of private shared-equity schemes. In Australia, the 2003 report of a government task force stimulated some private lenders to develop shared-equity products (Whitehead and Yates, 2010). Many of these are targeted at better off, equity-rich customers, but one, developed by Australian fund manager Rismark, is aimed at the intermediate market. They announced their intention to develop a sharedequity product in late 2005 and, after tentative partnerships with a number of different financial institutions, finally launched their ‘equity finance mortgage’ (EFM) in 2007 through the Adelaide Bank. To fund these EFMs, Rismark aimed to launch a new unit trust, the Rismark Active Property Trust (RAPT), with returns linked to the future capital values of [residential] properties, using house price indices specific to the scheme. The product involves a shared-equity loan of up to 20 per cent of the house value, in return for which the lender receives up to 40 per cent of the capital value over a 25-year period. The borrower makes no interest payments. The lender takes up to 20 per cent of realised losses associated with any negative equity. In principle, the product is targeted at first-time buyers as well as other aspirational purchasers facing cash constraints. However the main users were generally at the wealthy end of the market. The potential collapse of the residential mortgage-backed securities market in 2008, only avoided by government support, put paid to any immediate developments (Pinnegar et al., 2009; Whitehead and Yates, 2010).

Assessment of demand-side measures Demand measures are popular with governments, in part because they are less costly per unit than building new housing for the intermediate market, and they can easily be tailored to local conditions. However, because house prices are set by the interaction of supply and demand in the housing market, anything that boosts demand without affecting supply will tend to fuel house-price inflation. So while these demand-side measures might help today’s target households, their unintended effect may be to help make the problem worse for their successors. In practice, however, most of these programmes are very small – probably too small to have much effect on local housing markets generally.

Regulatory and contractual measures Regulatory measures encompass the operation of the planning system, which in many countries is the principal way of securing additions to the intermediate-housing stock. In the USA, as in the UK, tight planning controls

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(which take the form of zoning in the USA) are one of the root causes of a dearth of new construction and consequent high house prices in certain areas, and some experts advocate the general loosening of planning controls on new housing as the long-term solution to intermediate-housing problems. Most commonly, however, governments require the private sector to supply housing for the intermediate market as a condition of planning permission. Another, rather different, approach is to use contract law to unbundle the rights of owner-occupation, so that intermediate-market households purchase only some of the traditional rights of home ownership. This allows the establishment of entities such as limited-equity cooperatives and CLTs, with legal structures that ensure that affordability is maintained in the long term (such arrangements are often known as ‘shared equity’ in the USA).

Require construction of intermediate housing as a condition of development permission Private developers can be required to supply intermediate housing, usually as a quid pro quo for receiving development permission, as with S106 agreements in the UK. Developers may be required to supply finished housing units, or to provide a financial contribution to their construction; the intermediate-housing units may be integrated into the development in question or provided at another location. These policies presuppose that there is enough producer surplus available to the developer to fund the units, and they are therefore only likely to be effective in areas of relatively high housing cost – which is where intermediate-housing problems are concentrated. They have been introduced at local level in a wide range of countries including Korea, Australia and New Zealand, but have often proved difficult to implement. Indeed in New Zealand, the relevant national legislation has now been rescinded. In Ireland, the 2000 Irish Planning and Development Act provides that up to 20 per cent of land zoned for residential or mixed developments of a certain size should be reserved for social and affordable housing needs. This requirement can be fulfilled in several ways: the developer can transfer land or dwellings to the local authority at a specified price; they can offer a cash payment; or they can provide the land or dwellings in another location. The requirement was subject to constitutional challenge but was accepted by the courts. The city of Dublin has been very active in using the provision. The Australian city of Melbourne employs similar policies and there are many other local examples of similar schemes (Gurran et al., 2008). In the USA, there has recently been a move to ‘inclusionary zoning’, where developers are typically asked or required to contribute to the community’s affordable housing stock in exchange for development rights or zoning variances. Some programmes are mandatory, where others provide

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incentives. Some involve cash contributions to an affordable housing fund, while others involve the construction of affordable units within the development (Schnare, quoted in Oxley, 2004). Inclusionary zoning ordinances normally require that a certain percentage of units in new developments be affordable to households in specific income categories, with restrictions on resale or rental to ensure that they remain affordable for a minimum period (often 20 years). The developer may be able to secure LIHTC (see earlier) to help fund these units. In return, developers often receive a ‘density bonus’, allowing them to construct more units on the site than would normally be permitted. Municipal authorities generally control land-use planning in the USA. Not all are enthusiastic about inclusionary zoning, and in some cases states have tried to encourage (or force) them to adopt the practice. The state of Massachusetts, for example, offers its municipalities incentives of $10,000–600,000 for establishing ‘smart zoning districts’, which allow denser-than-normal development. In addition, 20 per cent of new housing in such districts must be affordable to households making 80 per cent of AMI (Rollins, 2006). Such proposals can be politically controversial. Although San Francisco has had an inclusionary zoning ordinance since 2002, in 2004 the city’s voters rejected a proposal that would relax height and density restrictions, and expedite paperwork, for developers who agreed to build owneroccupied housing for people earning 80–120 per cent of AMI (Sullivan, 2004).

Limited-equity cooperatives, CLTs, etc. These arrangements employ contracts or covenants to ensure that housing that is affordable today will remain so into the future. Limited-equity cooperatives are promoted in the USA as a means of combining owneroccupation with continued affordability. Usually, residents collectively own the building, rather than each member owning an apartment. There are restrictions on resale values to keep the dwellings affordable, though owners are usually permitted to leave their membership to heirs. New York City has more than 1000 limited-equity cooperatives (known locally as Housing Development Finance Corporations); most developed since 1975 in housing that was taken by the city of New York in lieu of unpaid taxes. Many residents fall into the intermediate-housing market: ‘artists, actors, musicians, teachers and public agency employees make up a sizable proportion of residents’ (Saegert and Benitez, 2005). A similar form of collective ownership is the Community Land Trust (CLT). CLTs are private non-profit corporations operating at the regional and local level and controlled by local communities rather than by governments. CLTs acquire land to use for the benefit of the community; one such use is the provision of intermediate housing. Dwellings on CLT land are sold or leased to individuals, but the CLT retains possession of the land and can enforce

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resale restrictions on the dwellings to keep them affordable. Since 1980 the CLT movement has developed momentum across the USA, and the idea has been much discussed in the UK (see, for example, Barlow et al., 2002). Charities such as the huge John T. and Catherine T. MacArthur Foundation and the Ford Foundation have helped fund creation of American CLTs.

Assessment of regulatory and contractual approaches Regulatory and contractual measures are attractive to policy makers because they involve no direct government expenditure and thus appear to be costless. In theory, requiring developers to provide affordable housing should have little effect on the price of market units if the development is large enough. Developers may argue that they have to put up the price of market units in order to subsidise the affordable ones. However, if we assume that developers always charge as much as the market will bear for market units, then the affordable ones are paid for out of producer surplus (and thus represent, in effect, a tax on developers). It is clear, however, that the requirement to provide intermediate housing changes the developer’s financial calculations. Some developments that would otherwise have gone ahead simply will not occur, and the mix of units may differ from what would otherwise have been built. One recent analysis of planning mechanisms for affordable housing concluded that ‘mandatory affordable housing requirements deliver a far greater affordable housing outcome than do voluntary schemes based only on incentives or concessions, in terms of units created’ (Gurran et al., 2008, p. 106). Regulatory mechanisms are generally most effective in high-cost areas (which is also where intermediate-housing need is greatest). Developers in these areas can still make a profit even after the implicit tax represented by their intermediate-housing obligation; this may not be the case in low-cost areas.

Assignment and eligibility Eligibility for intermediate-housing programmes is always limited – most often by income, as this is the defining characteristic of the intermediate market, but also frequently by profession. The most important eligibility criteria are discussed in the following sections.

Income In Ireland, only households with qualifying incomes are eligible to purchase the affordable homes provided by developers as a condition of receiving planning permission. The relevant formulae are set out in the

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law, and vary according to the number of income earners in the household (Norris and Winston, 2004). In the USA, the various bodies – government or otherwise – that fund intermediate-housing programmes are free to set their own income criteria. Programmes are often targeted at households earning close to AMI. (The Brookings Institute defines ‘middle-class’ households as those making 80–120 per cent of AMI, and the Department of Housing and Urban Development [HUD] defines low- and moderate-income homebuyers as those earning the Metropolitan Statistical Area [MSA] median income or less.) The tighter the local housing market, the higher permitted incomes are for intermediatehousing programmes – e.g., household income limits are up to 120 per cent of AMI in California’s Silicon Valley and up to 150 per cent of AMI in Seattle. Some authorities use a combination of income and housing-cost criteria – for example, non-federally assisted developments in the state of New York are targeted at households with an income less than or equal to seven times annual rent for families of three or fewer, or eight times annual rent for families of four or more.

Job Dedicated housing for target groups is a modern version of the teachers’ and nurses’ accommodation that was common until the 1960s in the UK and elsewhere. Such housing gradually disappeared as the housing aspirations of young professionals changed. However, the idea has now found favour again in high-cost markets. Several California school districts have built or plan to build rental housing for their teachers – in Santa Clara County, for example, the school district has provided land for the construction of 40 rental units for teachers, who may stay for a maximum of five years (Chamberlain, 2005). In the USA, housing programmes targeted at teachers are the most widespread (in some areas eligibility is limited to those serving in low-performing schools), but there are also some for other public-sector employees. Police officers, for example, could get a 50 per cent discount on the purchase price of homes owned by the Federal Department of Housing and Urban Development (HUD). The programme, known as ‘Officer Next Door’, was launched in 1997 (Jennings, 2000); it has since been expanded to include teachers and firefighters. Many of the job-targeted programmes require some quid pro quo from the employee, often an agreement to serve in a difficult location or to stay in the position for a certain period.

Employer Tax breaks or government funding may be available for private-sector employers who offer housing help to their employees. In the USA, according to Jennings (2000),

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Hundreds of employers are offering benefits to help moderate- and low-income employees afford housing. Such programmes, termed employer-assisted housing (EAH), typically provide workers with home-buying assistance in the form of a grant or forgivable loan that can be used for the down payment or closing costs on a home purchase. A relatively smaller, but growing, number of employers are supporting the development of affordable rental or home ownership units or subsidising rent payments. To assist these companies, Fannie Mae developed a special EAH mortgage product (Jennings, 2000). Private companies offering housing help to employees in the USA include Computer Associates, Tyson Foods, Honeywell and Harley-Davidson.

Geographical targeting Policies that target supply obviously must limit their geographical focus to those areas where there is a shortage of intermediate housing. In France, PLI and PLS loans are available only for construction in certain high-cost areas – basically Paris and other large cities, and the Mediterranean coast. For demand-side policies, eligibility is often restricted to those employed in (rather than resident in) a particular locality – understandable, given that the raison d’être of these programmes is the fact that target groups cannot afford to live in the area in question without assistance. Dwelling location may also be restricted, either to ensure that recipients live locally or to further urban-regeneration aims. For example, the city of San Jose, California, offers deferred-payment loans of up to $65,000 to teachers who are firsttime buyers; the recipient is required to buy a home within the city of San Jose (www.sjhousing.org/policy/citypo.html).

First-time buyers Many programmes are limited to first-time buyers. The California Housing Assistance Program is designed to help first-time buyers who do not have enough money for a down payment. It offers a 97 per cent fixed-rate 30-year mortgage at below-market interest, plus a 3 per cent second mortgage for the down payment, which accrues deferred interest at 5 per cent (Polonsky, 2003).

Allocation among eligible households If there are more eligible households than available supply, there are various procedures for assigning housing: a waiting list is often employed, but some cities use a lottery. In Dublin, eligible applicants are entered for a draw when new housing becomes available. Those who have been waiting longest get more chances – applicants who have been waiting for over six

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months have their names entered twice, and those who have been waiting for over 18 months have their names entered eight times.

Funding mechanisms Most intermediate housing is built by private developers as a condition of planning permission, but the remainder relies on some form of government subsidy – either explicit or implicit. Government involvement may be in the form of contributions in kind (most often land) or tax incentives, as well as direct funding. Funding for subsidies may come from general tax revenues, or it may be earmarked, as in the case of bond issues or special savings banks. In France, specialist state-owned banks operate the system of preferential loans for construction of social and intermediate housing; their funds come from tax-favoured deposits from small investors. Bond issues are a usual financing mechanism in the USA, but less common elsewhere. New York State, long an innovator in middle-income housing, in 1960 created the New York State Housing Finance Agency, which sold bonds to private investors and used the proceeds to make low-interest loans to builders. The results were impressive: From the start of the programme through the mid-1970s, 269 state-aided projects were built, with a total of nearly 105,000 apartments. Co-op City in The Bronx, the nation’s largest cooperative housing development with 15,372 apartments, was built using these funds (see Case study 3.1).

Case study 3.3: Housing Trust Fund of Santa Clara County Santa Clara County, California – whose cities are collectively known as Silicon Valley – has some of the highest house prices in the USA. Even some of the wellpaid employees of the area’s technology firms cannot afford housing there, and for public-service workers such as teachers the problem is much more acute. In 1999, the Silicon Valley Manufacturing Group, a coalition of local employers, created the Housing Trust of Santa Clara (HTSC) to aid the construction of affordable housing. By 2001, the group had raised a $20 million endowment from contributions by local companies (about 200 have donated, including major high-tech firms such as Adobe Systems, Cisco Systems and Hewlett-Packard), foundations, governments and private citizens; this had risen to $40 million by mid-2009. HTSC is one of only two housing trusts in the USA that relies on the private sector for funds; most operate with money that comes from taxes on developers. As of August 2009, the trust had provided money to 2046 first-time buyers through its various loan programmes. The average home purchased with the Housing Trust’s assistance sold for about half the median price for existing houses in the area. The trust had also helped develop 1643 units of rental housing. As of 2009, about one-third of buyers of single-family homes were teachers.

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In many countries the provision of housing for low-income groups is considered a legitimate charitable activity; indeed, some of the earliest social housing in the UK was built by charities. This tradition has been revived on a small scale in the USA, where the Greater Minnesota Housing Fund, the Rochester Area Foundation, the John D. and Catherine T. MacArthur Foundation, and the Fannie Mae Foundation have all provided grant money for intermediate-housing projects. In California, a business-backed charity provides gap financing for construction of affordable housing in the Silicon Valley. This is illustrated in Case study 3.3.

Conclusions Internationally, as in the UK, the issue of providing housing for the intermediate market is most pressing in identifiable areas of high housing cost. The approach a country takes to addressing the problem reflects its own culture and administrative structure. In France, the approach is a top-down one, where a central authority produces a list of those particular local authorities where new intermediate housing may be built. In the USA and Germany, however, solutions tend to be local. This is partly because the problem is often perceived to be a local one – ‘Teachers can’t afford to buy a house in San Francisco’ – and partly because municipalities in the USA and Germany have much greater independence in policy and budgetary matters than do local authorities in the UK. These countries thus provide a wealth of different (but generally small-scale) examples of how to approach the problem. There is no universal solution. Planning measures, demand- and supplyside approaches each have pluses and minuses. Demand subsidies are relatively inexpensive and easy to target, but do nothing to increase supply and may lead to further house-price inflation. Supply subsidies do increase overall supply but are costly, and construction of targeted new homes can be politically unpopular. Moreover, many provide affordability only to the first purchaser as the dwelling is then sold on into the market. Both supply and demand measures involve government subsidies – implicit or explicit. These can raise real political issues about whether limited government funds should be spent on middle-income families rather than on those in most need. Regulatory controls usually place the onus on developers, who may react by withdrawing from the market. Private-sector solutions such as EAH are resurfacing in some places. These dimly echo the projects of nineteenth-century British employerphilanthropists, such as the Cadbury family or Titus Salt, who respectively built Bournville and Saltaire for their workers. Today, however, private-sector involvement is predicated on tax breaks, as is the provision of housing as a charitable activity. EAH is attractive as it leverages public funding and

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should provide homes that are well located with respect to workplaces. But such programmes may be ill-suited to today’s mobile society – could they in fact contribute to a less responsive labour market? Finally, the issues faced by the framers of New York’s Mitchell-Lama Program 50 years ago are still current today in the context of the intermediate market: How should the target market be defined? How can we ensure the dwellings remain available to the right people? What should we do about residents whose incomes rise? These questions of targeting are inevitable when government intervenes in the housing market in favour of intermediate households.

Notes 1. There was also a parallel, state-financed Mitchell-Lama Program operating in New York City at the same time; this financed The Bronx’s Co-op City, with more than 15,000 units. 2. In this, the programme resembles the German system of social housing provision, where developers receive subsidies for a limited period – often 30 years – in return for building housing for rent to low-income families. When the subsidy period ends, the units can be rented or sold on the open market. 3. This idea is often known as ‘shared ownership’ or ‘shared appreciation’ in the USA; there, the term ‘shared equity’ can mean that the dwelling is affected by permanent resale restrictions aimed at preserving affordability. That is not the meaning in this discussion.

Section B Measuring the problem

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Introduction to Section B: Estimating requirements for intermediate housing

This section looks at different methods of estimating requirements for intermediate housing in the UK. Ever since the 1960s, central government and independent commentators have produced estimates of the total numbers of dwellings required and the splits between market and social housing (Holmans, 1970; Department of the Environment, 1977). The objectives have been twofold: to ensure adequate land is made available through the land-use planning system (which is formally tenure neutral) to meet the long-run demand for housing overall and to identify the public funding which is needed if adequate subsidised housing is to be provided. These estimates were household based – projecting the likely increase in the numbers of households to be accommodated. They were based on population and household attributes; projecting the tenure split based on past trends – and sometimes economic variables; and identifying the backlog of unmet need and the housing that this requires. In the 1990s and 2000s, there were a number of initiatives to introduce more formal modelling approaches to identifying requirements as well as updates of the demographic approach (Department of Applied Economics, 1997; Holmans et al., 1998; Meen et al., 2005). The need for robust estimates which specifically enable the scale of intermediate requirements to be identified was increasingly obvious as the policy to expand the sector became increasingly important. By definition, it could not be done directly using past trends – as this was a new initiative. The estimates are important for central government because intermediate housing both requires lower subsidy and helps to meet their owner-occupation objectives. It is equally important to regional and local authorities to enable

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them to support their estimates of affordable housing requirements, needed for development control and to meet their housing targets. Finally, they are important to Housing Associations because they have a major role in ownership, allocation and financing. The processes have changed very little. The starting point has taken the form of ‘top-down’ estimates based on national and regional population and household projections. These are converted into a requirement for new dwellings by taking account of vacant stock, second homes, conversions, changes of use and demolitions. At national level, the resulting future housing requirements are currently for all housing with no distinction between market and subsidised housing (NHPAU, 2009) although in the past (Department of the Environment, 1977) owning, renting privately and renting from a local authority, but not intermediate tenures, were distinguished. Local governments and affordable housing providers need robust evidence on the numbers of new affordable dwellings required including both social renting and intermediate housing. Using government guidelines, they estimate both the numbers of dwellings that require land to be made available and local housing needs to determine the mix of market and social housing. There have been a range of approaches to estimating the future need or demand for affordable housing that include both social rented and intermediate tenures. The different types of measurement include approaches based on more general trends plus an estimate of affordability, recent trends in housing tenure by income group and those based on full economic modelling. None of these approaches are ideal, but they do give an indication of the scale of the problem. They are almost certainly better than looking at local authority housing waiting lists, which tend to double count and overestimate requirements. One reason why it is difficult to estimate the scale of intermediate housing required is that all existing evidence is affected by supply constraints and many households who would be eligible for the government schemes do not apply. If they are existing social tenants, they may be averse to the risks associated with home ownership, while if they are private tenants they may be saving for a deposit and believe that they will eventually be able to access a standard repayment mortgage on a full share of a property. In either case, they may be satisfied with their current accommodation and reluctant to move and enter a new sector. Equally, in estimating demand for intermediate housing, most approaches make an implicit or explicit assumption that housing is only ‘affordable’ if household outgoings on housing costs do not exceed some proportion of income, usually between 25 and 30 per cent of net or gross income. Yet in practice, people may spend more than this on housing, or may have assistance in the form of gifts or loans or legacies, so that it cannot be assumed

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that all those in the ‘eligible’ income bands would need or want intermediate housing. This section examines the main methods that have been used to estimate future demand for intermediate housing. First, Chapter 4 reviews four approaches to measuring the extent of the intermediate market. These all focus on newly forming households, but otherwise they are quite different and produce different results. The first does not aim to estimate potential demand for intermediate housing or future housing requirements as such, but instead in a series of reports highlights the increasing affordability problems facing younger households trying to access home ownership for the first time. While this is clearly useful in illustrating the numbers of such households falling into the income range, it does not provide a basis for determining housing or funding requirements. The other three approaches are concerned with estimating the future requirements for intermediate housing. The first calculates need or demand for intermediate housing as a subset of need for affordable housing. The second, the GLA study of 2004, is based on a London-wide household survey that supplies detailed information on households moving into, out of and between different tenures including shared ownership and shared equity. The final approach uses national household projections and survey data to divide initial estimates of households in the owner-occupied, private rented and social rented sectors into the intermediate market defined, like the other studies, by income bands. Chapter 5 examines a more formal approach to estimating future requirements for intermediate housing using an econometric model of housing choice. It describes two such models applied recently to England (Cho and Whitehead, 2006; Monk et al., 2007). Models of tenure choice are relatively straightforward in countries such as the USA where there are basically just two tenures – home ownership and private renting. Since these are both market tenures, the idea that households make a rational, if constrained, choice between them seems reasonable and the results, using longitudinal data sets, have proved highly encouraging. However, the situation is rather different in the UK where social housing remains a major, if proportionately declining, tenure, and where the focus of the modelling is in fact intermediate housing which as already noted is both new and small – probably as small as public housing in the USA where it is generally ignored. The chapter asks whether such models are actually appropriate for estimating requirements for intermediate housing both currently and in the future.

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4 Methods for estimating need for intermediate housing Alan Holmans and Sarah Monk

There have been a number of different approaches to estimating the need for intermediate housing. These provide a necessary tool for government at all spatial levels to develop and implement affordable housing policies. The approaches are all grounded in assessing the number of households whose incomes lie in the gap between eligibility for social housing and being able to afford full home ownership. There are three groups of stakeholders who need to be able to estimate potential demand: providers who need to know the scale and nature of the market in their areas, regional and local government agencies who require information on which to base their affordable housing policies, and central government who are aiming to develop broadly based policies that provide value for the public purse by meeting housing needs with limited subsidies. However, intermediate tenure housing is a relatively new market sector, so directly measuring demand is extremely difficult. Census and survey data suggest that the current stock in England is very small, certainly less than 1 per cent of the total housing stock, although larger in some highdemand areas. Equally, general household surveys rarely show large numbers of people interested in the sector. However, this lack of knowledge and interest may be more a matter of limited supply. We do not know the extent to which more households would choose intermediate housing if the available supply were to increase. Nor do we know whether people are

Making Housing More Affordable: The Role of Intermediate Tenures, edited by Sarah Monk and Christine Whitehead © 2010 Blackwell Publishing Ltd.

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simply unaware of what intermediate housing is available, and do not need to become knowledgeable until it is a relevant option. However, current interest in the intermediate market in the UK may be mainly a reflection of the recent steep increases in house prices. Estimates therefore concentrate not on measuring demand but on the potential requirements for this sector. They are used first to identify the scale of the affordability problem and second to inform government about the mix of new building which might be most appropriate and – implicitly – the levels of subsidy required. This chapter discusses the four main detailed assessments that have been used to estimate the need for intermediate housing. They have somewhat different objectives – at one extreme estimating the scale of potential affordability problems; at the other proving detailed guidance on potential supply requirements. In terms of method, they differ from one another in four main ways: the range of households included, the assessment of what is affordable, the spatial level of the estimates and whether the estimate is translated into a supply requirement. The four detailed approaches discussed are: 1. Wilcox’s narrow and broad intermediate markets (Wilcox, 2003, 2004, 2005, 2006a, b). 2. The Bramley approach (Bramley and Karley, 2005). 3. The GLA study (Greater London Authority, 2004). 4. The Holmans approach, as part of demographically based estimates of demand and need for housing analysed by tenure (CCHPR, 2004, 2006; Holmans and Fenton, 2007, 2009; Monk et al., 2008b). Of these, (1) is a measure of the number of younger employed households who can afford to pay more than social rents but cannot afford home ownership at the bottom of the housing market, defined as either the lower quartile or the lowest decile of house prices; (2) includes intermediate housing as a sub-sector of a broader estimate of the need for ‘affordable’ housing, defined as those households who are not able to afford to buy housing at market prices; (3) is a study of housing needs and supply requirements to provide for additional households in London, divided into market, intermediate and social sectors over a 10-year period and (4) is a group of studies using substantially similar methods to produce estimates of future demand and need for housing, divided into market, intermediate and social rented sectors. The final approach has been applied at national level for Shelter and at regional level for the West Midlands, East of England and South East England Assemblies.

Wilcox’s measure of affordability Wilcox (2003, 2004, 2005, 2006a, b) has undertaken several studies designed to highlight the increasing affordability problems facing young working

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households during the recent period of rapidly increasing house prices. The estimates all relate to the local-authority level, so that each local authority can see how affordability problems affect their area and can compare their position with other areas. Over time, the estimates have become increasingly sophisticated, using new data sources particularly for household incomes, for which available data are problematic below regional level. These localauthority estimates are then aggregated to regional and national levels. Wilcox (2006a, b) uses an operational definition of the intermediate housing market (IMH) which focuses tightly on younger working households (aged 20–39) who can afford to pay more than a social sector rent, but still cannot afford to buy at the very bottom of the housing market. The definition involves dividing all younger households (aged between 20 and 30) into five groups: not in work, and hence on income support; in work, but on housing benefit; in work, not on housing benefit but cannot buy at the lowest decile local house price; in work, but cannot buy at the lower quartile house prices; and finally those who can afford to buy at the lower quartile level. The middle category – not on benefit but cannot buy at the lowest decile level – is called the narrow IMH. The lowest decile is important because it reflects to the cheapest market housing available for sale although these may not necessarily meet quality standards. The three middle categories taken together are termed the broad IMH. Figure 4.1 provides an illustration. The definition is based on household incomes and on a consistent house-price measure for two- and three-bedroom dwellings.

Not in work

In work but on housing benefit

Not on housing Cannot buy at benefit but lowest quartile cannot buy at level lowest decile level

Can buy at lowest quartile level

Figure 4.1 Broad intermediate market. Source: Wilcox (2005).

Wilcox also uses different data sources from those in more common use. For house prices, he prefers data from the Survey of Mortgage Lenders to Land Registry data, because it distinguishes the size of dwellings and so provides a consistent measure across different locations. For incomes, Wilcox uses earned incomes from the Annual Survey of Hours and Earnings (ASHE). Although this relates to individuals, it is converted to estimates of household incomes at local-authority level. Control totals for these household income estimates are provided by taking regional household incomes from the Expenditure and Food Survey pooled over three years. Further innovations include using income to loan ratios based on survey data of

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actual payments rather than the standard 3.5 times gross income which lenders typically use. Wilcox uses a deposit of 18 per cent because, while recognising that this varies between regions, he argues that consistent assumptions have to be made across the whole country to provide a neutral measure of potential affordability. The Wilcox studies identify the number of working households aged between 20 and 39 who are unable to purchase at lowest decile and lower quartile house prices in each local-authority district. They consistently find London, the South East and the South West as the least affordable regions for younger working households looking to purchase their first home. The localauthority level analyses show a more variable pattern, with districts changing their rank as the housing market changes, and with some districts from other regions entering the least affordable category. The earlier studies (2003, 2004) show some districts with no narrow IMH (in the North East), but more recent estimates (2005, 2006a, b) show this disappearing as house prices have risen everywhere. The latest figures (Halifax plc, 2010) show some 40 per cent of areas where households can afford at least the lowest priced housing. All in all, these studies provide a fascinating story of the changing affordability problems facing younger households in accessing home ownership. One issue raised by Wilcox is that, in principle his approach could include in potential demand households with very low residual incomes after paying mortgage costs as being able to purchase at the required house price to income ratio. However, he suggests that income support in the form of work and child tax credits ensure that residual incomes remain well above income support levels for most such households. The problem is confined to a minority of working households who do not meet the qualifying conditions for tax credits, i.e. single people, childless couples under age 25 and some other small groups. Many of the households may already be in owner-occupation or other appropriate housing. It is not, therefore, an attempt to estimate likely demand for intermediate housing. What it provides is a clear indication of the extent of affordability problems facing first-time buyers on limited incomes based on the relationship between incomes and house prices at the local level.

The Bramley approach Bramley has undertaken a long sequence of studies, which aim to estimate the need for affordable housing by newly formed households, defined as the numbers that have incomes too low to gain access to owner-occupation. The latest in the series is Bramley and Karley (2005), which estimated the need for intermediate housing from their more general affordability model (though the terms ‘demand’ and ‘market’ are also used as well as need).

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The estimates assume that the income required to purchase a home with a price equal to the lower quartile house price is based on the loan required for the local-authority area and lenders’ policies about the maximum multiple of income that they will lend. Like Wilcox’s approach, this calculation is carried out for each local housing authority, of which there are 354, but with house price data from the Land Registry and with modelled income distributions. Local estimates are then aggregated to regional and national levels. The essential point is that Bramley and Karley make estimates of the proportion (and hence the number) of new households who do have sufficient income to gain access to owner-occupation, with the rest deemed to need ‘affordable’ housing. Bramley and Karley used the same model to estimate the number of new households who could gain access to intermediate, but not market, housing. Calculations were made for two types of intermediate housing: shared ownership with a 25 per cent share purchased (the smallest share allowed) and HomeBuy, with an equity loan equal to 15 per cent of the price and a standard mortgage for the remaining 75 per cent. For shared ownership, the calculation is based on the price for dwellings in new shared ownership schemes, while for HomeBuy it is simply 75 per cent of lower quartile prices for second-hand houses. For HomeBuy, the minimum income is calculated from the model in the same way as for market price housing; for shared ownership, it is calculated so that outgoings do not exceed 30 per cent of net household income. The two measures of affordability of intermediate housing produce different results according to region, because the relationship between the prices of new and second-hand houses varies. In particular, second-hand house prices are lower relative to prices of new houses where market pressures are lower. Table 4.1 shows Bramley and Karley’s estimate

Table 4.1 New households able to afford intermediate housing but not market prices in England in 2002. Shared ownership

North Yorkshire and Humber North West East Midlands West Midlands East of England London South East South West England Source: Bramley and Karley (2005, Table 8).

2 144 153 789 673 4,183 9,937 11,201 4,934 32,016

HomeBuy

3 333 407 929 819 3,236 6,069 7,615 3,988 23,399

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of new households who could afford intermediate housing but not market prices, at house prices and incomes as of 2002. That the need for intermediate housing as estimated by Bramley and Karley was so strongly concentrated in the South of England is because the estimates were for 2002. In subsequent years, house prices rose faster in the North of England than in the South. House prices in the South East rose by 45 per cent between 2002 and 2007, as measured by DCLG’s mixadjusted index, while in the North West region they rose by 86 per cent, so the mix has changed at the same time as the overall numbers have risen. The latest numbers based on this approach are much larger: some 20 per cent of the current National Housing and Planning Advice Unit (NHPAU, 2009) estimates of overall annual requirements of 270,000 nationally.

The GLA study This study (GLA, 2004) was the first attempt to produce a policy-based estimate of intermediate housing requirements, by estimating a ‘gross flows’ model of additional households in specified income ranges. It used a London-wide household survey conducted in 2002 by Opinion Research Services (ORS) to assess the need for intermediate housing by dividing flows of households into and out of London and within London itself between the market, intermediate and social housing sectors. The study distinguished seven household flows: (i) moves into London from the rest of the UK, (ii) moves into London from outside the UK, (iii) moves out of London to the rest of the UK, (iv) moves from London to outside the UK, (v) new households formed in London, (vi) households in London dissolved by death and (vii) moves by households within London. For (i)–(iv), the source was the migration components of mid-year estimates of the population and population projections for London. These flows are however of individuals; they were translated into households using information from the household survey. The translation is straightforward for movers into London; but for movers out, the study relied on survey respondents who said that they expected to move out of London. The ORS survey was also the source of information about income and household composition used for apportioning households between tenure sectors. The upper limit to the range of income for intermediate housing was based on the ability to afford the lower quartile house price with the maximum amount that could be borrowed in terms of gross income derived from mortgage lenders’ practice plus savings minus debts plus (for existing owner-occupiers) the equity in their houses. Information about savings, debts and equity was collected by the household survey. The lower boundary was where rent would equal 25–30 per cent of ‘equivalised’ gross income

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Table 4.2 Estimates of flows of households needing intermediate housing to, from and within London (10-year estimate). In-migrant households New households formed Moves to intermediate housing by continuing households Out-migrant households Moves from intermediate housing by continuing households Households dissolved Net requirements for intermediate housing

⫹247,500 ⫹297,300 ⫹41,200 ⫺319,900 ⫺233,900 ⫺7,800 ⫹24,400

Source: GLA (2004, Figure 80).

according to whether the income was £15,000 a year or less, £15,000–40,000 or £40,000 or more. ‘Equivalised’ income means income adjusted for the composition of the household. For example, the scale used in the GLA study took the equivalence value of the household head and partner as 1.0 and a child aged 11–12 as 0.25. A couple household with 2 children aged 11–12 would therefore have an ‘equivalence value’ of 1.5, which would be used to divide their income in a comparison with a couple with no children or a single person. The household with an ‘equivalence value’ of 1.5 with an income of £20,000 a year would therefore have an ‘equivalised’ income of £13,333. Flows of households with incomes within the range for intermediate housing as given in the GLA study are shown in Table 4.2. The numbers were for a 10-year period. The net requirement for intermediate housing is the comparatively small difference between much larger totals and so vulnerable to error in the flows. This is very important, and means that the model used in the GLA study did not produce a true ‘gross flows’ estimate of the need for intermediate housing. Also important to emphasise is that households shown in Table 4.2 as moving from intermediate housing are households within the income range; they are not actually leaving that tenure. Even so, it provided a first estimate based on affordability criteria. The resultant figure, which reflects the housing market of the early twenty-first century, was quite small and indeed only just over 50 per cent of current requirements as specified in the London Plan (GLA, 2009). In the Plan, intermediate housing requirements are 15 per cent of the total as compared to 7 per cent in the 2002 estimate.

The Holmans approach Estimates of need for intermediate housing made by Holmans and colleagues have been made as elements in more general estimates of newly

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arising demand for housing in total and for market, intermediate and social rented sectors individually, both nationally and for individual regions. The national estimate was made by aggregating estimates for each of the nine regions, because a calculation with national average house prices would miss much of the impact of regions of variations in the ratio of house prices to incomes. Intermediate housing requirements are for new households who cannot afford house purchase at market prices but can afford to pay more for their housing than the rents charged for social rented housing. It is recognised that a need for intermediate housing might arise from existing households moving. But no satisfactory data are available about the incomes of interregional movers; and there has been little policy interest in intermediate housing for non-moving households. At regional level, the estimates of the need for intermediate housing year by year were made in the following stages: 1. 2. 3. 4.

The number of new households annually Their income distribution The range of incomes for intermediate housing From (2) and (3) the number of households within the income range for intermediate housing 5. The housing tenure of these households 6. How many would be likely to want intermediate housing if it were available to them. We discuss this approach in some detail partly because it is the approach that most closely matches policy requirements and partly because it has been the core of CCHPR work in this area.

New households and their incomes The source of information about the number of new households, their incomes and their housing tenure in work by Holmans and colleagues has been the Survey of English Housing (SEH). This survey was conducted by the Department for Communities and Local Government (DCLG) (and predecessors) continuously from 1993/94 to 2007/08, with an achieved sample of about 20,000 households annually. Household members are asked for the length of time they have lived at the interview address. When this is less than three years, further questions are asked about whether the accommodation occupied before the move was owned or rented in the name of the person in whose name the present accommodation is owned or rented. If the previous accommodation was owned or rented in the same name as the current accommodation, then the move is counted as a move by a

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continuing household. If not, the move is counted as having been made by a new household. For purposes of analysis, moves by new households and continuing households are those that have taken place in the year before the interview. This is the basis of the table published annually from SEH of the previous and current tenure of moving households. Some households move more than once in a year, however. If, for example, a couple set up house in rented accommodation and then within a year move to owneroccupation, SEH records a continuing household move from the private rented sector to owner-occupation. The formation of a new household in the private rented sector is lost from view. Recent work (Holmans, forthcoming) puts the number of new households ‘missed’ in this way as some 50,000–60,000 a year in 2006, as compared with 400,000 identified new households. The ‘missed’ new households are apportioned between regions pro rata to the identified new households in the private rented sector. In estimating new households requirements for intermediate housing, data from the three most recent available years were combined to provide larger samples for analysis. It is considered that the ‘real’ changes between the three years were probably small in relation to the reduction in sampling variation achieved by having a sample of approximately 60,000 households instead of 20,000 from any one year. The grossing of the samples was undertaken by DCLG (see DCLG, 2009b, Housing in England 2007/08 for details of the method). A total sample of 60,000 households would include about 1200 new households. This is not a large number for estimating need for intermediate housing in each region. To reduce the risk of distortion through sampling variation at regional level, comparisons were made between distributions of income and tenure of new households in the regions with the distributions for England as a whole.

Income range for intermediate housing As in the other approaches, the potential demand for intermediate housing depends on the number of households with incomes too low to afford adequate housing at market prices or rents, but high enough to afford considerably more than social sector housing rents. The upper boundary of the range of incomes for intermediate housing has been derived from lower quartile house prices from which a ‘user cost’ is calculated. This comprises the mortgage outgoings on a loan equal to 90 per cent of the price, the interest forgone on the 10 per cent paid in cash and the cost of insuring the dwelling. In practice, this is close to the outgoings on a 100 per cent mortgage, slightly less as the interest rate that could have been earned on the amount paid in cash is normally lower than the mortgage interest rate. The income which is the upper boundary of the range for intermediate housing is where the user

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cost of the lower quartile house value equals 30 per cent of the net income (i.e. after deducting income tax and employee’s National Insurance contribution) of the household head plus wife or other partner (where there is one). Using house prices to calculate the upper boundary has the advantage that they are available at district level and so can be used to subdivide regional estimates of need for intermediate housing. Thus far there has been insufficient information about rents to use them in this way. With the increase in the size of the private rented sector and the increase in the proportion of younger households who rent, it may well be possible before long to look again at using rents as well as house prices. For the lower boundary of the range of income for intermediate housing, the income taken is that at which 30 per cent of net income is equal to the average weekly housing association rent plus £25. Unless some addition (not necessarily £25) is made, some households would require nearly as much subsidy as households in mainstream housing association and local-authority housing. It is a characteristic of intermediate housing that it should be more lightly subsidised than new provision of social rented housing by housing associations. Table 4.3 shows, for the regions and England, the ranges of gross income for intermediate housing calculated in the way outlined, and the estimated number of new households with incomes below, above and within these ranges. The relationship of gross income to net depends on the number of earners. For the lower boundary, the calculation is households with one earner; for the upper boundary two earners. The differences between regions in the lower boundary of the range of income for intermediate housing are much smaller than in the upper boundary, because housing association rents vary much less between regions than do house prices.

Housing tenure of households within the income range for intermediate housing The housing tenure of households within the range of incomes for intermediate housing was estimated from information in SEH, and is shown in Table 4.4 for the regions and England. The figures for the social rented sector come from small sample numbers, and the comparatively high figure for the East of England could well be overstated. The reason why there are social rented sector tenants within the income range for intermediate housing is because the income distribution for social sector tenants has an upper tail. The incomes of those in that tail are however generally not far above the lower boundary of the income range for intermediate housing.

Table 4.3 Numbers of new households and ranges of income for intermediate housing (thousands). North West

Yorkshire and Humber

East Midlands

West Midlands

East of England

London

South East

South West

England

360

370

360

380

380

420

500

450

400

n/a

480

540

550

700

680

930

1,300

1,050

930

n/a

19

35

21

17

24

20

40

31

19

226

4 4

7 12

9 8

12 5

8 5

17 5

23 7

26 3

14 3

120 52

27

54

38

34

37

42

70

60

36

400

Notes: Details do not always add to totals owing to rounding. There are no income boundaries for England, because the national figures for households in the three categories are the sum of independently estimated regional figures. Source: Holmans (2008, Tables 9 and 10).

Methods for estimating need for intermediate housing

Lower boundary (£/week) Upper boundary (£/week) New households with income: Below lower boundary Within range Above upper boundary All new households

North East

73

74

North East North West

Owner-occupiers Social rented sector Private rented sector All new households within income range for intermediate housinga

Yorkshire and Humber

East Midlands

West East of Midlands England

2.5 0.7

3.9 1.1

3.2 1.1

6.5 0.7

5.7 0.4

10.4 2.1

1.2

2.4

5.7

6.5

3.3

6.9

4.4

7.4

10.0

13.7

9.4b

19.4

London South East South West

5.8 1.8

England

13.3 0.7

5.4 0.7

56.7 9.3

20

16.7

10.2

72.9

27.6

30.7

16.3

138.9

Notes: a Differences in the totals of households within the income range for intermediate housing compared to Table 4.3 is due to those figures not including new households not counted in published tables from the SEH, whereas Table 4.4 includes them. b The figures in Holmans and Fenton (2009) are slightly different owing to later information. Source: Holmans (2008, Table 22).

Making housing more affordable: the role of intermediate tenures

Table 4.4 Housing tenure of new households within the income range for intermediate housing (thousands).

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75

Proportions of new households who would want intermediate housing Not all households within the range of incomes for intermediate household would necessarily want it if offered to them on standard terms. Table 4.4 shows that there were many new households with incomes below that which would be necessary to meet the outgoings to purchase a lower quartile-priced house with 30 per cent of net income, who nevertheless became owner-occupiers. There is little information about how they were able to do this. Possibilities include buying houses with prices well below the lower quartile, spending more than 30 per cent of their net income on their housing, and receiving gifts or loans from their families and friends. It is possible, though, that some are financially stressed as a result of the amount they have to spend to buy their houses, or have been able to afford only poor-quality accommodation. They might well have welcomed intermediate housing if it had been available. Given this possibility, a working assumption is made that only 10 per cent of the owner-occupier new households within the income range for intermediate housing actually need it. New households in the social rented sector with incomes high enough to be within the range of income for intermediate housing are few. There is no presumption that they ‘ought’ to be in intermediate housing. Income is usual income at the time of interview, and so might be higher than what the household could rely on earning in the longer term. Or the income could be too variable safely to carry a long-term commitment such as a shared ownership or shared-equity mortgage. New households in the social rented sector within the income range for intermediate housing could be classified to either the social rented or intermediate sector, or divided between them without any effect on the estimate of total need for ‘affordable’ housing, i.e. social rented and intermediate housing combined. With the rise in the proportion of younger households who are privatesector tenants, it is becoming increasingly difficult to decide what view to take about how many of the new households in the private rented sector with incomes within the income range for intermediate housing would want it. The assumption that a high proportion of new households who are in the private rented sector are there only because exceptionally high house prices in relation to income prevent them from buying is now much more open to doubt than formerly. In earlier work, the assumption was made that two-thirds of new households in the private rented sector would want intermediate housing. The other third were thought to be households obtaining better value for money from the accommodation they rented. In more recent work (Holmans, 2008; Shelter 2008), the view was taken that the growth in renting from private landlords made the proportion

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of two-thirds too high, particularly in the South of England, and 40 per cent was taken instead. This is a debatable topic, and in work for the West Midlands Regional Assembly (Holmans and Fenton, 2009) the proportion of two-thirds was retained.

Sub-regional estimates of need for intermediate housing It is important to emphasise that estimating need for intermediate housing at sub-regional level is essentially about distributing the estimate for the region between the districts. The information available at local-authority district level relevant to estimating need for intermediate housing includes projections of household totals, lower quartile house prices and average housing association rents. Estimates of new households are not available below regional level. The procedure used has two elements: the projected net increase in households, and the differences between user cost derived from lower quartile house prices and average housing association rents plus £25. Variation between districts in the difference between lower quartile user costs and average housing associations predominantly arises from differences in house prices. Housing association rents vary by comparatively small amounts within regions. The projected net increases in households at district level are estimated by DCLG from population projections produced by the Office for National Statistics (ONS). These population projections assume a continuation of recent trends, particularly in migration. No account is taken of possible influences that might constrain these trends in future years. Spatial constraints could potentially occur if, when the population increase is translated into households, there is not enough room for them all within the boundaries of some districts. Dividing the regional estimate of need for intermediate housing between districts on the basis of household projections, lower quartile house prices and housing association rents is a mechanical process. The results provide a set of estimate for the districts, which can then be used as the starting point for assessments that bring to bear local knowledge. Making alterations on the basis of local knowledge has of course to work within the requirement that amended estimates for districts must add up to the regional total.

Taking account of future changes in incomes and house prices Projections generally assume that the base-period relativities between incomes and owner-occupiers’ user costs and new households’ income remain constant

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(taking one year with another) over a 20-year period – typically the time period of studies of housing need commissioned by Regional Assemblies and also by Shelter. That is a fair representation of the house price history of the past two or three decades. But different paths for house prices in relation to incomes are clearly possible. House prices in 2003/04, 2004/05 and 2005/06 combined, the period to which Table 4.4 refers, were well below the high point of the boom, by 20 per cent in cash terms (DCLG mix-adjusted index), and between 10 and 11 per cent relative to incomes. Relative to income, house prices in the first half of 2009 appear to have been fairly similar to what they were in 2003/04 to 2005/06. It is possible to test the effect on the estimate of need for intermediate housing of assuming that house prices remain broadly stationary in relation to the general price level and so decline considerably relative to real incomes, or that house prices rise in real terms, but more slowly than incomes. Such assumptions reduce the number of new households within the range of incomes for intermediate housing. Most of the reduction is however in the number of owner-occupiers within the range of incomes for intermediate housing; since only 10 per cent are assumed to want intermediate housing, the effect on the estimate of need is fairly small.

Recycling intermediate housing If part of the need for intermediate housing could be met from vacancies within the intermediate housing stock, the need for new provision would be less, in time perhaps much less, than the number of new households needing intermediate housing year by year. A high proportion of households entering the social rented sector are accommodated in dwellings vacated by households moving away or dissolved. Intermediate housing is different; in that in many instances the departure of the occupier causes the dwelling to cease to be intermediate housing. When a house bought with a HomeBuy mortgage is sold, it becomes part of the market housing stock. Similarly with shared ownership housing where there is a right to purchase the other share, it is possible to buy out the other owner (usually a housing association). Recycling of intermediate housing will depend on the emergence of a resale market that is restricted to households that qualify for intermediate housing. There are signs of interest in this form of tenure in areas where house prices are high in relation to local employment incomes, and housing development is tightly restricted by planning policies. If schemes of this sort form an important part of provision of intermediate housing, recycling could become significant in meeting new needs for intermediate housing. In Homes for the Future (Shelter, 2008), the figure for new provision of intermediate housing assumed that an average of

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10,000 dwellings a year would be recycled (see Holmans, 2008, paragraph 46). But the Regional Assemblies that commissioned work on future demand and need for housing that included an intermediate sector did not regard such an assumption as realistic for their regions.

Conclusions Estimates of demand and need for housing in England in 2006–26 published by Shelter in Homes for the Future put the need for intermediate housing at about 30–31 per cent of the total annual need for affordable housing (i.e. social rented plus intermediate housing). In seven of the nine regions, the proportion is between 30 and 35 per cent. High house prices in the South of England were the reason for more than half of the national need for intermediate housing being in London, the South East and the East of England regions. The need for intermediate housing is estimated separately from the need for social rented housing, not as a sub-sector of a total of affordable housing. Not far short of one-half of the national total of need for social rented housing generated by household growth and change is in these three regions, hence the high figures for intermediate housing do not result in large shares of all affordable housing. Estimates of need for intermediate housing have been used in two main ways. One is as part of national estimates of housing demand and need by housing campaign groups (notably Shelter) which have a particular interest in affordable housing. The other way is by regional assemblies as part of the material for their housing strategies. The South East, East of England and West Midlands have used estimates of housing demand and need made by the Holmans’ method. The GLA has used its own method. There are substantial differences between the methods reviewed here. First, the total number of households to which the income boundaries are applied varies between different approaches. Wilcox confines his analysis to all new households aged between 20 and 39; and the GLA looked at seven different flows, while Holmans and Bramley and Karley both include the overall flow of new households. Second, while they all define the market in terms of an income range, the upper- and lower-income bounds for this range are defined differently. Wilcox determines it in terms of the ability to afford lower decile or lower quartile house prices without exceeding 30 per cent of their household income. Holmans defines the upper bound as households unable to afford lower quartile house prices unless they pay more than 30 per cent of net income, and the lower bound by the social sector rent plus £25 a week which must also amount to no more than 30 per cent of net income. The GLA study defines the lower boundary for intermediate housing as the social rent with no addition, while Bramley

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and Karley do not use social rent at all – their income range is a subset of their estimate of need for affordable housing. Their measure alone is being tied to the detail of specific housing schemes. Only Holmans addresses the question of whether those households estimated to be within the range of income for intermediate housing would actually take it up if it were available, and then only by making some assumptions. In principle, the characteristics and circumstances of those who have entered intermediate housing should be a guide to whether other households in similar circumstances would also take it up if it were available. But currently it is a rationed system, so this would be an unreliable guide as to what take up would be if it were freely available on standard terms. This is an area that is difficult to research as there are well-known problems interpreting the answers to hypothetical questions. An important point here is the fact that considerable numbers of households with incomes below those deemed necessary to access market housing do nevertheless become house purchasers. A related issue is the fact that since the end of the 1990s increasing proportions of younger households have entered the private rented sector, and little is known about their likely future choices or whether these are available. If there has been a persistent trend towards renting, then a need for intermediate housing could arise from inability to afford adequate rental housing as well as the inability to afford to buy. At present, it would be very difficult to estimate need for intermediate housing based on rents, as rental information is so sparse. Monitoring of what rents younger households pay and what accommodation they get could provide useful insights, and the new English Housing Survey (due to report first full results at the end of 2010) may be able to provide relevant data. The method used by Holmans and colleagues would appear to have the most advantages from a policy point of view. It is more robust in relation to total flows of households than the GLA study. It is more comprehensive than Bramley and Karley’s method, which is tied to the detail of the products. It also takes more explicit account of how many households within the income range are likely actually to want to take it up. The income ranges used by Holmans tie up reasonably well with data on the characteristics of those that did take up intermediate housing in the past four years. Furthermore, regional estimates commissioned by regional assemblies of demand and need for housing, including intermediate housing, have been tested at Examinations in Public of Draft Regional Spatial Strategies. The proposed targets for intermediate housing using Holmans’ approach have been accepted. A final issue is the extent to which these estimates, which vary between 10 and 20 per cent of new housing requirements, are borne out by evidence of actual demand. It is difficult to estimate a realistic actual demand in

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England as it is such a small and relatively a new market sector. Experience of two of the government’s attempts to subsidise key workers (the Starter Home Initiative and Key Worker Living schemes, see glossary for details, and see also Chapter 9) has not been taken up as hoped or expected. Key workers targeted under these schemes appear to have preferred other products in the buoyant housing market conditions. However, this lack of interest may well have been the outcome of very specific constraints. Lastly, a question remains as to whether the interest in the intermediate market in England is simply a reflection of the recent steep increases in house prices or whether there is a continuing role for shallow subsidy affordable housing. Estimates using the types of approach discussed in this chapter can only provide evidence on the potential for using intermediate tenure products. It is the attributes of specific products and consumer attitudes that will determine their viability in the longer term.

5 Modelling the take-up of low-cost home ownership Alex Fenton

This chapter examines the use of modelling techniques to explain and predict which kinds of households are most likely to purchase intermediate or lowcost home ownership (LCHO) housing. These techniques are adapted from a well-established literature on tenure-choice modelling, in which individuals’ housing consumption is analysed using statistical regression methods. In the literature, ‘tenure choice’ is an abstraction of households’ decisions to live in one or other housing tenure. In most models, the choice being analysed is that between owner-occupation and renting, but the approach can potentially be extended to the choice between LCHO housing and other tenures. The central principle of tenure-choice modelling is that individual decisions about which tenure to live in and how much to spend on housing are not random. A household’s decision is first constrained by its financial means relative to the prevailing costs of different housing tenures. Demographic characteristics of the household are also very important in its tenure choice; for example, those with children may prefer the relative security and investment benefits of owner-occupation over the mobility of renting. Thus, tenure-choice models, in general or for LCHO, use large censuses or surveys of households which collect information about each one’s tenure, its finances and its demographic characteristics. Econometric techniques are used on these data to determine the relative importance of these factors in explaining housing decisions.

Making Housing More Affordable: The Role of Intermediate Tenures, edited by Sarah Monk and Christine Whitehead © 2010 Blackwell Publishing Ltd.

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Making housing more affordable: the role of intermediate tenures

This chapter first looks at the principles that underpin this approach to housing market analysis. This provides an ideal for extending this approach to LCHO. The econometric techniques used to construct the models are briefly introduced. The chapter then turns to their specific application in English studies of LCHO tenure choice reported in Monk et al. (2006) and Cho and Whitehead (2007). In these studies, modelling was hindered by the paucity of data, and by the immaturity, small size and heterogeneity of the market for intermediate housing. The models are not particularly good at explaining who will or will not choose LCHO, although the factors that are found to predict LCHO purchase are at least consistent with expectations and with qualitative studies of LCHO. Importantly, the models are weak because in the historic period modelled, take-up of LCHO was constrained primarily by supply rather than by the mainly demand-side factors used as predictors in the model. In the period modelled, LCHO in England worked primarily as a haphazardly distributed state benefit, rather than an open market as implied by the modelling approach. While LCHO markets remain immature, policy planners may do better to consider alternate planning techniques instead of or as well as econometric modelling.

General principles of tenure-choice modelling ‘Tenure choice’ denotes a formalisation of the process by which households or persons decide what housing tenure to live in. This abstraction has an outcome that can be econometrically modelled using regression techniques which are briefly introduced in the later section, after giving an outline of what a tenure-choice model might encompass. It is presupposed that each household makes a rational choice of tenure based upon their financial wherewithal, the value (or ‘utility function’) which they attach to the inherent properties of different tenures, and the specific combinations and costs of property-and-tenure which are available. Therefore, modelling includes observations of many households with their tenure outcome as the dependent variable, and independent variables such as household financial and demographic data, local housing costs, and some account of the broader economic and fiscal environment as it affects the value of different tenures. This is equally true whether it is a straightforward choice between owning and renting that is being modelled, or whether the model includes other tenures. The inclusion of household financial data acknowledges that tenure choice is to some degree constrained. The ‘choice’ of some or many may in fact be of the only tenure which they could afford. A household’s current income is the simplest and most obvious measure of the means available to it to purchase housing. It is not, however, the only measure that is useful for explaining behaviour in a housing market. First, in order to purchase, a deposit is often required in addition to the income to meet the mortgage

Modelling the take-up of low-cost home ownership

83

payments. A household’s accumulated wealth or at least its access to such wealth by borrowing or gift from family can be a prerequisite for one choice within a model. Haurin et al. (1997) find borrowing constraints to be highly influential on the tenure choices of young adults. Household wealth will thus be a desirable factor to include for modelling LCHO products designed to overcome a deposit constraint on entry to owner-occupation. Second, not only the present income but its reliability and a household’s expectations of future income have been found to influence choices for some tenures. For example, Goodman finds that modelled permanent income, predicted from human capital – such as the individual’s educational qualifications – is more effective than current income in predicting tenure choice (Goodman, 1988, p. 328). This makes sense if one considers the implications of a reduction in income in different tenures. Renting typically offers more mobility and so greater facility to reduce spending on housing in the face of a fall in income by moving to a cheaper property. In the UK, tenants also have rather greater scope than owners to claim personal housing subsidies from the state under some circumstances. This signals the fact that households make simultaneous decisions on which tenure to live in and how much to spend on housing – together often termed ‘housing consumption’ or purchase of housing services. Some of the value produced by housing as an asset is consumed immediately by the occupier as shelter. Different tenure-choice models use different approaches to assessing the value of the housing services purchased. One estimate of the value of housing services that a dwelling provides is its last sale price, adjusted for subsequent house price growth. However, a housing asset can also appreciate, so for owner-occupiers, the decision to buy also includes some valuation of the expected growth of the capital value of the dwelling, which will be realised as profit when the dwelling is sold. Tenure-choice and housing expenditure models seek to include this by, for example, taking recent house price changes as an estimate of a buyer’s expectations of future growth. This anticipated capital gain over time is offset against the cost of owner-occupation. The tax system also shapes the expectation of capital gains. In the UK, for example, the tax regime highly favours owner-occupation by wholly exempting profits from sales of owner-occupied dwellings from capital gains tax. The total cost of owner-occupation therefore has to take account of mortgage payments, insurances and interest that are foregone by using the deposit to buy the property rather than putting the same money into a savings account. Thus, for modelling, the estimation of the values and costs of different tenures becomes a rather more elaborate exercise than might be expected, and more abstract and mechanistic than the real way most individual choices are made. Nonetheless, having some estimate of the real costs and values of a specific LCHO product is important for explaining why a household has or has not chosen that tenure.

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Making housing more affordable: the role of intermediate tenures

The concept that different households have varying attitudes to tenures is the other crucial foundation of housing decisions aside from financial constraints. For example, for those who have sufficient income to choose between owning and renting, a preference to enjoy all the value of housing expenditure in the present influences them towards renting. Others are prepared to pay more in the present for the same amount of housing services by being owneroccupiers – or LCHO purchasers – in the expectation of future profit. So, they are inclined to pay more at the outset in costs for a given property than they would in rent, in the hope that the asset they are buying will appreciate. Subjective preferences are assumed to operate with regard to other characteristics of tenures, such as mobility and security of occupation, in a similar way as the choice between immediate consumption and future investment. These preferences cannot of course be directly observed, although some housing surveys include attitudinal questions about housing tenure. To a degree, it is taken that that preferences for, say, the investment and property rights particular to owning are randomly distributed by the idiosyncrasies of personality. However, an important assumption of tenure-choice models is that there is correlation between such preferences and demographic characteristics of the household. So, for example, a household with school-age children might be thought likely to particularly value the security of occupation offered by owner-occupation. Conversely young single adults, aside from their often limited means, might be less likely to value security over mobility, and more concerned to maximise the value of immediate housing services consumed at the expense of investment. Socio-economic variables are related to tenure choice alongside the more obvious financial data. These include household composition, such as presence of children, as well the age of household members. Ethnic categories are included because there are thought to be ‘cultural’ preferences for different tenures, which are somewhat durable and transmitted between generations. Alternatively, it may be thought that racial prejudice operating in markets for housing or for housing-related financial services influences tenure and housing consumption decisions. In the USA, for example, Painter et al. (2001) find very considerable differences in ownership rates between ethnic categories in 1981 and 1991, even after accounting for differences in income, educational qualifications and migration status. One final consideration in the construction of models of tenure choice is the aspect of time. The idea of ‘choice’ implies the possibility of a change of state from one tenure at one point in time to another tenure at a subsequent point. Despite that, models of choice are frequently based on crosssectional data, containing many households that are observed at a single moment. In this sense, they might better be described as tenure outcome models. They estimate the importance of financial, housing market and socio-demographic factors that are observed in the present that may have

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led to the observed tenure. Several authors draw attention specifically to changes in tenure state. Andrew and Meen (2006), for instance, emphasise looking at tenure choice and household formation together. Similarly, Kan (2000), following work by Boehm et al. (1991), treats tenure choice simultaneously with decisions about mobility. Kan’s model also addresses the possibility that past tenure state may influence one’s attitude towards a tenure by experience. Mobility may therefore be important to model for LCHO where a product is aimed at newly forming households, or where it is expected to be an alternative for those current tenants. In summary, there are several features that are general to tenure-choice models, and which are relevant as the approach is extended to LCHO. There is an assumption that individuals or households act rationally to maximise their utility within constraints. Households are constrained by their means – income and wealth – in relation to prevailing housing costs, and possibly other limitations such as access to credit. The accurate calculation of household income and housing costs is considerably complicated by the need to account for the role of tax incentives and expectations of the future. Preferences are taken into account by including demographic variables such as age, sex, household status and ethnicity. Lastly, some models recognise that decisions about housing tenure are simultaneous with and linked to other housing decisions, such as overall housing expenditure (consumption), household formation and mobility.

Econometric methods In tenure-choice models, including models of LCHO, the dependent variable is tenure. Housing tenure is, unlike income, not measured by a scale, but instead has a discrete set of states, such as owner, renter or LCHO purchaser. One is either one or other, not more or less of one. Therefore, what is modelled is the changing probability of the dependent variable (tenure) taking one or other state as the independent variables (e.g. income, presence of children) change. Log-linear, logistic and probit models extend the principles of generalised linear models (regression) to deal, respectively, with dichotomous and categorical variables like tenure. The independent variables can be continuous (e.g. income) or categorical (e.g. ethnicity). Using maximum likelihood estimation in place of the ordinary least squares (OLS) method as used in linear models, a coefficient is calculated for each independent variable. The coefficient represents the change in the probability of dependent variable – tenure, in this case – taking one of two values – owner-occupier, for example. The actual coefficients represent a movement along a probability distribution which underpins the model, the normal distribution in the case of probit and the binomial distribution in the case of logistic models. This means that the interpretation of the values of the coefficients is unfortunately

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Making housing more affordable: the role of intermediate tenures

not as straightforward as saying ‘being a single person increases the likelihood of being a tenant by 30 per cent’. However, the coefficients do provide some sense of the relative importance and significance of the predicting variables included in the model. Results from models also include indicators of how effective it is at explaining the total variation observed in the dependent variable. One way of doing this is to apply the model’s coefficients to each case in the dataset to see what tenure it predicts and then comparing these expected values with the observed values using a measure such as chisquare. There are also other (pseudo-R2) measures of the model’s explanatory power, as well as indicators of how efficient it is in achieving good explanatory power with parsimonious use of predictor variables. Numerous elaborations of this approach are found in the tenure-choice literature, including the examples cited above. Basic logistic and probit models work for a dichotomous dependent variable, which always takes one of two values. Multinomial models extend these approaches to deal with categorical dependent variables which can take more than two different values. Clearly, this is necessary where tenure-choice models are dealing with housing systems like the UK with at least three significant tenures. Modelling changes of state between multiple observations of the same case over time also necessitate the use of more advanced econometric techniques such as fixed-effects models. This is beyond the scope of this chapter, but is discussed in detail in several of the referenced academic articles.

Modelling LCHO in England Much of the substantive tenure-choice modelling literature is American, where only two tenures are taken into account. More recently, research has been published addressing tenure outcomes in a wider range of countries, including Australia, China and Sweden (see, for example, Bourassa, 1995; Huang and Clark, 2002; Chen and Eustrom, 2003). Wood et al. (2006) look at grants to promote home ownership in Australia. However, all these works are concerned with constraints on accessing owner-occupation rather than measuring potential demand for distinctive minority tenures such as LCHO. A number of different types of LCHO have entered the UK’s three-tenure system in recent years; these are described in detail in other chapters of this book and elsewhere. In Monk et al. (2006), two reasonably well-established, state-supported LCHO schemes were modelled – HomeBuy and shared ownership. Under shared ownership, the purchaser and occupier buy only a share of the total equity in a property, using a mortgage. The remainder is held by a third party, to whom the occupier may pay a rent on the unowned equity. Upon sale, the proceeds or profits are divided according to the equity share. Under HomeBuy, the purchaser and occupier buy all the equity but

Modelling the take-up of low-cost home ownership

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receive an interest-free loan on a portion while using a normal mortgage for the rest. The equity loan is repaid at a price proportionate to the original equity share when the dwelling is sold. The supply of both these LCHO products is constrained; the greatest disparity between supply and demand is found in schemes allowing the purchase of a share in any existing openmarket dwelling, and next in those involving a share in a newly built home. This supply constraint varies between localities. Regions with high housing costs and a large gap between the cost of renting and that of owneroccupation have the greatest demand for LCHO (Bramley and Morgan, 1998). Supply of this subsidised housing has been shaped by this perceived demand which is strongest in London, the South East and the South West of England. The fact that supply is limited is a difficulty returned to below.

Data sources and model design Another challenge for modelling LCHO in England is the availability of suitably detailed household and property data. As discussed in the previous section, the first choice is to use a dataset which incorporates repeated observations of the same households or individuals over time – a panel study. The British Household Panel Study (BHPS) has been used for tenure modelling with major tenures (e.g. Andrew and Meen, 2006). However, for the relatively rare and novel LCHO tenures, the total number of individuals in that tenure within BHPS’s sample is too small to be used for modelling. The approach in Monk et al. (2007) was to use cross-sectional data that indicate whether a household has moved in the past year, and so has possibly changed tenure, potentially into LCHO. The Survey of English Housing (SEH) is a cross-sectional annual sample survey which includes detailed questions about property, tenure, household and housing finance. Even with pooling six years, 2000–06, of responses from SEH, the number of cases of households which have moved into LCHO in the year preceding the survey interview was very small. Therefore, administrative data from COntinuous REcording (CORE), which should in theory be a census of all LCHO sales in the years 2000–06, were combined with the SEH data. The SEH cases, each weighted to actual population numbers, provide a reference population of all recent movers in the years; the CORE data, each representing a single household, provide the cases that recently moved into LCHO. The model looked only at the binary outcome of LCHO or any other tenure; it did not consider any simultaneous decisions about mobility or amount of housing consumption. Administrative data typically cover characteristics of the household, its finances, and the property bought, but less comprehensively than a specialised survey like SEH. As described earlier, what are needed are data on the income and wealth of the household, local housing costs in different tenures, the amount of housing consumed and socio-demographic features

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of the household which might be correlated with an underlying preference for the inherent features of LCHO as a tenure. All of these requirements were met at least in part. The lower quartile of house prices paid in the local district was used for the cost of owning. Similarly, estimates of prevailing private and social-sector rents were taken from district averages, although there are some reservations about the quality of private rent data at localauthority level. The user cost of the LCHO schemes was estimated from local average house prices, applying global assumptions about the size of the equity stake purchased and the interest or rate of return paid by the purchaser on the unbought part of the equity. Whether the property was a flat or house and how many bedrooms it had were included. Importantly, however, for each household the actual amount being spent on housing was not available. This prevented joint estimation of a model of total housing consumption in each tenure, though the literature suggests that this is potentially an important part of understanding tenure decisions. For these first models, only current total household income was used; there was no basis on which to estimate a permanent income, nor any data on wealth. An economic activity variable distinguished households with an employed person, no employed people and only retired adults. Household demographics included as predictors in the model were the age group and ethnicity of household reference person, and a household composition variable distinguishing single people, couples, lone parents and multi-adult households. Given the potential importance of the presence and age of children in tenure choice, it is unfortunate that data on these could not be included. The household’s tenure prior to moving was included in the model distinguishing the three main tenures of owner-occupation, private renting and social renting, plus ‘living with family or friends’ to identify newly forming households. Finally, dummy variables were added for the broad geographic region of England, separating London, the South and East – which are generally high-pressure, expensive areas - from the Midlands and the North, with more mixed and lower-pressure areas. Given the absence of detailed information on the volume of LCHO actually built in local districts, the regional dummies were intended to capture differences in the supply of the intermediate tenures.

Model results Probit models were estimated separately for each LCHO scheme. Table 5.1 summarises the results from the shared ownership model, although the effects of the independent variables in the two models of interest – shared ownership and HomeBuy – were broadly similar. For continuous variables like housing costs and incomes, a positive value for the coefficient indicates that the probability of taking up LCHO increases as that variable increases. For categorical variables like household type, a positive coefficient

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Table 5.1 Model results. Independent variable

Coefficient

Lower quartile local house prices Local shared ownership user cost, estimated (£/week) Local housing association net rents (£/week) Local private rents (£/week) Weekly income

0.003 –0.001 0.004 0.002 0

Region London and South North of England Midlands East of England

0 –0.394 –0.027 –0.431

Age group of household reference person 16–19 20–24 25–29 30–34 35–39 40–59 60+

–0.065 0.466 0.559 0.597 0.579 0.51 0

Ethnicity of household reference person White ethnicity Mixed ethnicity Black ethnicity

0.279 0.616 0

Household type Single Couple Lone parent Multi-adult household

0.414 0.148 0.054 0

Household previous tenure Owner Private tenant Social tenant Temporary accommodation

–0.424 –0.267 –0.380 0

Property characteristics House Flat 1 bedroom 2 bedrooms 3+ bedrooms

0 –0.182 –0.204 –0.182 0

for one value (e.g. ‘couple’) indicates the LCHO is likelier for that category than another reference category, which has the coefficient zero. Full reporting of the parameter estimates and diagnostics for both models is provided in Monk et al. (2006).

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The direction of the effects of the predictor variables are intuitively plausible, and in line with what qualitative and descriptive studies of these LCHO schemes in England have found (Clarke et al., 2007). LCHO purchase becomes more likely as alternative rented and owned tenures become more expensive locally. LCHO take-up is most probable for people in the age groups normally associated with first entry to owner-occupation, 25–40. As might be expected, LCHO is almost completely irrelevant to those who are already in open-market owner-occupation. It is interesting to note, though, the negative coefficient for previous private tenants moving into LCHO. This means that choosing LCHO is more common among newly forming and temporarily housed households than with existing households in private rented accommodation. The reason for household current income having no effect on the probability of choosing LCHO is that the relationship between income and LCHO take-up is non-linear. Univariate analysis of LCHO take-up by income showed a curved relationship, with LCHO probability greatest for middle-income households and falling away to near-zero for low- and high-income households. Higher-income households are able to afford full owner-occupation, and low-income households are restricted to renting, possibly in the public sector, or in the private sector with the aid of personal subsidies. This cannot be reflected in a binary LCHO/other tenure model, but could potentially be captured in a multinomial model where probabilities for several different tenures, including LCHO, are estimated separately. Lastly, the regional dummy variables show greatest take-up in London and the South, and least in the North. This accords with where one would expect the supply of LCHO to be concentrated, in more pressured areas. Although the signs of the estimates for the variables are plausible, the overall power of the LCHO models in explaining LCHO take-up is weak. A simple and natural way of looking at a logit or probit model’s usefulness is to see how much better it is at correctly guessing the outcome for each case compared to randomly assigning that case to one or other outcome. However, in the period for which the modelling was done, LCHO remained very much a minority outcome in comparison to renting or owner-occupation. This means that even the households with the characteristics most inclined to LCHO, in the housing markets and regions most favourable to intermediate housing, were still more likely to end up in another tenure. As a result, neither model was better at assigning cases to outcomes than a null model with no independent variables. An alternative way of looking at the power of probit models is pseudo-R2 values of how much of the variance in the outcome is explained by the independent variables in the model. The values for the shared ownership and HomeBuy models were around 0.2, which is low for models of this sort; one might expect a reasonably good explanatory model of behaviour

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or outcomes to have values of 0.5 upwards. This means that whether or not a household ends up in LCHO is determined by factors other than those observed and included in the model, or at random.

Commentary and critique The results of these empirical models of LCHO schemes in England are disappointing, but it is valuable nonetheless to reflect on why they might be so. Several features would seem to play a part: the weakness of the currently available data sources, the overwhelming importance of eligibility criteria and supply constraints in determining whether LCHO was chosen, and the fact that LCHO has not operated as anything near the perfect market that the modelling approach assumes. Each of these explanations has different implications for future endeavours to model LCHO.

Data limitations First, then, the data sources available on LCHO are much weaker than those available for more general tenure-choice modelling, and are far from optimal for the purpose. Even ignoring the differences between specific LCHO schemes, the intermediate sector in England remains a very small proportion of the whole housing market. The most thorough and welldesigned recording of household circumstances and property characteristics is found in major sample surveys, usually commissioned by the state. The rarity of LCHO means that only small numbers of LCHO buyers will be interviewed by these surveys, even within large total samples. If one is then further restricted to only looking at recent movers in order to model tenure choice, and if inter-regional variation needs to be tested for, even pooling cases over several waves of cross-sectional surveys will not provide enough LCHO cases for robust parameter estimates. The negative consequences of having to fall back on administrative data are felt most keenly in relation to the household means and housing consumption aspects of the modelling exercise. As observed above, several authors find that permanent income estimated from human capital measures is a better predictor of tenure choice than current income, and one would wish to know whether this is borne out for LCHO. Similarly, it would be highly desirable to have the data to investigate the effect of wealth and credit constraints on LCHO. The most serious data deficiency is perhaps the absence of comparable information on the actual housing consumption of each household. Without knowing the actual expenditure each household has committed to in rents or mortgage payments, it was not possible to see when and where LCHO comes to appear the most desirable or rational choice over renting or full

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owner-occupation for any household. It follows from this that per-case details of the LCHO agreement are needed, instead of applying global assumptions to local average prices. At the least, the size and value of the equity stake and the nature of any payments on the unbought equity are required; ideally some estimate of additional costs relative to renting, such as repairs and insurance, would be incorporated. In the absence of these data, a model cannot answer key questions about LCHO such as the degree to which households use LCHO to increase their total immediate housing consumption – acquiring a larger dwelling, say, or one in a better location than they could afford in the open market – at the expense of foregoing some of the investment value of the property. Lastly, this first effort at modelling LCHO has suggested that it may be of interest to potential households currently living with family and friends. If, in the future, LCHO is of sufficient size to be picked up in longitudinal studies, this panel data could be used to investigate the role of LCHO in the formation of new households and in behaviour that precedes that, such as increased saving.

Supply constraints Second, there is the problem of supply constraints. It has already been noted that the supply of LCHO has varied considerably between areas, following, to some unquantified degree, demand arising most strongly in high-cost housing markets. In the period modelled, prior to the housing market downturn of 2007 onwards, demand for LCHO very considerably outstripped supply. For a slightly earlier period, it is estimated that demand exceeded supply by a ratio of 3:1 (Dunmore et al., 1997, cited in Bramley and Morgan, 1998). The implication of this is that the availability of an LCHO property to buy may be more important in explaining a household’s choice to take up LCHO than its financial means or underlying preference for the tenure’s inherent characteristics and property rights. The effects of the powerful supply constraints are of course endogenous to the model, and are probably captured, albeit crudely, in some of the explanatory variables. The estimates for the regional variables, showing greatest probability of LCHO in London, followed by the South and East, must reflect supply. However, these regions are very much larger than the scope of an average housing search, and consolidate many housing market areas with varied dynamics of overall housing demand and supply. It would be desirable for the model to use housing market or travel-to-work areas that better reflect the spatial scope of households’ decisions, and thence to explicitly include real measures of the local availability of LCHO housing. Of course, one would expect LCHO supply to be positively correlated with local house prices and rents, and the estimates for these parameters support

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this in the models presented above. However, the supply of LCHO is also determined by the political control of local planning and affordable policies which may support or discourage development of LCHO, and thus determine availability and take-up. In a similar way, some local LCHO policies have been directed to particular recipients, and have operated eligibility criteria. These direct LCHO housing to people in particular occupations, such as public-sector workers in health, education or social care, or to households falling within a prescribed income range. Where and how these eligibility criteria have been applied is not known for the data modelled. This has a confounding effect on the estimates for the socio-demographic parameters: one cannot know how much the increased probability of LCHO associated with a particular household characteristic or income is a result of the household’s maximisation of its utility, or of explicit restrictions placed upon the LCHO product.

Information and market failure The third explanation for the shortcomings of this first attempt at modelling LCHO take-up follows from the comments about supply constraints and eligibility, but raises more profound questions about the suitability of econometric tenure-choice modelling for analysis of LCHO as it stands in England. Such a model assumes that each household, fully apprised of the relative merits of each tenure, chooses the one which maximises their utility within the limits of their means. This implies that whatever distributions one observes in aggregate are simply the natural outcome of many individual choices. The market in LCHO is taken to work in the same way as a largely open market in private rental and owner-occupation. However, the role of supply constraints and eligibility criteria in determining who has taken up LCHO indicate that the LCHO market in the period modelled was not an open market in the way that undertaking the modelling exercise implies. The political decisions of the national and local state to allocate subsidies, encourage certain forms of development and favour social categories to benefit from LCHO mean that distributions should not be analysed naturalistically, as the result of many private decisions. Going further, the market implicit in the model also assumes that each consumer not only has each choice available to them, but knows they have that choice and understands the value it will provide to them. Set against this for LCHO is the fact that any well-designed scheme should be attractive to a majority of those who can afford the payments. A purchase supported by an interest-free or subsidised loan from the state is, ceteris paribus, a more rational choice than buying full, open-market owneroccupation with a commercial mortgage. With the benefit of the subsidy provided by the state, any household should be able to consume more

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housing services (acquire a more attractive property) or accumulate more investment for the same outlay, compared to what could be secured without assistance. It is necessary to consider explanations why this is not observed empirically – why a very large proportion become owner-occupiers rather than choosing LCHO – one must go beyond the model. One possibility is that when the benefits of a specific LCHO schemes are summed, they are less favourable than alternate tenures. If the subsidy is too small or inefficiently deployed, or if the property rights of an LCHO tenure are unattractive, the balance of losing the mobility of the rented sector whilst taking on the costs of repairs and the market risk of owning the asset would make it a globally unattractive tenure. If the LCHO scheme is rationally attractive, restrictions on supply and eligibility may be the constraints on choice. Alternatively, some or many households may not know of or properly understand LCHO, and so they cannot carry out the process that econometric modelling implies of weighing up alternatives. Households do not choose LCHO as they are ignorant of it. Of course, such ignorance and knowledge may well be correlated with socio-economic characteristics of the household; the correlations arise not only from the household’s social milieu, but also from political decisions about where and how to market LCHO products. It does mean that any observed correlations between socio-economic characteristics and LCHO take-up must be interpreted with care, and not simply as proxies for an underlying individual preference for one tenure or the other.

Analytic strategies for LCHO policies The shortcomings of the data sources that contributed to the relative weakness of the LCHO models described are certainly not insurmountable. Even so, the importance of supply, eligibility and imperfect information in shaping the observed patterns of LCHO are serious challenges for the extension of tenure-choice modelling to state-subsidised intermediate housing. None of this scepticism is much help, of course, to those who have responsibility for planning housing policy, and who are important potential users of LCHO models. The government department which commissioned the models described here wished not only to understand the past, but then to project the understandings into the future to provide some estimate of the scale of demand for LCHO in England in future years. Each of the econometric models was adapted into a simulation tool built in Excel. The spreadsheets applied the model parameter estimates to household projections, and allowed policy users to take varying views on future house prices, interest rates, incomes and so forth to see how much take-up of the LCHO product

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would be estimated up to 25 years in the future. The econometric models had found LCHO probability increased with house prices and rents, and the spreadsheet simulations incorporated projected increases in the total number of households in England. As a consequence, most views of the future incorporating nominal house price increases estimated steady or rapid increases in potential take-up for LCHO. Such simulations, however sophisticated, are limited by the efficacy of the empirical models that underpin them. Since the empirical models were not wholly successful, and since there are some objections in principle to applying microeconomic approaches to LCHO as it is operates at present, it is worth considering what alternative tools are available to policy planners. A major criticism of the econometric analysis was that it implies a value-free, natural market, when in fact political decisions about supply and eligibility are central to where and how LCHO is supplied, and by whom it is bought. A prerequisite of LCHO policy planning tools should therefore be that they start from a statement about the specific social results that are being sought by implementing the policy. From this should stem a statement of the appropriate beneficiaries of the policy. Housing is a private good. Its immediate value as shelter is enjoyed by those who dwell in it, and any investment value accrues to whomever has rights of disposal, either the owner-occupier or the landlord. The traditional rationale for housing policy, state intervention in the supply of this private good, is a normative expectation that every person should have some minimum standard of housing. Should this fail to be secured through the market, the state should intervene either by directly supplying housing or by providing personal subsidies. LCHO policies depart from this rationale in directing benefits to households which are not in priority housing need as it is normally understood. It is therefore important to be explicit about the specific rationales of the policy. By making explicit the ultimate end of a policy, standard tools for policy planning can be used to investigate whether that end is achieved, and if so, whether the policy is more efficient than alternatives. The limited success of the first attempts at modelling LCHO in England suggests that LCHO is at present better understood as a statesubsidised benefit than an open-market choice. The standard tools for planning such interventions should therefore be the starting point for policy planning and evaluation at present. Modelling LCHO in the same way as the literature has treated owner-occupation and private renting implies assumptions about the nature of the market for LCHO which do not hold true. Patterns of LCHO consumption cannot be seen as wholly the outcome of many utility-maximising decisions; political decisions to support supply in certain places and to restrict eligibility to certain groups are crucial.

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This is not to say that tenure-choice modelling can never be worthwhile or interesting. If the tenure continues to increase in size, and as better data sources become available, modelling might soon be able to provide insights into the characteristics which distinguish LCHO purchasers from other households. Of particular interest will be findings comparable to those that have come from general tenure-choice models on simultaneous decisions about tenure, total housing consumption and mobility. It may be that LCHO as a distinctive tenure comes to play a distinctive role in these decisions. In the longer term, LCHO may develop to be a widespread, normal and well-understood part of the housing system, perhaps even with a secondhand market emerging. At this point, tenure-choice modelling may also be useful for projecting total future demand – but until then, it must be treated with some caution.

Section C Securing intermediate housing

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Introduction to Section C: Land for housing

Until the 1990s in England, most of the intermediate housing initiatives included assuring an increase in the total provision of usable housing as well as in the numbers of affordable dwellings. Thus shared ownership, the core policy instrument from 1980, was predicated on adding to the stock of housing. Viability was often based on using publicly owned land as had been the case for the large-scale post-war developments. Purchasers bought long leaseholds so that the dwelling would ultimately return to the public landlord, though probably not for a century or more. Build for sale operated on the same basis. Improvement for sale, homesteading and other instruments involving the existing stock were aimed at bringing housing up to standard and back into the useable stock (see Appendix 1). Only a few policies such as mortgage guarantees were finance based. Without the use of implicitly subsidised public land, it was extremely difficult to make intermediate housing stack up. If housing associations had to buy land on the open market, as they did in the 1980s, the output could not be affordable to those on modest incomes without significant direct subsidy, or charitable donation of land. It was in this context that some local authorities began to expand their use of planning obligations to include contractual mechanisms to increase developer contributions. The national policy, based on experience from these local initiatives, was included in the 1990 Town and Country Planning Act which made affordable housing a material consideration for planning purposes. Later planning guidance spelled out what was permissible under what conditions. This legislative change brought together for the first time the provision of privately owned land with a financial contribution to support affordable

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housing. This in turn came implicitly or explicitly from the reduction in land values that followed from the increasing planning obligations. And so began the policy – under Section 106 of the Act – which has helped expand the numbers of affordable dwelling built on privately owned land and in mixed communities. The next two chapters look at the provenance and implementation of this approach to ensuring both land and funding for affordable housing. Crook and Whitehead in Chapter 6 set out the way that the policy evolved both before and after 1990 and then examine the outcomes in terms of affordable housing in general (i.e. including social rented housing) and of intermediate housing in particular. They suggest that in its own terms it has been an extremely successful policy, but there are wider- and longer-term issues of viability and sustainability that have still to be addressed. In Chapter 7, Morrison looks at a case study of how the policy is actually implemented and the political and other pressures which mould the agreements on a particular site. The case study relates to health service provision in Cambridge, a very particular instance. However, the example is one which raises much broader issues which resonate across the country – and indeed in other countries attempting to use the planning system in this way, e.g. in Australia and New Zealand.

6 Intermediate housing and the planning system Tony Crook and Christine Whitehead

Introduction One of the most important factors in the growth of intermediate tenures has been the use of the planning system to provide both land and finance for new-build intermediate housing. Yet, traditionally, the land-use planning system held no truck with tenure – planning permission was given to develop land for housing of particular types and densities. Owners and developers then decided the tenure. In practice, the vast majority of local authority housing was built on publicly owned or acquired land (sometimes through compulsory purchase), and the funding came from central government subsidy and rents. Equally the land-use planning system had no truck with acting as a tax collector. Local authorities giving planning permission could not impose nor negotiate charges on the developer except to the extent that the development involved site-specific costs. The taxation of the uplift in land values arising from the granting of planning permission was normally a matter for central government. The story of how it became possible to use the planning system to support the provision of affordable housing is an interesting – and intricate – one. It depended upon the interplay of many different actors and their different requirements: the growing role of housing associations in providing affordable housing; the needs of local authorities to fund infrastructure and local services; the increasing financial difficulties for central government

Making Housing More Affordable: The Role of Intermediate Tenures, edited by Sarah Monk and Christine Whitehead © 2010 Blackwell Publishing Ltd.

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in providing adequate subsidy; and, most notably, the rapid increase in the price of land with residential planning permission. It was this pool of untapped value which enabled the juxtaposition of land allocation and finance for affordable housing through the introduction of planning obligations in the form of Section 106 agreements. Thereafter, a further stage in the story is how and why intermediate housing came to be such an important part of the story as a result of both policy and market imperatives. This chapter looks at how the story developed from the first principles of the land-use planning system, through the development of an effective instrument for the development of affordable housing of all types, to the current post-credit crunch crisis. We start by identifying the key landmarks in the development of the legal and regulatory framework by which spatial planning became a core element in providing affordable housing, and we examine the interface between planning and policy before turning to an assessment of the scale and nature of the affordable housing outputs achieved. In particular, we clarify the centrality of planning to the capacity to expand the intermediate sector. Finally, we look at how policy is changing, the mechanisms now being brought forward, and their likely impact in the new, far more uncomfortable, economic environment.

The policy and legal framework The whole process depends crucially on the distinctive characteristics of the UK spatial planning system which give central government, and local government as their agents, the right to permit or reject development. This process brings land forward for residential development, but it also ensures an uplift in land prices as a result of permission. So the second major strand has been how to develop an instrument that enables the government and local communities to benefit from that uplift in the form of affordable housing. The story consists of many stages: 1. It starts in 1947 when development rights were ‘nationalised’. As a result, all development requires planning permission from the relevant local planning authority (LPA) to be granted in accordance with its development plan and any other material considerations. 2. Initially the associated development values were taxed directly when permission was given. However, over the years, this tax was eroded so that from the 1980s onwards most of the financial benefits of permission have been kept by the developer and/or landowner. 3. However, planning legislation (currently Section 106 of the relevant section of the Town & Country Planning Act, 1990 – hence the colloquialism

Intermediate housing and the planning system

4.

5.

6.

7.

8.

9.

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‘S106 policy’) permits LPAs to enter into binding private contracts with applicants for planning permission, obliging developers to fund (in kind or in cash) some ‘off-site’ costs that are essential to the development (such as a link road to connect a development site with the wider road network). The next stage in the story is the growing use of these planning obligations in the 1980s to get developers to contribute to wider community needs (such as an additional classroom at a local school that is required because the development ‘generates’ more school-age children in the area); the impetus for this growing use of planning obligations lay in the restrictions placed by central government on the public-sector (especially local authority) capital spending from the 1980s onwards (Healey et al., 1993; Campbell et al., 2001). In using agreements to secure this infrastructure and community need, government policy obliges LPAs to ensure that obligations are relevant to planning, are necessary to make proposed developments acceptable in planning terms, are directly related to the site and the development proposed, are fair and related to the proposals, and are reasonable in all other aspects (ODPM, 2005a). The growth in the use of agreements to secure community needs later evolved to include affordable housing when LPAs in housing shortage areas, including rural areas, started to experimentally use S106 agreements to negotiate contributions of affordable housing from private developers. These local initiatives in the use of legislation were endorsed by central government, first in 1989, to allow rural LPAs to exceptionally grant planning permission for low-cost homes on sites which would not otherwise receive consent for development, and then in 1991 policies to secure affordable housing on all larger housing developments throughout England were endorsed and have been included in all central government Planning Policy Guidance on housing issued since then (DETR, 2000b; DCLG, 2006c). LPAs can now therefore require developers to provide social rented and/ or intermediate housing as part of larger residential developments – as long as the need for new affordable homes is identified in development plans and the development remains viable. They can also negotiate a contribution to costs either in cash or more generally through the provision of land and housing at discounts. In 1998, the policy significantly was amended to reduce site thresholds above which contributions can normally be sought, and to link it more closely with the Government’s policies on social inclusion, mixed communities and urban renaissance through on-site provision of affordable housing (DETR, 1998). In the 2000 version of national planning policy guidance for housing, the Government clarified that developers’ unwillingness to make contributions to affordable housing would be an appropriate reason, of itself, to refuse planning permission (DETR, 2000b).

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These new powers and associated negotiating practices took a long while to become embedded in the planning and development process. However by the new century the approach had become fundamental to the provision of new affordable housing. As a result, the system has moved from one where tenure and finance were both irrelevant to planning decisions to one where it supports the provision of affordable housing through a process of private contracts between LPAs and developers framed by a set of legal requirements and set within a framework of spatial planning policy and practice. The affordable housing element of the S106 policy was designed both to secure land for affordable housing and as a means of providing funding, with financial (or equivalent in kind) contributions made by landowners and developers. The principle involves a private developer both providing market housing and working in partnership with an affordable housing provider (AHP), such as a housing association, to provide affordable housing usually on the same site. The potential to ‘tax’ in this way comes from the uplift in land values arising from planning permission. At the limit before permission, the price of land is its agricultural value, while the price after planning permission is the residual value from the agreed residential or mixed use development (Figure 6.1; Crook and Whitehead, 2002). The difference in price forms the starting point for estimating potential developer contributions (Three Dragons, 2008/09). In practice, there will be other costs to take into account, including obligations to contribute to other physical and social infrastructure; there may be alternative uses with higher values than agriculture; and the contribution outcome arises from negotiation. So the available contribution is likely to be much less than this. However, the scale of price increase from granting planning permission has usually been very large, so there has been very considerable potential.

SResidential P

PResidential

Potential contribution

PAgricultural

PA DHousing Q

Figure 6.1 The impact of planning constraints on land prices.

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Where necessary to ensure development of the agreed mix of market and affordable housing, direct government subsidy for RSLs in the form of Social Housing Grant (SHG) is allocated through the Homes and Communities Agency (HCA, formerly the Housing Corporation), both to S106 sites and to 100 per cent affordable housing sites. In some cases, no public subsidy at all will be required, but this depends upon the method of provision and the types of housing secured, as well as what is specified in LPA policy and the negotiating strength of the LPAs and developers. The most recent policy clarifications have addressed several key issues that are particularly relevant to intermediate housing (DCLG, 2006a, b). First, LPAs are permitted to set separate targets for social rented and intermediate housing, and intermediate housing is defined as intermediate rented housing, equity sharing and shared ownership. The Government has been keen to encourage LPAs to set these separate targets as a way of addressing the needs of key workers and those wanting a first step on the housing ladder. Second, low-cost market housing must be sold at a discount on market price, not simply be low cost per se. Third, LPAs must clearly assess the viability of sites when taking account of the availability of the developer contributions and public subsidy that can be secured. Fourth, off-site provision, perhaps funded by ‘commuted payments’ (i.e. financial contributions), may be acceptable where it contributes to the creation of more mixed communities. Finally, whilst the threshold for negotiating contributions is still 15 dwellings outside inner London, lower local targets may be appropriate.

The scale of planning contributions to affordable housing Significant amounts of planning gain have been secured through S106. Recent evidence shows that almost £2 billion worth of obligations were negotiated in planning agreements in England in 2003–04, rising to £4 billion in 2005–06 and £5 billion in 2007–08 (Crook et al., 2006, 2008, 2010). Approximately half of this involved affordable housing contributions. The evidence also shows that the number of agreements has increased considerably in recent years. Looking at housing permissions and contributions, 51 per cent of large sites (this means more than 10 dwellings) had S106 agreements in 2007–08 (an increase from 40 per cent in 2003–04). Moreover, within these larger sites, nearly all with 16 dwellings or more now have S106 agreements.1 Two-thirds or more of large sites in the southern regions of London, the South East and South West had agreements in 2007–08, although less than a third had them in the three northern regions of the North East, North West, and Yorkshire and the Humber where opportunities are fewer.

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There are also major variations in the use of planning obligations between LPAs. These variations can be found within each region, between LPAs of the same size, and even within LPAs between development schemes with similar characteristics (Crook et al., 2006, 2008, 2010). These differences reflect variations in the strength of demand and the land market (and hence in development values and the funds available to finance contributions), and in the patterns of landownership. But they also relate to variations in planning policy between LPAs, their supporting supplementary policy guidance, and the skills and experience of their staff in handling negotiations with developers (Crook et al., 2002). Statistical modelling of the numbers and valuation of planning agreements against a wide range of policy, land market and socio-economic variables found a changing relationship over time. In 2003–04, whilst population growth, house-price changes and the speed with which planning applications were processed were positively related to the numbers and value of agreements, the relationship was slight (Crook et al., 2006). In 2005–06, the significant variations between LPAs found in 2003–04 still persisted. Variables related to local practice were still important in explaining variations, but matters related to market variations (development pressure and land values) were more significant (Crook et al., 2008). By 2007–08, large variations between local authorities were still present, but these were now much more related to differences in development pressure and in land values than in previous years (Crook et al., 2010). These findings suggest that the ability of LPAs to ‘extract’ contributions from developers, including for affordable homes, is now more an outcome of market factors than in the past when differences in policy and practice were key. A series of studies on good practice (e.g. Audit Commission, 2006; DCLG, 2006c) also show that the greater formalisation of policy and its more widespread adoption have increased LPAs’ abilities to negotiate contributions where development pressure and market values enable them to do so.

The numbers of affordable homes secured through planning gain Over the last few years, the numbers of affordable dwellings provided have varied considerably; the absolute levels and proportions of those that involve S106 agreements have however grown rapidly and the proportion of these affordable homes that are provided in the form of intermediate tenures has increased disproportionately. First, our evidence (Crook et al., 2002, 2008, 2010) shows that 90 per cent of LPAs in England now have explicit policies requiring developers to

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50000 40000

S106 affordable permissions

30000

S106 affordable completions

20000

All affordable completions

10000 0 1999–00

2001–02

2003–04

2005–06

2007–08

Figure 6.2 Completions of all new affordable housing and S106 affordable completions. Source: DCLG HSSA statistics.

make contributions towards affordable housing. Those who do not make this a requirement are in areas where there is little need for new affordable homes. Most LPAs are looking for at least 20 per cent of new developments to be devoted to new affordable homes: this rises to 50 per cent in Greater London. In many cases, these are also explicit site-specific requirements. The numbers of all new affordable housing completions each year have varied considerably over the last decade. In 1999–00 and 2000–01, nearly 45,000 were completed each year; but there was a significant decline and this figure was not achieved again until 2007–08 (Figure 6.2). Within this overall total, Table 6.1 shows just how big an increase there has been first in approvals of new affordable homes involving S106 in recent years, and then in completions. S106 permissions rose from just under 14,000 in 1998–99 to over 48,000 in 2007–08, an increase of 246 per cent in 10 years. Increases have occurred in all regions but especially in the South. Typically the four southern regions of London, the East, the South East and the South West now account for over 70 per cent of new approvals. None of this should be surprising: these are the regions where need is at its greatest. They are also the regions where the private housing market has been buoyant for most of this period and hence where development values allowed LPAs to negotiate significant amounts of planning gain, including new affordable homes. Once S106 agreements have been signed, our evidence suggests that 80 per cent of what is agreed is ultimately delivered (Monk et al., 2006; see also Crook et al., 2010). There is of course a lag between agreement and completion whilst site preparation and construction takes place but, allowing for this, it is only on the larger sites that there appears to be a shortfall between agreement and delivery. This shortfall arises from the complexities of developing large sites which often result in long delays, with much

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Region

North East North West Yorkshire and the Humber East Midlands West Midlands East London South East South West England

1998/99

1999/00

2000/01

452 716 555

286 1,013 691

845 1,759 1,637 2,662 3,806 1,460 13,892

1,021 1,032 1,978 3,508 3,917 2,083 15,529

Source: DCLG HSSA statistics.

2001/02

2002/03

2003/04

2004/05

2005/06

2006/07

2007/08

609 1,168 356

287 834 835

348 1,533 962

388 1,242 1,427

326 1,211 1,996

791 1,817 1,914

922 1,668 1,860

992 2,699 1,980

1,566 838 1,814 3,648 3,064 1,705 14,768

1,418 1,099 1,895 6,433 4,013 1,666 18,480

2,433 1,532 3,598 5,853 5,483 1,985 23,727

1,653 3,242 5,008 9,374 6,223 3,078 31,635

2,795 3,148 4,857 9,701 8,363 4,219 36,616

2,888 2,933 5,696 14,061 7,951 5,326 43,377

3,190 3,621 8,135 13,357 8,978 5,437 47,168

3,956 3,264 5,362 14,376 9,977 5,539 48,145

Making housing more affordable: the role of intermediate tenures

Table 6.1 Approvals of new affordable homes on S106 sites.

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renegotiation or replacement of planning permission, especially where land is sold on to other developers. Once data inaccuracies and the extremely long build-out periods are taken into account, the proportion that is delivered could be expected to be higher. Table 6.2 shows that completions on S106 sites have risen from just over 9,000 dwellings in 1999–00 to over 27,000 in 2007–08, an increase of over 190 per cent. The numbers have risen significantly in all regions, but especially in the four southern regions that anyway account for over 70 per cent of these completions. New affordable homes on S106 sites now constitute a majority share of all new affordable homes. As Figure 6.2 indicates, the proportion has increased from 21 per cent of the total in 1999–00 to a peak of 65 per cent in 2006–07. This increased proportion is as much the result of a fall in completions on other sites (‘non-S106 sites’) as it is to the increase in S106 completions. Indeed, the growth of S106 completions barely matches the fall in completions on other sites. This suggests that S106 has been replacing, rather than adding to, the total of completions of affordable homes in the growth years of the new century. However, in 2007–08, as Figure 6.2 also shows, there was a significant increase in affordable housing secured by means other than S106, often using publicly owned land. So, although completions on S106 sites continued to increase, the proportion, at 56 per cent, was lower than in the two previous years. Where are these homes? When we look in detail at the pattern of completions on individual case study of S106 sites, we find some consistent patterns. First, as we have already said, there has been a large shift towards southern regions. Second, the sites are generally in ‘upmarket’ areas. This is only to be expected since they must inevitably be in areas where private housebuilders expect to be able to sell homes. However, third, in fact they tend to be in the lower-priced areas of the more ‘upmarket’ LPAs and in the higher-priced areas of the more ‘downmarket’ LPAs (Crook et al., 2006). Almost all the provision is on site, making an important contribution to creating mixed communities. The cost of the shift in location is that the prices paid for affordable housing have been high so that significant government subsidy has been required in addition to developer contributions even in high-value areas. It is here that intermediate housing becomes so important, because it enables households in the areas of greatest housing shortages and priced out of market housing, but not eligible for social rented housing, to get a home (and with prospects of staircasing to full ownership with some intermediate products). It also requires less public subsidy and so stretches subsidy further in high-value areas where otherwise developer contributions are not sufficient to eliminate the need for some subsidy.

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Region

North East North West Yorkshire and the Humber East Midlands West Midlands East London South East South West England Source: DCLG HSSA statistics.

1999/00

2000/01

2001/02

2002/03

2003/04

2004/05

2005/06

2006/07

2007/08

442 550 289

290 777 336

206 785 502

160 733 515

133 812 760

186 631 681

269 1,097 1,039

594 624 797

450 998 1,009

691 1,029 1,194 1,842 2,553 654 9,244

778 660 1,103 1,958 2,298 1,097 9,297

761 985 1,511 1,904 2,394 1,255 10,303

1,155 1,117 1,780 3,153 2,923 1,056 12,592

898 1,199 2,426 3,895 3,577 2,680 16,380

1,294 1,672 2,710 3,725 5,327 1,949 18,175

1,914 2,046 3,229 4,981 6,168 3,126 23,869

2,089 1,610 4,018 7,468 5,569 3,069 25,838

2,605 1,950 4,236 6,774 5,884 3,204 27,110

Making housing more affordable: the role of intermediate tenures

Table 6.2 Completions of new affordable dwellings on S106 sites.

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The increasing role of intermediate housing In the early years of policy implementation, the vast majority of the affordable housing provided by S106 was social rented housing. But as the numbers of affordable units grew from under 10,000 per annum at the end of the 1990s to over 25,000 per annum in the last two years (2005–06 to 2007–08), the proportion of intermediate housing increased rapidly. Table 6.3 clarifies how the mix has changed in the twenty-first century. There are strong reasons why almost all of the stakeholders involved in providing affordable housing would wish to increase the proportions of intermediate housing. First, central government both wants subsidy to lever in as much private finance as possible and to increase the numbers of affordable homes provided. They also want to support lower-income employed households with as little subsidy as possible. Government has also become increasingly concerned that new developments should be mixed communities created through mixed tenure, particularly because social rented housing goes almost entirely to those in priority need. Second, local authorities are required to meet targets for affordable homes that are based on needs rather than resources – so concentrating on those who can afford a higher proportion of the costs themselves makes sense. Equally authorities face targets to increase site densities which can be achieved only by building smaller flatted accommodation. This can often be best delivered by intermediate homes for smaller households. Moreover, there is often local opposition to development so that providing access to owner-occupation for key workers and sons and daughters can help make residential development more acceptable. Third, developers are happier to provide intermediate tenures because they regard key workers, and more generally employed households, as good neighbours for market purchasers. Intermediate provision can also sometimes reduce the amount of land taken from the site by affordable development because of lower densities. To the extent that intermediate housing can reduce costs to the developer, it also makes it easier to negotiate with landowners to obtain the land, increasing the price the developer is prepared to pay. Finally, in a rising market, RSLs have found intermediate tenure housing to be highly profitable. A proportion, usually 50 per cent, of the purchase price is paid to the RSL on sale and this can be recycled into additional development; staircasing further adds to this capacity to maintain output. Many RSLs used this freedom to cross-subsidise their bids to provide social rented housing, so that intermediate housing plays an important role in increasing the overall supply of affordable housing. A subset of these RSLs have depended heavily on this flow of funds to ensure financial viability – which has raised difficult issues in the aftermath of the credit crunch with

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Tenure Year

North East North West Yorkshire and the Humber East Midlands West Midlands East London South East South West England

Rent

Shared ownership

Other tenures (1)

2001/02

2005/06

2007/08

2001/02

2005/06

2007/08

2001/02

83 63 88

73 46 63

80 29 54

13 11 9

24 37 24

17 49 39

4 26 3

3 17 13

3 22 7

59 69 90 75 78 82 77

54 50 65 68 57 60 60

50 49 64 63 57 55 57

13 6 5 20 20 9 13

40 34 27 29 35 35 33

43 41 33 37 41 34 38

28 25 5 5 2 9 10

6 16 8 3 8 5 7

7 10 3 ⬍1 2 11 5

1 Other tenures include discounted market sale units (up to 2007–08), local authority units and units of unknown tenure Source: DCLG HSSA statistics.

2005/06

2007/08

Making housing more affordable: the role of intermediate tenures

Table 6.3 Affordable completions on S106 sites as a percentage of total affordable completions, by tenure and region.

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intermediate products more difficult to sell and with fewer of those who bought shared equity products in the past staircasing, thus capital remains tied up in unsold units. In many cases, the price at which developers wish to transfer the land they have acquired and the homes they have built has required the RSLs to make contributions from their reserves as well as to finance acquisitions from any SHG subsidy received and private loans raised (Monk et al., 2005a, 2008a; Whitehead et al., 2005). The extent of reserves contribution depends on a whole range of factors, including the relative negotiating strength of developers and RSLs, and also the price developers pay for the sites. Much also depends on the extent to which the chosen RSLs have been party to the original S106 negotiations or have been brought in after the agreement has been signed and the changing policy of the (now) HCA about providing subsidy for S106 schemes. During the early part of the new century, S106 policy and absolute levels and the incentives and negotiations involved have worked together to generate far higher proportions of shared ownership, mainly in the form of small flats. Table 6.3 shows that in 2001–02 intermediate housing was 13 per cent and rose to 38 per cent in 2007–08. At the same time, the proportion of social rented housing fell from over 75 per cent to just over a half by 2007–08. There has been a significant absolute as well as proportionate increase in shared ownership completions, from 1,339 in 2001–02 to 10,316 in 2007– 08. In some northern regions, the supply of social rented housing is such that there is little apparent need for additional affordable rented homes, whereas providing discounted market homes can help low-income households in work acquire a newly built home in an area of new development. But in London and the South East where the proportion of social rented has also fallen significantly, the need for this is at its greatest at a time when funding and sites for provision outside the S106 framework has fallen. Moreover, the proportion of S106 completions that are in shared ownership has increased in all regions over the period, reaching over 40 per cent in the South East, the Midlands and the North West. Our case study research (both of LPAs and specific S106 sites) confirms the principal reasons for this trend. First, LPA policy has stressed a wider range of provision and in some areas (especially southern LPAs) shared ownership is seen as a means of enabling key workers (including key publicsector workers such as nurses and teachers) to get access to homes in very high-priced areas. These are areas where such groups would probably not qualify for social rented units. Second, shared ownership is more acceptable to private housing developers. Many believe that such provision is less stigmatised and makes it easier for them to sell the market component of a S106 site. In so far as it does (and keeps up the development value of the

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Making housing more affordable: the role of intermediate tenures

site), they may be able to make bigger financial contributions to shared ownership dwellings than to rented ones – and this helps to keep public subsidy down. Third, many LPAs have been pressing for higher proportions of S106 sites to be devoted to affordable housing. Developers are often resistant to this but are prepared to go beyond 30 per cent (which many find acceptable) if the additional units are in the form of shared ownership (Monk et al., 2008a). There is another possible reason: the need to limit SHG in expensive areas such as the South East and the evidence that a number of LPAs have S106 policies that require affordable contributions to be secured without public subsidy. It is easier for developers to respond to this with shared ownership than with rented housing. Most recently, in 2008–09, these trends have been reversed with greater proportions of rented than intermediate homes now being completed on S106 sites (Crook et al., 2010). The credit crunch along with lower house prices and tougher mortgage terms, especially for first-time buyers, has made shared ownership units harder for RSLs to sell whilst staircasing has also slowed down (Burgess et al., 2007). Both have reduced RSLs’ capital receipts. This in turn has impaired RSLs’ reserves and balance sheets, making it much more difficult to fund new shared ownership and to cross-subsidise rented homes on S106 sites. In the meantime, the HCA has been investing counter cyclically, increasing funding for RSL rented units in order to maintain a continuing output of new affordable units and to keep S106 and other sites working.

Has the policy been effective? Taking all S106 sites together, we have evidence that the S106 policy has not eliminated the need for public subsidy and has not generated substantial amounts of additional affordable housing, although the growth of intermediate tenures has been critical in stretching subsidy further and hence securing more additional homes (Whitehead, 2007). Our tracking of case study sites and Housing Corporation casework files shows that the majority (i.e. 75 per cent on average since 1999–2000) of affordable homes on S106 sites receive SHG. This is a paradox because we know developers do make financial contributions (see the evidence in Crook et al., 2008, 2010). However, the underlying variables that determine how much of a contribution they make on each site are very complex and it is difficult to establish a pattern (Whitehead et al., 2005). However we can conjecture as follows. S106 sites are inevitably in the higher-priced areas – this is where housebuilders can build, sell and make profits. Land prices are high. These are not areas where RSLs could normally build affordable homes even with subsidy. What S106 negotiations appear to do are to bring the prices

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of the land down (i.e. by discounting as the contribution) just to the level which is acceptable for the HCA (and formerly The Housing Corporation’s) cost limits for subsidy. In so far as subsidy is paid, this limits the affordable homes secured by S106 that are therefore additional. The negotiating outcome is further complicated by the fact that affordable homes are not the only obligation LPAs are trying to secure. If a new access road or a new school classroom are imperative, it is these that developers will be asked to fund, leaving public subsidy to pick up the ‘tab’ for much of the social housing. Instead what the S106 policy does is to secure land for RSLs and to ensure low-cost affordable housing is built in the high-pressure areas where need is at its greatest. It has thus shifted the geography of new social housing but not secured a lot more of it. It is of course possible that more systematic and better structured negotiations by LPA S106 teams could extract more developer contributions and thus make more of the affordable housing additional. Indeed, this is what the government have been trying to do both in terms of spreading good practice better and trying to establish a common starting point for developer negotiations once the scaled back S106 is introduced alongside the newly introduced Community Infrastructure Levy (CIL) (DCLG, 2008c; Monk et al., 2008a). But there is also evidence that much less subsidy is needed for intermediate housing on S106 sites than for rented housing. This is only to be expected. The proportions for rented and shared ownership completions in 2005–06 and 2007–08 are shown in Table 6.4. Clearly, all other things being

Table 6.4 Proportion of new affordable homes completed on S106 sites in 2005–06 and 2007–08 without public subsidy. Region

Rented 05/06

Rented 07/08

0 20 42

8 28 62

91 47 80

28 52 77

15 45 12 13 9 16 16

14 58 22 12 5 20 18

24 66 30 16 25 29 32

29 73 33 19 19 32 31

North East North West Yorkshire and the Humber East Midlands West Midlands East London South East South West England Source: DCLG HSSA statistics.

Shared Shared ownership 05/06 Ownership 07/08

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equal the greater the proportion of shared ownership the less the call on subsidy, but even with shared ownership completions on S106 sites, subsidy was still needed on 68 and 69 per cent of them in 2005–06 and 2007–08, respectively. Limited case study evidence shows that the lower subsidy for shared ownership is not necessarily replaced by higher developer contributions but instead by higher RSL reserves (Whitehead et al., 2005). Nonetheless, the evidence shows that the trend towards more intermediate housing has enabled S106 to secure more genuinely additional new affordable homes. What is also noticeable (and this applies to subsidy on rented units too) is that a much higher proportion of new homes are being funded without subsidy in the northern and midlands than in the southern regions. Whether this regional pattern is a matter of variations in underlying costs and land values or the outcome of differently and better structured negotiations is an as yet unexplored question, although the varying policies of the (now HCA) regional offices in providing subsidy on S106 sites may be an additional factor. Finally, the credit crunch has almost closed down the possibilities at least for the moment both because few new planning permissions are being sought and because the value uplift in many cases disappeared.

Reforms of the planning gain system Even in the good days, S106 (or planning gain as it has become colloquially known) has not been without its critics. Negotiations are often lengthy and uncertain, delay development and add to its costs. It is not seen as equitable because only those promoting medium- to large-scale schemes contribute and most small-scale schemes ‘escape’ despite the cumulative infrastructure and other costs of developing many small plots of land. The system is also prone to ‘free rider problems’, because the first developer of a new area may pay for many of the costs of providing the necessary infrastructure from which subsequent developers benefit. At one stage, to foster more certainty and to speed up negotiations, the Government consulted about replacing negotiated outcomes with a tariff approach, but following consultations decided against adopting this route. It subsequently examined the possibility of combining negotiations with a ‘tariff’ alternative, but these provisions were also not implemented. The Government has more recently clarified the basis on which LPAs may use formulae and standard charges, provided a model agreement, clarified current policy (ODPM, 2005a), published good practice guidance for local authorities and developers with respect to affordable housing (DCLG, 2006c) and also published proposals to make the planning system more responsive to changes in the market demand for housing (ODPM, 2005b). But a more fundamental change is pending. Kate Barker in her review of housing supply (Barker, 2004) recommended that the use of planning obligations

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should be scaled back to deal with the mitigation of development impact and affordable housing. A new tax, Planning Gain Supplement (PGS), would be used to extract a modest amount of the windfall gain from the grant of planning permission with the yield recycled to help finance infrastructure. In the Pre-Budget Report for 2007, the Government announced that, following discussions with key stakeholders, it would not be introducing PGS and would, instead, legislate for a new planning charge, to be called the Community Infrastructure Levy (CIL) (HM Treasury, 2007). The use of CIL will not be mandatory and each LPA will be free to decide whether or not to introduce a levy. CIL allows LPAs to charge a levy on all, except very small scale, developments, in order to secure contributions to sub-regional and other infrastructure. S106 agreements will be limited to addressing more local site-specific infrastructure, any other mitigation needed for development to proceed and to secure contributions to affordable housing (DCLG, 2008a, b). The introduction of CIL will loosen the ‘rational nexus’ that currently restricts S106 agreements contributions to meeting need that directly arises for individual developments. CIL will not provide the whole of the funding for the necessary infrastructure. It will depend on the overall level of infrastructure needed over a plan period, their costs and the extent of other funding. CIL will need to be fixed in relation to these sums but also to take account of site viability issues. They are likely to be averaged, and not site specific, but also not necessarily the same across a whole of a LPA’s area. Legislation enabling LPAs to charge a CIL was included in the 2008 Planning Act, but the relevant parts of the legislation will not be enacted until 2010. Before then, DCLG are consulting on detailed regulations and procedures (DCLG, 2009a). It is not easy to assess the likely impact on affordable housing. Putting infrastructure before affordable housing clearly reduces potential resources. It is also possible that the capacity to achieve affordable housing will be cut back even in LPAs that do not introduce CIL. But existing development frameworks include relatively high affordable housing targets and it may be problematic to admit defeat on these. So there will be increasing pressure to increase the proportions of intermediate housing. In addition, the introduction of a CIL on all but the very smallest sites increases the capacity of the system to secure more funds for infrastructure enabling scaled back S106 to focus on affordable homes as well as local site mitigation. The credit crunch has slowed the process, but the relative benefits to stakeholders are so great that ways may well be found.

Looking forward We have seen how spatial planning has provided a means for LPAs to secure land and some funding for affordable homes. It has ensured that RSLs have been able to acquire land in the areas of greatest need at a time when

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Making housing more affordable: the role of intermediate tenures

traditional sources of land are in decline. Further, developers have provided funds for affordable homes through discounts on land prices and construction costs. In addition, more intermediate housing has been built than might otherwise have been the case for three distinct reasons. First planners are specifying this requirement in their local development frameworks ensuring that intermediate homes for key workers and other priority groups are secured via S106, as well as social rented housing. Second, developers much prefer intermediate housing for both financial and long-term estate management reasons. Third, intermediate housing spreads public subsidy further. The apparent success of the policy has however been highly dependent on a very favourable market environment (Whitehead, 2007). Until the credit crunch, private housing developers have benefited from a very buoyant demand for new homes in the first decade of this century and were thus relatively easily able to develop market sites. Without this there would have been far fewer sites for affordable homes and no source of subsidy for land and construction costs, other than public subsidy. Current developments put these recent achievements in jeopardy for two reasons. The first reason is the market framework. As we have discussed, the credit crunch has created difficulties for both RSLs and developers. RSLs with shared ownership on their balance sheets have faced liquidity problems because of falling sales and reduced staircasing. Developers, faced with falling private market sales, have cut back on new private starts on existing sites and have not opened up new ones. On existing sites, the slower pace of development means that the ‘trigger points’ by when they are required to meet obligations for new affordable homes have not been reached. The HCA is keen to maintain output of new affordable homes and to secure this it has enabled RSLs to acquire land on S106 sites by a, temporary, higher degree of subsidy. Thus on many S106 sites, the absolute and proportionate increase in intermediate homes seen in the last decade has, for the moment at least, gone into reverse (Crook et al., 2010). The second issue is the policy framework. As well as being a time of much uncertainty about the private housing market, it is also a time of significant policy uncertainty as LPAs start to consider whether or not to introduce CIL in 2010 and run it alongside scaled back S106 contributions. The level of CIL that is charged together with the costs to developers of scaled back S106 obligations will clearly affect site viability. Since the CIL charge will be determined within the development plan framework and will not depend on site-by-site negotiations, viability may to a large extent be determined by the outcome of negotiations on site mitigations and affordable housing. Fixing the level of CIL will thus not only be critical for securing some of the funding for sub-regional infrastructure (whilst not suppressing development), but will also be critical in determining how much LPAs will be able to secure for affordable housing. Affordable housing becomes the residual. Getting the CIL framework

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right is going to take time and this uncertainty may well impede development and thus negotiations for affordable homes. In so far as the introduction of CIL has a negative impact on viability, there may be more pressure to secure affordable homes in the form of intermediate than social rented homes. On the positive side of viability, the fact that CIL will cover all but the very smallest of sites will enable LPAs to secure sub-regional and other infrastructure contributions from almost all new development and this may reduce the demands on the large sites which provide almost all the contributions at the moment. If that happens, there may be more and not less scope for getting affordable housing contributions on the larger sites. Overall changes in planning policy have enabled a big shift in development – from lower demand to higher demand areas, from single tenure to mixed community developments, and a massive shift from social rented to intermediate tenures. The credit crunch has changed the picture – directly because of the lack of mortgage funds, indirectly because of its impact on the viability of development. The future role of planning is therefore much less certain than before the crunch. As yet it is unclear whether the crisis in provision resulting from the separation of land provision from land owner and developer contributions is a short-term issue or whether in the long term the re-emergence of the separation of land and finance will be maintained. Even so, if we can be optimistic about the future operation of CIL and scaled back S106, we can conjecture that more intermediate and other affordable housing could be found. This is for two reasons. First, we have seen that the discretionary basis of the planning system means that there are LPAs that are getting less out of the system than they could if they pursued best practice from elsewhere. Second, the affordable housing aspects of planning gain apply only to above threshold sites. Under a more universal system, the policy can be applied to all sites of all sizes and commuted payments through standard formulae can be sought on smaller sites where a mix of tenures was simply unfeasible. Thus in future more resources could be forthcoming for all affordable housing including shared ownership and other intermediate forms.

Postscript The latest data for 2008–09 shows how the credit crunch has significantly reduced the numbers of affordable homes on S106 sites with only 35,500 new homes agreed compared with 48,000 in 2007–08.

Note 1. This is the threshold above which LPAs are now encouraged to negotiate contributions of affordable housing (formerly it was 25 dwellings outside inner London).

7 Securing key worker housing through the planning system Nicky Morrison

Introduction Household and employment growth without an equivalent growth in the housing stock has resulted in overheated housing markets across the South of England. This has been reflected through substantial increases in housing costs, construction and land prices over the past decade. In many places, this has led to increases in demand for social rented housing provided at subsidised costs at below-market rents. However, the ability of affordable housing providers (AHPs) to meet this growing demand has become constrained by restrictions on the availability of government housing subsidy, a general lack of affordable land for development in the South and the continued loss of council-owned housing through ‘Right to Buy’ policies. A more recently recognised problem is the growing number of local people on low or modest incomes who are unable to gain access to suitable market housing that is both affordable and within reasonable reach of their workplace. At the same time, these households are not eligible for the oversubscribed rented social housing managed by local authorities or AHPs. Traditionally, social rented housing met the needs of many lowerincome employed households. However, with a renewed increased emphasis on catering for those in priority housing need who are increasingly outside the labour market, this group of households has fallen into a growing gap. Lowerincome employed households are being effectively squeezed between those

Making Housing More Affordable: The Role of Intermediate Tenures, edited by Sarah Monk and Christine Whitehead © 2010 Blackwell Publishing Ltd.

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who are eligible for traditional subsidised social housing and those who are able to afford the local high house prices and rents in an area (Morrison, 2003) (see Chapter 1). Increased affordability problems have contributed to households moving away from the main centres of employment to find relatively cheaper accommodation. This population overspill not only puts additional pressures on already over-stretched infrastructure, but it also creates an extension of local housing markets away from larger urban settlements into surrounding areas that lie well beyond reasonable commuting distances. Extreme market pressures particularly affect lower-paid workers who generally wish to live nearer their employment. These people include those who are considered key both in providing public services and in supporting the commercial businesses on which local economic growth depends. Affordability problems in turn create recruitment and retention problems particularly for certain types of employers in the local area who are tied to national salary scales and are unable to increase pay to help overcome employees’ high housing costs. These employers include the key publicsector services, such as health, education, and law and order, that are all required to sustain a local economy into the future. The particular difficulties that lower-paid public-sector employees are experiencing in accessing affordable housing in high-cost locations have provoked a public policy debate within England. At the same time, it has provoked associated concerns over problems in recruitment and retention of key public-sector employees, such as police, nurses and teachers, and the subsequent impact that this will have on local service provisions. This problem has been termed the ‘key worker’ problem in government policy statements (DETR, 2000a, 2001; ODPM, 2004; HCA, 2010). Moreover, households who are priced out of local housing markets need some form of government assistance so that they can afford to remain within an area both for their own sake and for the health of local economies (see Chapter 9).1 The purpose of this chapter is to focus on the scope of the English landuse planning system for securing key worker housing. In acknowledgement of the growing affordability problems facing this group of households, Planning Policy Guidance (PPG) 3: Housing (2000a) introduced the concept of key worker housing into the planning system. It required that local planning authorities have regard to the housing needs of many different groups including key workers in preparing policies to meet needs in their areas. Local planning authorities should . . . assess the range of needs for different types and sizes of housing across all tenures in their area. This should include affordable housing and housing to help meet the needs of specific groups – the elderly, the disabled, students and . . . key workers . . . (PPG3, 2000, paragraph 13).

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Moreover, Planning Policy Statement (PPS) 3: Housing (2006b) which superseded Circular 6/98 ‘Planning for Affordable Housing’ and PPG3 (2000) extended the definition of affordable housing (DETR, 1998, 2000b; DCLG, 2006b). It now includes both social rented and intermediate housing, defined as ‘housing at prices and rents above those of social rent, but below market price or rents’ (DCLG, 2006a, PPS3, Annex B). It is to be provided to specified eligible households whose needs are not met by the market, including key workers. However, although the concept of key workers and intermediate housing has been introduced nationally, until recently there was little guidance and clarity as to the nature of the local planning policies to be implemented nor on what is reasonable to expect from developers and landowners as their contribution to the S106 negotiation process (see Chapter 6). The government permits local planners to define the concept of key workers in response to local conditions. They are also permitted to set separate targets for social rented and intermediate housing. The exact proportions will vary depending on the viability of sites, availability of developer contributions and public subsidy which can be secured. Local planning authorities across England have subsequently revised their affordable housing policies as part of the local plan review process to be in line with national policy directives (DCLG, 2006a, b). This chapter focuses upon the way that key worker planning policies have been formulated at the local level through the use of a case study, namely the city of Cambridge which represents an area of high housing demand, rapid economic growth but tightly constrained land and housing supply. The chapter first highlights the housing pressures in the city and the extent of the key worker problem. It then outlines the new affordable housing policies in the city, demonstrating how they have been revised in response to key worker needs. Focusing upon the development proposal adjacent to the regional hospital, the chapter then explores the way that the City Council’s key worker policies are being implemented on the ground. Drawing together evidence from the hospital’s housing need survey undertaken by CCHPR, relevant planning and health sector policy documents as well as interviews with key representatives from both professions, the chapter examines the rationale for key worker housing in the health sector as well as the approach to delivery. The chapter concludes by suggesting some of the difficulties in pursuing this planning policy stance more widely.

Employment and household growth in Cambridge: the context Over the past 50 years, the number of people and jobs has doubled in Cambridgeshire – the county in which Cambridge is located (Greater

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Cambridge Partnership, 2009). The county as a whole has witnessed the fastest rate of growth in the UK in recent years, and this growth is occurring within an area where the settlement pattern has remained largely unchanged (Morrison, 1998; Segal et al., 2000). The current population of Cambridge city is 120,000 and it is surrounded by a rural district comprising 101 villages. At the same time, Cambridge city has been subjected to a number of inconsistent policies in the past that have contributed to the imbalances between jobs and housing within the city which the new Cambridge Local Plan (2006a) hopes to address. These past policies reflected the general character of land-use planning in the UK, but also were a particular feature of the Cambridge area. One set of policies has been concerned with constraining the growth of Cambridge to preserve its unique character and environment. The Green Belt was set up in 1957 to contain growth and to protect the size and setting of Cambridge. One clear consequence of this has been a constraint on the supply of land within the city boundaries, resulting in tight restrictions on housing supply within the city itself (Morrison, 2003, 2010a). Another set of policies related to an economic strategy that consistently favoured high-tech industries and research-based activities. Although a policy of restraint was in place with respect to manufacturing development, Cambridge City Council did allow planning permissions for a variety of high-tech research parks around the city. Subsequently, employment growth within the Cambridge area has very much focused on the service sector, higher education and its spin-offs, and new high-tech companies. In effect, this type of employment growth has not been constrained by restrictive land-use planning policies. Cambridge has significantly above UK average proportions of employment in high growth sectors such as hightech services, research and development, communications equipment/ instrument manufacture, and academic publishing (Greater Cambridge Partnership, 2009). In addition, the environmental protection of Cambridge has also made the city an attractive place to live, with improvements in transport links greatly increasing its accessibility. These factors have further encouraged new and in-moving companies in high growth sectors, such as high tech and research and development into the city, particularly those who want to remain accessible to the London agglomeration. At the same time, it has also encouraged Cambridge to become an important commuter location for those who work in London. This trend towards in-migration is set to continue. The anticipated population growth of Cambridge has risen from 0.8 per cent per year through the 1990s to 1.1 per cent per year between 1999 and 2016, much of which is due to in-migration (Cambridgeshire County Council, 2007). This will lead to further competition in the already constrained housing market, bidding

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up house prices as more households aspire to live in or near Cambridge. The contribution of commuters to incomes and purchasing power in Cambridge is also likely to be disproportionately high. The workforce that has moved out of London, but continues to commute is well positioned to afford housing in Cambridge. Similarly, in-movers taking up employment in the growth sectors, such as high tech, are also able to compete with local people in the housing market, bidding up house prices (Morrison, 2003). The uneven distribution of income is likely to continue with increasing numbers of lower-paid employees unable to access the housing market. Average house prices in the Cambridge sub-region are now approximately eight times average incomes, although the downturn in the housing market has slowed down house price rises (Cambridgeshire Horizons, 2008; Greater Cambridge Partnership, 2009). The economic success of the Cambridge sub-region has made it one of the priority areas in the government’s Sustainable Communities Plan (2003) and it is part of one of the four English Growth Areas (ODPM, 2003a). Its continued prosperity is therefore important nationally as well as regionally. However, success has its consequences (Housing Corporation, 2007a, b). Job/ housing imbalances are projected to increase with employment growth outstripping housing growth in the future. Cambridgeshire County Council has projected 75,000 additional jobs in the County between 1996 and 2016, with 40 per cent occurring within the City, although it only has 29 per cent of the County’s population (Cambridgeshire County Council, 2007). Implications for housing demand and pressures on the housing market are considerable, with lower-income groups being displaced and moving to cheaper, less accessible areas further outside Cambridge, resulting in growing travel to work distances. This subsequently feeds into recruitment and retention problems particularly for public-sector employers. This is an important employment sector within Cambridge, with public administration, education and health representing over 40 per cent of the city’s total employment (Greater Cambridge Partnership, 2009). A number of studies have been carried out that demonstrate the problems experienced by key workers at the Cambridge sub-regional level (East of England Regional Assembly (EERA), 2003, 2005; Roger Tyms with Three Dragons, 2004), and at the county level (CCHPR, 2002a; Fordham Research Ltd, 2004; Morrison, 2003) as well as for particular organisations, such as Addenbrooke’s hospital (CCHPR, 2002b) and the University of Cambridge (CCHPR, 2005, 2008). Although it is difficult to quantify precisely the extent of the key worker problem, the different studies confirmed the problems of recruitment and retention for different groups of key workers as defined by the Government’s Key Worker Living (KWL) Programme as well as more broadly across the public sector and not just the grades mentioned in the programme.2

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Employers surveyed in the different studies were unable to respond to problems of high housing costs as they do not have the flexibility to offer more pay because they have to comply with national salary scales (see Chapter 9). Providing affordable housing through the planning system to assist key workers with their housing costs was considered by the employers to be essential (see CCHPR, 2002a; Morrison, 2003). It is not only for those households but also for the health of the local economy that such people are retained in the local area. The next section discusses how Cambridge City Council’s affordable housing policies, and key worker policies specifically, are aiming to address these growing affordability problems.

Cambridge affordable housing policies The Cambridge Local Plan (2006a) acknowledges that the availability of housing that is affordable and accessible to those in housing need is a major and growing problem within the city and its sub-region. The yearly net affordable housing requirement was estimated in its Cambridge City Council (2002) to be 3670 dwellings. Additional evidence relating to the needs of key workers in the Cambridge sub-region key worker housing research report (2003) showed yearly key worker housing demand in Cambridge of 295 units, of which 247 were related to the local hospital alone (Roger Tym & Partners, 2003; Cambridge City Council, 2006a). On the strength of this evidence, the City Council seeks a target of 40 per cent or more affordable dwellings on each development proposal coming forward. The precise amount of such housing to be provided on each site is to be negotiated with the developer through S106 agreements (see Chapter 6). The definition of affordable housing has also been widened in the 2006 Local Plan to include intermediate housing. This allows for much more flexibility in the type of housing to be provided through the planning system. In the past, affordable housing had been (with some exceptions) subsidised rented housing in Cambridge, managed by an AHP and eligible for priority need households. However, given the wider recognition of other types of households in housing need, such as key workers, together with changing tenure aspirations, widening the definition of affordable housing in the new Local Plan was seen as justifiable. The main difference between key worker housing and traditional affordable housing is that key workers are more likely to be able to contribute to at least part of their housing costs and they are likely to aspire to owneroccupation. To be affordable, the City Council’s definition of key worker housing takes the form of shared ownership in partnership with an AHP. It can also be discounted market housing provided that the discount is secured in perpetuity. This would allow a lasting benefit for future targeted groups

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of key workers. It also includes intermediate rented housing provided by a housing association or other not-for-profit organisations at below-market rents to meet short-term needs (see glossary). The City Council also established an affordability criterion for those households requiring intermediate housing but who cannot access market housing and do not qualify for social rented housing. For intermediate rented housing, rents are not to exceed more than 30 per cent of the net median household income in Cambridge except where provided for specific groups of key workers, where they should not exceed 30 per cent of the net median household income for the specific group. For low-cost home ownership, including shared ownership, shared equity and discounted market housing, the costs (mortgage and any rent) should not exceed more than 30 per cent of the gross median household income in Cambridge. Again, an exception is made for specific groups of workers, such as key workers, where housing costs should not exceed more than 30 per cent of the gross median household income for that group (Cambridge City Council, 2006a). The Cambridge Local Plan (2006a, b) does not specify the type or mix of affordable housing on development sites. No targets are set with respect to how this 40 per cent of affordable housing should be apportioned. However, it does suggest that key worker housing would not normally be expected to exceed 30 per cent of the affordable housing provision on each site. The exact proportion of key worker housing on a site is determined by Cambridge City Council based on evidence of need, location and landownership. With respect to location, planners acknowledge that ‘key worker housing should be located within a 30-minute drive time of their place of employment’ (Cambridge City Council, 2006a, paragraph 5.10). A register of key workers has now been set up by the Zone Agent for the Eastern region – Key Homes East (part of Bedfordshire Pilgrims Housing Association) – to manage the allocation of the key worker housing. The Cambridge Local Plan (2006a, b) states that key worker housing is to be available to initial and successive key workers on the register unless there are no eligible nominees in which case the units are offered to others in housing need. Key workers eligible for the housing include those categories of workers defined under the Government’s KWL Programme. However, Cambridge City Council also acknowledges that housing for specific groups of workers other than those included in the Government’s programme could be included if employers can demonstrate that they are facing recruitment and retention difficulties related to housing costs and that their workers cannot afford to rent or buy suitable housing locally to meet housing needs. In essence, the City Council has adopted a broader definition of key workers than the government’s, one which was proposed in CCHPR’s research into ‘Key Worker and Affordable Housing in the Cambridgeshire

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Area’ commissioned by the Council (CCHPR, 2002a). This definition gives local planners greater freedom to tackle the problems specific to their area. The next section provides an illustration of how the City Council’s key worker policies are being implemented. The example chosen is the Southern Fringe site next to Addenbrooke’s, the regional hospital in Cambridge.

The delivery of key worker housing for the health sector Addenbrooke’s hospital was first opened in the city centre in 1766 and relocated its facilities to a 70-acre site south of Cambridge in 1962. This site has gradually undergone major reconstruction and expansion, with the hospital representing one of the largest employers in the area with over 7,000 staff. Currently, the hospital has around 1,100 beds and serves approximately 0.5 million residents in Cambridge and surrounding areas). The Addenbrooke’s NHS Trust was formed in 1993, and in 1999, in partnership with the University of Cambridge and the Medical Research Council, it published its long-term development plans for the hospital site in the document ‘Addenbrooke’s: the 2020 Vision’. This spelt out a vision for the transformation of the hospital facilities to meet changes in medical practice and forecast population growth (Addenbrooke’s NHS Trust, 1999, 2008a). The Cambridge University Hospitals NHS Foundation Trust was formed in 2004 to further crystallise these expansion plans. The Trust’s £400 million 2020 Vision includes an expanded maternity hospital at a cost of around £28 million, a £5 million cancer unit, a £9 million nuclear health unit and an expanded critical care facility costing £8.5 million. The Trust’s aim is to expand the hospital as a regional and national centre of clinical excellence and biomedical research with a range of new clinical facilities and a biomedical research campus (Grove, 2009). In 2009, the hospital was designated by the Government as one of the five ‘academic health science centres’ in the UK, with plans to make it a European centre for clinical care and research in the future. These ambitious expansion plans are to proceed despite possible cuts to the NHS and difficult economic conditions. Strong Government commitment and private-sector support should allow the Trust’s 2020 Vision to withstand the economic downturn (Cambridge University Hospitals NHS Foundation Trust, 2009). Overall, the existing hospital site is expected to more than double in size, with clinical staff requirements alone expected to double by 2016. The extra 6,000 staff predicted would make the hospital the largest in the UK, eclipsing the 14,000 people currently employed by the Leeds Teaching Hospitals Trust (Grove, 2009). As a senior representative from Addenbrooke’s

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stated in interview, ‘the site will have a population equivalent to a small town . . . if the plan goes ahead, around 17,000 people will be turning up to work each day’. The hospital’s expansion plans are therefore of national as well as regional significance. Recruitment and retention of health sector staff as well as considering their housing needs is of critical importance not just for this key public-sector institution but also for the local planners catering for this growth. Addenbrooke’s hospital is primarily reliant on the national labour pool for its qualified health care workers. Overall, there is a national shortage of such staff and the market is extremely competitive. The Trust has a very limited opportunity to increase staff pay as salaries are nationally negotiated (see Chapter 9). The high cost of housing in Cambridge is therefore a serious obstacle when attracting and retaining staff, particularly for those who have a choice of working on similar terms in areas of the country with a lower cost of living. Posts for qualified professional staff that are advertised nationally are particularly hard to fill compared to locally advertised positions. This reflects the mobility of such employees who are able to compete in the national job market. The overriding concern, expressed by Addenbrooke’s Human Resource department, centres on the significant numbers of applicants either withdrawing their application or not making one, once they make enquiries about the level of housing costs within Cambridge as they cannot afford to move to the city. Staff shortages cause significant problems in such a labour-intensive environment, including the closure of hospital beds, the increasing use of less effective agency staff and reliance on overseas recruitment. Unfilled posts and increased work loads affect the continuity of care and overall quality of service. Moreover, the turnover of staff generates significant costs both to management and patients, as increasing patient waiting times are considered a critical issue facing the National Health Service in general. Recruitment and retention problems are clearly related to the national shortage of workers within the health service, inadequate pay and the cost of living, particularly of housing, which is particularly acute in a location like Cambridge. The problem, however, is not simply a cyclical one which will disappear in the recession. It is structural and related to the rigidity of national salaries. Increasing the ability of public-sector staff to pay for housing by increasing their wages is unlikely to happen as central government commitment to address this issue is not forthcoming. Addenbrooke’s has introduced a wide range of policies to reduce its staff turnover rate, including flexible working arrangements, changing shift hours, new systems of internal rotation of duties and improving child care facilities, such as its nursery and play schemes. The effectiveness of these policies in terms of recruitment and retention is continually monitored,

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with regular staff surveys conducted to assess its staff support programme (Cambridge University Hospitals NHS Foundation Trust, 2009). However, these types of personnel reforms can only reduce turnover in the relatively short term. The main problem is clearly one of low pay levels in relation to those in the local area. Whilst it is difficult to show conclusively that the extent of the problem is also related to the housing market, housing costs are often quoted by departmental managers as the key reason why staff are particularly concerned about pay levels and their need for higher pay. Addenbrooke’s commissioned CCHPR to examine the housing needs of its staff to establish the level of key worker and affordable housing required. Over 1,000 staff were surveyed (CCHPR, 2002b). This study was subsequently followed up by a survey of 348 new employees in 2007 (Addenbrooke’s NHS Trust, 2009). The two studies showed consistent results. It was clear that key workers were trapped in the ‘gap’ between traditional social housing which they were not eligible for and high-priced market housing. Over 50 per cent of existing staff were found to live in shared accommodation in Cambridge and that moving to Cambridge had resulted in a fall in accommodation standards while housing costs increased. This had resulted in staff having to find more affordable accommodation away from the immediate Cambridge area. This adds to traffic and travel difficulties and is contrary to planning policies regarding sustainability. It also demonstrates the need for accommodation to be available within easy access of the hospital site, particularly as many of the staff are shift workers and out of hours public transport is not readily available to the site. The Addenbrooke’s staff housing need surveys also highlighted that the highest turnover of staff was found to be among those in the 30- to 39-year age bracket, i.e. those who have settled into their careers. One of the problems noted was the lack of affordable accommodation suitable for families nearby. Addenbrooke’s Human Resource department confirmed that this trend in staff turnover has persisted (Addenbrooke’s, 2009). As part of Addenbrooke’s 2020 Vision, the Trust has expanded its current housing stock within the hospital complex for medical and other on-call staff. At present, there are around 850 units of accommodation on site managed by a housing association. An additional 292 key worker dwellings were granted planning permission in July 2008, equating to a £28 million scheme (Addenbrooke’s NHS Trust, 2008b). However, although this on-site housing provision is a valuable additional source of key worker housing, it is only suitable for those workers who have short-term contracts or those who are required to be resident on site as part of on-call arrangements. The Addenbrooke’s housing need surveys demonstrated that for the majority of existing and new staff, on-site accommodation is neither a desirable nor a practicable solution (CCHPR, 2002b; Addenbrooke’s NHS Trust, 2009).

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Addenbrooke’s does not have available land in its own ownership to fulfil its key worker housing requirements, so it is reliant on the provision of key worker housing in locations adjacent to the main hospital complex site. Provision close by is necessary to allow staff to travel to work using sustainable modes of travel (walking, cycling) and also would suit employees who work irregular or antisocial hours through shift work. The Cambridge Southern Fringe has been identified for development in the Cambridgeshire County Council’s Structure Plan (2003), the Cambridge City Council’s Local Plan (2006a) and the South Cambridgeshire District Council’s Local Development Framework (LDF) (2007) to serve the major expansion of Addenbrooke’s hospital and its new biomedical campus. The Structure Plan (2003) and subsequent Joint Area Action Plan (2009) between the two districts make provision for land to be removed from the Green Belt and used mostly for housing and mixed use development, with an indicative capacity of 4,000 dwellings (around 65 hectares of housing) as well as a new primary school, shops, enhanced community facilities and a 60-hectare country park (CCC & SCDC, 2009). The vision for the Southern Fringe is to create a distinctive new urban extension to the City and provide additional housing close to the main public-sector employer in the area. The Homes and Communities Agency (HCA) has piloted a partner commissioning process for three strategic growth sites in Cambridge, including the Southern Fringe as well as the North West site (excluding University-owned land) and the new settlement, Northstowe, proposed north of Cambridge. Developing a new urban extension through this innovative partnership arrangement – named the Cambridge Challenge – with the landowner and a consortium of developers plus selected housing associations represents a sea change in the way the HCA normally manages public investments and provides funding for affordable housing. The development partner has been selected in advance of agreeing the specific site details. The HCA has also committed grant funding for affordable housing to all three strategic sites over the next five years. The agency’s intention is to test whether identifying a development partner in advance and providing longer-term funding to these strategic sites will help maximise the impact of the agency’s grant funding and strengthen the strategic partnerships (HCA, 2010). The development on the Southern Fringe will also go ahead with the help of a £4.5 million loan to the developers put in place by Cambridgeshire Horizons, the not-for-profit company set up by the County and district councils to deliver sustainable growth in the Cambridge sub-region (Cambridgeshire Horizons, 2010). This is deemed necessary so that housing growth targets set for the Cambridge sub-region are delivered, but also in response to the employment needs of such a key public-sector employer within the area. Delivering this growth has not only regional but national significance

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(HCA, 2010). To ensure that this scheme is as sustainable a location as possible and to minimise the traffic impact, the developers have agreed to help fund a new access road; the Cambridgeshire Guided Busway; on-site parking and improvements to roads, footpaths, cycle ways and bridleways (Cambridge City Council, 2009). With regard to the new housing, Cambridge City Council is committed to its Local Plan (2006a) policy that 40 per cent of the new homes will be affordable housing, despite pressures from developers to reduce the requirement (Cambridge City Council, 2009). The proportion of key worker housing for the health sector employees is to be 30 per cent of the affordable housing on the Southern Fringe. It will take the form of shared ownership (New Build HomeBuy), shared equity, discounted market housing and cost renting. The Addenbrooke’s staff housing needs surveys suggested that neither existing nor new employees themselves want to live in a location dominated by health workers and which might be perceived of as a health sector ‘ghetto’. Instead, there is a strong preference to live among the wider community (CCHPR, 2002b; Addenbrooke’s NHS Trust, 2009). Therefore a 30 per cent quota of key worker housing as part of the affordable housing requirement seems appropriate. However, concerns have been raised with respect to the type, size and tenure of the properties to be built. New-build properties tend to be primarily one- to two-bedroom flats, which are likely to be too small for families and thus would not help towards retaining older, more qualified health sector employees in the area. As Roger Tym & Partners (2003) argued ‘the efforts in delivering key worker housing should not simply focus on the provision for new recruits’ (p. 41). Their interviews with the Cambridge Employers’ Consortium raised concerns that ‘some of the best and most experienced middle-ranking staff were being lost’ (p. 41). In terms of determining eligibility of staff for the key worker housing, the hospital, the Zone Agent (Key Homes East) and the local authority will use the City Council’s affordability criterion for key workers defined in the Government’s KWL Programme. This focuses primarily on nurses and other NHS clinical staff. However, the Addenbrooke’s staff housing needs surveys suggested that many other categories of health workers are in housing need in the Cambridge area, including porters and junior technical staff (CCHPR, 2002b; Addenbrooke’s NHS Trust, 2009). A wider definition than the current government definition was recommended in CCHPR research for the EERA to include contracted out workers in public hospitals as well as medical secretaries and medical receptionists (EERA, 2005). So far, the Zone Agent has not included these groups in its definition of key workers. Student nurse grades are also not eligible for any form of housing assistance nor are recruits from overseas. However, a lot of the recruitment to Addenbrooke’s hospital is from overseas, including around 100 nursing

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staff each year (approximately 45 from the Philippines and 40 from Spain). Under current regulations, these staff members are usually not eligible for housing assistance as they do not have permanent leave to stay in the UK. However, staying on rates at the hospital is high, with only a small proportion leaving hospital employment. These types of staff therefore need to look to rent or buy accommodation, with many of them bringing their families with them to the UK. As the Government’s key worker evaluation study suggested, having some health workers who are ineligible has a negative impact on morale (GHK Consulting Ltd and Centre for Urban and Regional Studies, 2006). Problems are also envisioned with regard to New Build HomeBuy (shared ownership) (see Chapter 11). This is particularly significant in relation to what happens when a key worker buys the full equity on the property and sells it on the open market, as it is important that key worker housing remains affordable in perpetuity. Up until March 2008, the HCA stipulated that if a key worker left their eligible occupation, they had to pay back the proportion of the original value of the property still covered by the KWL Programme within two years. This clawback mechanism, however, adversely affected potential demand and reduced the popularity of key worker New Build HomeBuy across England. Key worker housing was therefore in competition, for instance, with other shared ownership schemes which did not have a clawback element (GHK Ltd and Centre for Urban and Regional Studies, 2006). In the current housing market downturn, such restrictions have subsequently been removed by HCA to aid the take-up of this new housing supply coming on stream (Morrison, 2010b). Overall, New Build HomeBuy has proved to be less popular compared to the KWL programme’s open market HomeBuy, especially where mortgage payments, rent and service charges together are roughly equivalent to a single mortgage payment. It also does not offer the same degree of choice in terms of type and location of housing as Open Market HomeBuy (Morrison, 2010b). Even with the removal of the clawback mechanism, Key Homes East noted in an interview that take-up across the region has remained slow.3 Unlike Open Market HomeBuy, beneficiaries do not have the benefit of an equity loan. To purchase a 50 per cent share of a new dwelling with a value of £180,000, for example, a key worker would require an annual income of around £26,000 and rent and services charges would still have to be paid on the remaining share. A high percentage of applicants do not have incomes of this size. So this type of intermediate housing may not be affordable for many would-be purchasers, unless they have access to additional capital. This is becoming increasingly unlikely given the reduced availability of mortgage finance (see Chapter 13). These findings do not auger well in relation to anticipating the demand for key worker housing on the Southern Fringe site.

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Conclusions Traditionally, social rented housing met the needs of many lower-income employed households in England. Growing incomes and aspirations on the one hand and increasing emphasis on meeting priority needs in traditional affordable housing provision on the other hand have left a gap, currently reflected in the concerns about key workers. Addressing this problem is particularly important in the Cambridge sub-region because of the region’s role as an engine of economic growth nationally. It is essential that these workers are retained in the area both for the local economy and the broader community (Palm, 2005). Securing key worker housing through the planning system does allow key workers to access new affordable housing in high-priced severely constrained areas, like Cambridge. Also, it contributes to the sustainable community agenda by providing mixed income, mixed tenure housing on new-build developments. Cambridge City Council, like many other local authorities in England, has therefore revised its affordable housing policies, widening them to include key worker housing. The setting up of a new delivery mechanism – the ‘Cambridge challenge’ – has the potential to offer a new way of delivering both subsidised rented and key worker housing on large strategic sites. Both Cambridge City Council and South Cambridgeshire District Council are committed to working with the HCA to make the delivery of the affordable housing component as cost effective and efficient as possible. This is paramount given the urgency to bring forward major housing developments, like the Southern Fringe, to meet the housing needs of key workers as well as those in priority need, irrespective of delays from the private sector in the current housing market downturn. If this new commissioning process works in Cambridge, the Government’s intention is to replicate it in other areas in England (HCA, 2009). At the same time, Central Government is also pushing for hospitals, like Addenbrooke’s, to expand and become international centres for clinical care and research. However, consideration has to be also given to how this growth is to be accommodated within existing built-up areas, like Cambridge. Given the significance of this new urban extension, the overall scheme and new key worker housing have to be right. Key workers who have settled into their careers may not favour the concentration, size and tenure of key worker properties. At the same time, new recruits will also want the ability to trade up into larger accommodation in the future rather than having to relocate elsewhere. The long-term sustainability and social cohesion of new communities, such as the one proposed beside the hospital, need to be taken into account, with key workers’ changing housing requirements considered at the outset.

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In addition, the principle of selectivity between those that are entitled to key worker housing and those that are not may create divisiveness. The complexities of defining and drawing boundaries for key worker entitlement have not been resolved by central government (HCA, 2010). However, allowing local planning authorities, and their respective Zone Agents, the discretion to respond to key worker and general housing needs specific to their area at least provides some form of policy flexibility. New-build shared ownership properties are potentially less popular, despite providing a realistic stepping stone into owner-occupation. Ultimately, if key workers aspire to full home ownership, they will continue to move to locations where they are able to meet that aspiration, even if this is currently unrealistic given their incomes and lack of mortgage availability. The housing they choose may continue to be at considerable distance from the workplace and take a high percentage of income, regardless of what is built adjacent to key public-sector institutions. There is a clear opportunity cost in addressing key worker housing need through the planning system when demand is less than clear and when problems with homelessness and need for traditional social housing provision remain. As the Government’s own key worker evaluation report noted ‘it appears inappropriate to reserve housing for this group, if empty units could be usefully allocated to others in housing need’ (GHK Ltd and Centre for Urban and Regional Studies, 2006, p. 89).

Notes 1. The Government’s ambitious £690 million programme, known as the KWL programme, was introduced in England in April 2004 (ODPM, 2004). The Government’s HCA administers the scheme through local Zone Agents, with the main form of assistance being the provision of interest-free equity loans worth around 25 per cent of the property value, known as Open Market HomeBuy. 2. The Government’s definition of key workers in its KWL programme (2004) includes nurses, other NHS clinical staff, teachers in schools and further education and sixth form colleges, police officers, prison and probation service staff, social workers, educational psychologists, planners (in London) and occupational therapists employed by local councils, whole-time junior fire officers and retained firefighters (ODPM, 2004). 3. In 2008/09, the number of approved key workers in Cambridge city who was currently on the Key Homes East register included 173 for New Build HomeBuy compared to 191 for Open Market HomeBuy and 188 for intermediate renting – whether these figures translate into actual take-up remains to be seen. The number of key workers actually housed who work in Cambridge includes 59 in New Build HomeBuy compared to 137 Open Market HomeBuy and 47 intermediate renting. This gives an indication of housing tenure preference, however much of the New Build HomeBuy programme is still underway or not come to fruition, such as the Southern Fringe.

Section D Who benefits from intermediate housing?

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Introduction to Section D: Who benefits from intermediate housing? Case studies of implementation

Is intermediate housing a way of increasing home ownership, a way of assisting households unable to access market housing but ineligible for social housing, a way of alleviating employment problems, a way of ensuring sustainable homeownership, or a way that governments can meet their declared affordable housing targets by building new homes with lower subsidy? In other words, given the policies that have been introduced, how do they work on the ground to achieve more fundamental objectives? One way of addressing these questions is to look at who has actually benefited from intermediate housing and how this has been achieved. Between 1999 up to the end of 2006, shared ownership and shared equity products had helped about 40,000 households. This section asks who these beneficiaries were, what are their characteristics, where do they live and what have been their experiences of intermediate housing. Important in this context is also how implementation strategies are developed to mould national policy to local circumstances. The two distinct intermediate housing schemes that have been running under various guises in England over the last decade or so are shared equity and shared ownership. These types of product might be expected to appeal to different types of household. For example, shared equity products have a larger standard mortgage requirement than shared ownership but they also provide the possibility of a wider range of dwellings, so they might appeal to better-off households among the target groups. Similarly, we might expect key workers to prefer shared equity because public-sector workers, notably health care workers and policemen, are well known to dislike the idea of living on an estate surrounded by similar professionals. We might

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Making housing more affordable: the role of intermediate tenures

therefore expect the success of key worker shared ownership schemes to be quite dependent on being in the right location. Shared ownership however provides a narrower range of options but also lower outgoings, greater risk sharing between the purchaser and the landlord, and the possibility of Housing Benefit on the rental element and even staircasing down if circumstances change for the worse. Shared ownership is therefore likely to appeal more to those on lower incomes and perhaps those looking for a first home. The different products might also be expected to work for different groups of people in different housing market contexts. The housing market in the south is generally very pressured, while in the north there are lower demands in most areas. We might therefore expect shared ownership products to be accessed by rather lower-income households than in the south, because house prices and rents are more affordable. In the south, we might expect shared equity products to be more popular among higher-income groups who are still unable to access market housing. Cho and Whitehead in Chapter 8 directly address these kinds of questions. Using data from the COntinuous REcording (CORE) system on sales from affordable housing providers (AHPs), they examine differences in purchasers of the two main products in terms of household characteristics including income, and regional differences. Looking at actual take-up in two time periods, one before house prices started to rise so dramatically, the other more recent but still avoiding the impact of the downturn, the chapter shows which products have been taken up at different times and by varying types of household. Chapter 9, by Scanlon, then focuses on targeting key workers in London and explores the different behaviour of teachers, police, health workers and transport workers. In this context, housing solutions are being used to alleviate what basically are labour market problems. However, using a generic ‘key worker housing problem’ can obscure important differences between those with transferable skills and those whose skills are sector-specific. This can affect the success of targeting specific products at particular groups and/ or locations. Clarke in Chapter 10 emphasises issues of satisfaction and sustainability and is based on surveys of households living in shared ownership housing. One group had only recently moved in while the other had been there for some time. Their experiences were different, and whether shared ownership was sustainable depended on timing as well as the size of the share relative to income. The chapter explores the extent to which shared ownership has been achieving its stated objectives and whether it has met householder expectations in practice. The final chapter in this section – Chapter 11 by Monk – traces the processes whereby local authorities and housing associations in a relatively

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139

high demand region try to implement national government policies on intermediate housing. As the products kept changing, the regional body tried to provide guidance and assistance to housing providers. At the same time it was developing its own policies on affordable housing and responding to government requests for information that would affect the amount of housing subsidy the region would get in the following year. The issues are not just those of process but of outcome – who actually is able to buy in the highly pressured areas of the East of England where there has been plenty of opportunity for providing affordable housing on the back of market development.

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8 Different tenures, different households? Youngha Cho and Christine Whitehead

In developing government policy on intermediate housing, a major objective is both to target groups that are particularly likely to want the attributes on offer and to meet broader social and government objectives, including ensuring value for the public purse. The UK government has identified two particular groups that intermediate housing should target: key workers who need to live in or near highly pressured areas and tenants who will move out of social housing and so leave a tenancy for someone in greater need – and by extension those who are on waiting lists but might be able to access home ownership with limited subsidy. In this chapter, we examine the evidence on who has actually been helped by government schemes and whether the household attributes of those taking up intermediate housing vary between schemes, regions and over time. To do this, we look first at the period 2000–05 when there were two main products: shared ownership (SO) and HomeBuy – a shared equity (SE) mortgage. We then move on to examine the evidence on who has been taking up the rather different products that have been made available since the financial crisis of 2007. The types of households who might be prepared to take up intermediate housing are those where at least one member is in work, probably full time, while a second member might also be in work, either full or part time. A significant proportion of this group of low-income employed households would traditionally have been housed in social rented housing in the UK. Today however social rented housing is in the main allocated according to priority need which excludes most working households.

Making Housing More Affordable: The Role of Intermediate Tenures, edited by Sarah Monk and Christine Whitehead © 2010 Blackwell Publishing Ltd.

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Making housing more affordable: the role of intermediate tenures

The group includes many who in the last few years would have stretched their finances to obtain a mortgage. As house prices continued to rise faster than incomes, more and more households have been excluded from ownership. As a result, people in occupations such as teachers, nurses, the police, the lower echelons of local government and other similar positions have started to fall into the category of households who might take up intermediate housing. Thus for most potential intermediate tenure purchasers, the only other option would be private renting. In addition, some households who are currently in the social rented sector might take up intermediate housing if members of the family are in work and earning reasonable incomes. Potential purchasers are therefore likely to be relatively young – age between 25 and 40 – single or couples, initially without children. Their incomes would be such as to make home ownership difficult and they are likely to be living currently in the private rented sector or with family or friends. Many would be considered ‘key workers’ by local authorities – those who are employed in public-sector occupations that are ubiquitous and who would have expected to be able to access home ownership before rises in house prices made it unaffordable. They aspire to home ownership and may well be prepared to move to a cheaper area in order to purchase their first home.

Who actually takes up intermediate housing? The two core intermediate tenure products provided over the last decade have been SO and HomeBuy – the SE product. As we noted in Chapter 2, these two products have had very different attributes in terms of choice (new build as compared to the whole housing market) and tenure form (part own, part rent as compared to 100 per cent purchase with an equity loan). Both are however allocated by social landlords on fundamentally similar criteria. This section looks at the types of people who have actually taken up the two main schemes in England: the kinds of property they buy in terms of size and location and how much they pay for their property, both at the time of purchase and on a regular basis afterwards. The analysis concentrates on the period April 2000 to March 2005 when the two schemes were clearly delineated. In the final section, we examine what has happened in the context of changing instruments and the changing economic environment following the credit crisis. Evidence is available from the census of sales, CORE (COntinuous REcording system), which contains information on all sales via SO and HomeBuy schemes monitored by Housing Associations (HA) in England. Table 8.1 shows the numbers available for the two schemes by year for the 2000–05 period. Table 8.2 provides some summary statistics about the attributes of the households involved. It shows that there are very significant differences

Different tenures, different households?

Table 8.1

143

Numbers in the two schemes.

2000 2001 2002 2003 2004 2005 Total

SO

HomeBuy (SE)

3,752 3,856 4,144 4,822 5,923 7,132 29,629

1,078 1,016 881 1,214 1,403 3,507 90,99

Source: CORE.

Table 8.2 Household attributes (2000–05) (%). SO

Annual income

Household type

Age

Ethnicity

Economic status

Previous tenure

LA, local authority. Source: CORE.

0–15,000 15,000–25,000 25,001–45,000 45,001⫹ Total Single household Couple household Lone-parent household Two-parent household Multi-adult household Total 0–29 30–49 50–64 65⫹ Total White Mixed Black Asian/Chinese/other Total Working Retired Unemployed/inactive Total Owner Private tenant Renting LA Renting HA Family/friends/temporary housing Total

HomeBuy

18 38 40 4 100 40 26 10 17 7 100 46 47 6 1 100 83 4 7 6 100 98 2 0 100 10 37 4 7 42

6 35 50 9 100 27 21 13 32 7 100 35 60 5 0 100 77 3 12 8 100 99 1 0 100 5 31 11 31 22

100

100

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Making housing more affordable: the role of intermediate tenures

between those who have purchased under the SO programme as compared to those who used HomeBuy to achieve owner-occupation. Shared owners were far more likely to be single people, to be younger and considerably poorer than HomeBuy households. HomeBuy households were all in work and were generally better off. Indeed, they appeared to be much more like those who lost out on purchasing during their twenties – with reasonable incomes but also more family responsibilities and somewhat older and more settled in general. They were also more likely to be from ethnic minorities than those in SO. One of the biggest differences between the two schemes was the household’s past tenure. Over 40 per cent of the HomeBuy purchasers had been social tenants previously, while the majority of the SO purchasers were from the private rented sector but with 42 per cent coming from family and friends or temporary accommodation. Table 8.3 shows the geographical distribution of those who benefited from the two schemes. Nearly two-thirds of those accessing either scheme were in London and the Southern regions, followed by the Midlands (SO 16 per cent and HomeBuy 18 per cent). As for the rest of England, SO was taken up more in the North (11 per cent), whereas HomeBuy was more popular in the East (15 per cent). Table 8.4 shows how the household attributes of those accessing the two schemes varied between the pressured areas and the lower-priced Northern regions. In the pressured areas of London and the South, those on the lowest incomes were not able to benefit from the schemes in the way that they could in the North – in the South more than half of shared owners and almost 70 per cent of HomeBuy purchasers earned more than £25,000 a year (income figures were adjusted for inflation using the GDP deflator with 2003 ⫽ 100). It is also worth noting that ethnic minorities were more likely to benefit from the schemes in the Southern than in the Northern regions, while single parents had a greater chance in the North, especially moving into SO.

Table 8.3

Distribution of sample by region. SO

London/South East Midlands North Total Source: CORE.

HomeBuy

No.

%

No.

%

27,165 1,906 6,434 4,293 39,798

68 5 16 11 100

7,787 1,813 2,158 337 12,095

64 15 18 3 100

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Different tenures, different households?

Table 8.4 Household attributes: regional analysis (%). SO London/ South

Annual income

Household type

Age

Ethnicity

Economic status

Previous tenure

LA, local authority. Source: CORE.

0–15,000 15,000–25,000 25,001–45,000 45,001⫹ Total Single household Couple household Lone-parent household Two-parent household Multi-adult household Total 0–29 30–49 50–64 65⫹ Total White Mixed Black Asian/Chinese/ other Total Working Retired Unemployed/ inactive Total Owner Private tenant Renting LA Renting HA Family/friends/ temporary housing Total

HomeBuy

North

London/ South

North

12 35 47 6 100 39 27

37 43 19 1 100 45 23

4 29 55 12 100 28 21

24 48 27 1 100 19 21

9

12

11

18

18

12

34

37

7

8

6

5

100 44 50 5 1 100 79 4 10 7

100 46 41 9 4 100 93 1 2 4

100 33 63 4 0 100 74 4 14 8

100 29 61 8 2 100 90

100 99 1 0

100 94 6 0

100 100 0 0

100 98 2

100 7 41 4 8 40

100 19 28 5 5 43

100 4 32 12 31 21

100 8 22 14 43 13

100

100

100

100

2 8

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Making housing more affordable: the role of intermediate tenures

The most fundamental regional difference in terms of purchaser attributes was income. There were also significant regional differences between the two schemes in terms of tenure with more ex-owners in the North (especially moving into SO) and a far higher proportion coming from the social rented sector to the HomeBuy scheme. In sum, SO purchasers were younger and more likely to be single, while HomeBuy purchasers were older and more likely to have families. More HomeBuy purchasers have come from the social sector while SO has catered particularly for those from ‘temporary’ accommodation. And in pressured areas, all purchasers, but particularly for HomeBuy, have been better off.

The attributes of properties purchased There are obvious reasons why the properties purchased should differ between schemes, because SO properties were all new build or renovated while HomeBuy purchasers were generally looking in the market for existing homes. Table 8.5 gives summary statistics on what was purchased by the two groups and shows very significant differences, reflecting both the available housing and the reasons for using a particular route to home ownership. Four out of ten homes bought by SO purchasers were purpose-built flats or maisonettes – and this proportion has been rising rapidly as the emphasis on increasing the total output of affordable and market homes has grown. The proportion was slightly higher in London and the South (50 per cent) but was also significant in the North (38 per cent), whereas it

Table 8.5 Property attributes (%, £). SO London/South

Property type

Bedroom

Property value (median) Moving Distance Source: CORE.

Flat/maisonette House/bungalow Bedsit/other Total 1 2 3+ Total

Short distance Long distance

HomeBuy North

50 50 0 100 22 55 23 100 £148,632

38 62 0 100 12 48 40 100 £78,497

96 4

96 4

London/South

North

29 71 0 100 14 36 50 100 £135,266

5 95

91 9

100 3 34 63 100 £83,030

84 17

Different tenures, different households?

147

was much lower in the Midlands and the East regions (28 and 19 per cent, respectively). However, far more HomeBuy purchasers obtained houses or bungalows rather than flats, with over 70 per cent able to purchase houses, even in London and the South. SO purchasers appear to have been happy simply to be able to buy a property, while HomeBuy purchasers seem to have looked for the home they want to live in into the longer term. Of interest is the high proportion of flats purchased by retirees under the SO scheme – at 42 per cent in the North and 38 per cent in the South. This almost certainly reflects the extent to which such households are buying properties specifically designed for older people who often form part of new-build mixed tenure schemes. The picture is similar with respect to the size of property as measured by the number of bedrooms: a much higher proportion of HomeBuy as compared to SO purchasers were able to buy larger properties. Equally across the two groups of buyers, dwellings were generally smaller in London and the South East than in other regions where housing pressure is less. A further issue relates to the location of the properties purchased. One of the recognised problems of social renting is that the capacity to move between areas is extremely limited and intermediate tenures have been seen as able to provide greater choice (Cho and Whitehead, 2003). The evidence (Figure 8.1) suggests that SO enables very little longer-distance mobility but that HomeBuy purchasers are able to move more easily. Other evidence (Cho and Whitehead, 2003, 2004) suggests that even for short-distance moves (within the same district), HomeBuy purchasers move relatively further away to cheaper neighbourhoods in order to obtain the type and size of property they desire. The regional picture (Figure 8.2) shows, however, that HomeBuy households’ capacity to move is lower in London, the South and the Midlands than in the North and the East.

100% 80% 60% 40% 20% 0% SO

HomeBuy

Long distance

4.0

10.8

Short distance

96.0

89.2

Figure 8.1 Distance moved. Source: CORE.

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Making housing more affordable: the role of intermediate tenures

100% 80% 60% 40% 20% 0%

SO

HomeBuy SO

HomeBuy SO

London/South

HomeBuy SO

East

HomeBuy

Midlands

North

Long distance

4

9

9

23

3

6

4

16

Short distance

96

91

91

77

97

94

96

84

Figure 8.2 Distance moved: regional analysis. HB, HomeBuy. Source: CORE. Property value (median) 200,000 150,000 100,000 50,000 0

London/South

East

Midlands

North

England total

SO

148,632

130,000

91,561

78,497

134,006

HomeBuy

135,266

128,000

98,000

83,030

126,651

First-time buyer

147,123

100,950

88,818

74,005

98,722

Figure 8.3 Property values. Source: CORE and Nationwide online data.

An important issue is whether SO and HomeBuy schemes have enabled households to buy larger or higher-quality housing than other first-time buyers, or whether it has simply made ownership possible. One way of looking at the question is to compare property values across the different options. The property prices of dwellings purchased under the SO and HomeBuy schemes – which are market prices before discounts and grants are taken into account – can be compared with those paid by market buyers. The value of first-time buyers’ property is sourced from nationwide online data, while the SO and HomeBuy prices come from CORE as before. Figure 8.3 shows the pattern of prices across the three schemes. For England as a whole, the median values of SO and HomeBuy properties were 20–30 per cent higher than those for market buyers over the period 2000–05. Once the figures are broken down by region, the importance of location becomes more obvious. They clarify the significant difference between

Different tenures, different households?

149

Property value (median) 200,000 150,000 100,000 50,000 0

London/South

East

Midlands

North

England total

SO

148,632

130,000

91,561

78,497

134,006

Home Buy

135,266

128,000

98,000

83,030

126,651

LR 1LQ property (C)

102,905

83,681

59,827

43,856

68977

Figure 8.4 Property values compared to lowest quartile transactions: regional analysis. Source: CORE and the Land Registry online data.

property values in London/South and other regions and the extent that SO and HomeBuy has been concentrated in the higher-priced areas. The value of SO property purchased in London and the South is similar to that for market first-time buyers in the same regions, while HomeBuy prices are about 8 per cent cheaper. At the extreme, SO and HomeBuy properties in the East are around 30 per cent more expensive than properties for market buyers, and across the rest of the country SO and HomeBuy prices are above first-time buyer prices. These comparisons suggest that purchasers using SO and SE schemes are not buying something the market sees as less valuable. They are able to buy more expensive properties in most parts of the country, perhaps reflecting the newness of SO properties and the larger size of HomeBuy purchases. They are also able to buy in more sought-after areas as a result of the schemes. The Survey of Mortgage Lenders provides additional data regarding the average property price paid by first-time buyers, based on building society mortgage completions. According to this, the median price paid between 2000 and 05 by first-time buyers was £70,788, which is much less than that paid by SO and HomeBuy purchasers (around 45 per cent cheaper). Figure 8.4 shows the property values of both schemes as compared to the lowest quartile prices of dwellings transacted. The lowest quartile prices are sourced from the Land Registry online data. The property values of SO and HomeBuy in London/South are 30–40 per cent higher than those in the lowest quartile, 50–60 per cent more expensive than those in the East and Midlands and over 80 per cent more expensive than those in the North. This further suggests that low-cost home-ownership (LCHO) purchasers have not been ‘bottom-end of the market’ purchasers. These figures have important implications. Findings from several much earlier studies suggested that LCHO was about 20 per cent cheaper than

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Making housing more affordable: the role of intermediate tenures

the average price paid nationally by first-time buyers (Littlewood and Mason, 1984). The evidence since 2000 suggests that this has changed with LCHO purchasers buying similarly priced or more expensive properties than market buyers.

Affordability Affordability is a complex issue and a number of different measures can be used to assess it. It is traditionally suggested that households might spend up to 30 per cent of their net income on rent or mortgage payments. A more recent study recognised that some households in London could be expected to pay as much as 50 per cent of net income towards their total housing costs at least for a short period, and this would leave enough residual income available for other necessities (Lee, 2004). This section examines whether the LCHO purchases in the period 2000– 05 appeared to be affordable at the time of purchase (and to some extent into the longer term), and whether this has varied between different housing markets. We use two measures: the price-to-income ratio (PIR), i.e. the ratio of housing cost to income, and a simple housing cost measure. There are a number of studies on income differences across tenure, all of which have shown that households buying their homes were better off than tenants in the private or social rented sectors (Allen, 1982; Wood et al., 1988; London Research Centre, 1989; Levison, 1990; Lynn, 1991). General points emerge from those studies. First, homebuyers were likely to have had incomes that were 1.5 times the national average, although firsttime buyers tend to have incomes that are only just above the average. The incomes of households who bought through the LCHO schemes (including the Right to Buy, as well as SO and HomeBuy) have been just below that average. Second, there has been remarkably little difference in the average incomes of households buying under the different LCHO schemes. They all had incomes of between 80 and 90 per cent of the incomes of market firsttime buyers, about double those of social tenants but less than-two thirds of the income of homeowners with a mortgage (Littlewood and Mason, 1984; Home Ownership Taskforce, 2003a, b). The incomes of HomeBuy and SO purchasers during the 2000–05 period however show a somewhat different picture (Figure 8.5). As a benchmark, firsttime buyer’s monthly income is used, sourced by the Council of Mortgage Lenders’ survey, although it does not provide a geographical distribution. Since 2000, the incomes of purchasers using these schemes have only been about two-thirds of first-time buyers’ incomes (SO 69 per cent, HomeBuy 75 per cent). HomeBuy purchasers’ incomes were around 15 per cent higher than those of SO purchasers across regions.

Different tenures, different households?

151

Monthly income (median) £2500 £2000 £1500 £1000 £500 £0

London/South

East

Midlands

North

England total

SO

£1668

£1567

£1256

£1264

£1541

HomeBuy

£1787

£1756

£1500

£1467

£1704

Market FTB

£2236

Figure 8.5 Monthly income. FTB, first-time buyer. Source: CORE and CML/Bank Search Regulated Mortgage Survey. PIR (median) 6.0 4.0 2.0 0.0 London/South

East

Midlands

North

England total

SO

5.7

5.3

5.1

4.5

5.5

HomeBuy

4.5

4.6

4.4

4.1

4.5

Market FTB

2.7

Figure 8.6 Price-to-income ratios (PIRs). FTB, first-time buyer. Source: CORE and CML/Bank Search Regulated Mortgage Survey.

This is significant: it seems that the affordability of low-cost homes has worsened considerably over the years as house prices have risen. Moreover, taking into account the evidence that SO and HomeBuy properties are not necessarily cheaper than those of market first-time purchasers, it suggests that the subsidy alone may be the only factor making purchase possible. The PIR is one of the most frequently used measures of affordability, especially at the time of purchase. Figure 8.3 shows that there is a definite North/South gradient in house prices, suggesting that purchase is easier in the North of England than in the more affluent South. However, there is equally a North/South gradient in household incomes, so the issue of affordability may not be so straightforward. Affordability measured by the PIR for SO and HomeBuy purchasers (Figure 8.6) shows a clear North/South gradient – with higher PIRs in

152

Making housing more affordable: the role of intermediate tenures

the South and lower PIRs in the North. Moreover, SO buyers’ PIRs were consistently higher (5.7 in London/South and 4.5 in the North) than those for HomeBuy purchasers (4.5 in the East and 4.1 in the North). These PIRs were also consistently higher than those of market first-time buyers which were on average 2.7 during the same period. We may therefore conclude that SO and HomeBuy purchasers’ affordability in the early twenty-first century was considerably worse than for first-time buyers in general.

Housing costs A rather different measure that better reflects the attributes of SO and HomeBuy looks at the household’s regular housing outgoings in relation to income. Absolute housing costs vary considerably across the types of tenure. Figure 8.7 shows the monthly housing costs of those in the two LCHO schemes. There were only very small differences between SO and HomeBuy purchasers – with HomeBuy purchasers having slightly lower costs, except in the East region. However, on costs-to-income ratios, the differences are large (Figure 8.8), with SO purchasers paying higher proportions (34 per cent in London/South, 28 per cent in the North) and HomeBuy costs considerably lower (27 per cent in London/South, 23 per cent in the Midlands and the North). Finally, these ratios can be compared to first-time buyers’ ratios at the national level using the Regulated Mortgage Survey for evidence on firsttime buyers (Figure 8.9). On this basis, first-time buyers were paying on average 13.8 per cent of their monthly income on housing costs. The evidence

Monthly housing costs (median) 800 600 400 200 0 London/South

East

Midlands

North

England total

SO (A)

582

477

371

360

523

HomeBuy (B)

559

509

332

347

497

Figure 8.7 Monthly housing costs. Source: CORE.

Different tenures, different households?

153

Monthly housing cost to income (median) 40.0% 30.0% 20.0% 10.0% 0.0% London/South SO (A) HomeBuy (B)

East

Midlands

North

England total

33.9%

30.8%

29.8%

28.4%

32.5%

27.0%

27.4%

22.8%

22.8%

26.3% 13.8%

First time buyer (C)

Figure 8.8 Ratio of monthly housing costs to incomes. Source: CORE and CML/Bank Regulated Mortgage Survey.

1 0.9 Housing cost ratio–total

0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 0

10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 100,000 Annual income total

Figure 8.9 Distribution of ratio of housing cost to income by annual household income, SO purchasers. Source: CORE.

clearly suggests that the two LCHO groups were much more burdened than the average first-time buyer even after subsidy. Research findings in the 1990s showed that taking all housing expenditure into account, the average homebuyer in the 1980s paid about 30 per cent of their income to cover their housing costs, while the average for tenants was less than 20 per cent (Maclennan et al., 1990; Berthoud and Kempson, 1992). However, the proportion of income devoted to housing costs varied widely

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Making housing more affordable: the role of intermediate tenures

with household income levels, with a majority of lower-income households seen to be paying out 20–30 per cent of their net income. A more recent study (Lee, 2004) suggested that households with incomes of less than £15,000 should contribute no more than 25 per cent of their income to housing, increasing up to a maximum contribution of 30 per cent from households earning £40,000 or more. Figures 8.9 and 8.10 show the distribution of the ratio of housing costs to household income for those purchasing under the two schemes. The white line indicates a benchmark, suggested by the Greater London Housing Requirements Study, for the proportion of household income that should appropriately go on housing. Nearly 60 per cent of SO buyers were spending more than 30 per cent of their income on housing costs. Those paying more than 30 per cent were concentrated among poorer households earning less than £15,000 per year. The evidence on SO in practice suggests that concentrating on new dwellings, while having the benefit of adding to the stock at less subsidy than social renting, is a relatively expensive approach to the issue. Among HomeBuy purchasers, 32 per cent of households were paying more than 30 per cent of their income on housing. These higher rates were to be found slightly further up the income scale (£15,000–25,000) (Figure 8.10).

1 0.9 Housing cost ratio–total

0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 0

10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000100,000 Annual income total

Figure 8.10 Distribution of ratio of housing cost to income by annual household income, HomeBuy purchasers. Source: CORE.

Different tenures, different households?

155

Table 8.6 Distribution of ratio of housing cost to income: regional analysis (%). London/ South

SO

HomeBuy

East

Midlands

North

Total

0–25% 25–30%

17.5 17.7

25.4 21.6

31.5 19.3

36.6 18.3

22.3 18.3

30–50% 50–75% 75% Total 0–25% 25–30% 30–50% 50–75% 75% Total

55.0 9.1 0.7 100.0 39.2 25.7 32.8 1.7 0.6 100.0

47.0 5.3 0.7 100.0 37.3 25.0 34.2 2.9 0.6 100.0

44.0 4.5 0.7 100.0 59.0 21.1 18.0 1.5 0.4 100.0

39.8 3.5 1.8 100.0 60.2 19.2 17.8 1.4 1.4 100.0

51.1 7.5 0.8 100.0 43.6 24.4 29.6 1.9 0.5 100.0

Source: CORE.

Table 8.6 shows the regional pattern of affordability across the two schemes. As might be predicted, those buying in London/South and the East were spending considerably higher proportions of their income on housing, compared to those in the Midlands and the North. This pattern was consistent across the schemes. Thus it appears that SO and HomeBuy purchasers have been prepared to incur rather higher housing costs than first-time buyers in order to gain at least partial ownership. It also shows that shared owners were paying higher costs in proportional terms. Further, the affordability situation was clearly worse in the pressured areas of London/South and the East, with many households paying up to 50 per cent of their income on housing costs. This may be acceptable in the short run given the higher incomes especially in London, but any change in the economic environment may make this unsustainable.

What happened after the downturn? During 2007, the housing market turned down, first slowly as the market came off the boil, then dramatically, as a result of the failure of Northern Rock and then because of rapidly declining demand in the face of falling house prices and lack of confidence. The vast majority of those who had bought their homes under the two schemes in the two years before found themselves in negative equity as average house prices fell by over 15 per cent and those for flats fell even further. Those wanting to buy were often unable to find a mortgage, especially for SO that includes an implicit 100 per cent

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loan-to-value mortgage. They had to find large deposits and saw valuations fall as they tried to complete their purchases (Burgess et al., 2008, 2009; Chapter 13). Yet there were large numbers of dwellings coming on to the market as a result of the pressures to expand supply and the increasing emphasis on intermediate tenure development (see Chapter 6). In these circumstances it might be expected that the attributes of those purchasing intermediate products would have changed. More fundamentally, the post-credit crunch experience should provide evidence of the extent to which these intermediate products are appropriate in more difficult circumstances. Two important issues in assessing findings are to understand both the extent to which the products on offer have changed and the evidence on overall demand for schemes – in particular whether there was still excess demand. Open Market HomeBuy was first restructured and limited to two specific schemes in April 2008, both of which were oversubscribed throughout their period of availability. In early 2009, both were withdrawn and the intermediate market was restricted to new-build products including HomeBuy Direct that involves developer contributions (see Appendix 2 for details). For the analysis of the impacts of the credit crisis which occurred in late summer 2007 and the subsequent housing market downturn, we used the most recent CORE data that are publicly available. The analysis covers a 19-month period from September 2007 to March 2009 and includes some 20,000 dwellings and households (Table 8.7). To clarify the distinction between the two schemes, we use SO for part own/part rent and SE HomeBuy for equity mortgage products. The make-up of the schemes is more complex than before 2007. In London and the South, 66 per cent were accessing through the traditional SO scheme and 24 per cent came from New Build HomeBuy. In the North, the proportion of New Build HomeBuy purchasers remained low at 7 per cent,

Table 8.7 The numbers in the new schemes. SO

London/ South East Midlands North Total

SE HomeBuy

No.

%

9,801

64.0

1,589 2,458 1,458 15,306

10.4 16.1 9.5 100

Source: CORE (2007–09).

No.

Total

%

No.

%

3,304

69.4

13,105

65.3

1,031 347 77 4,759

21.7 7.3 1.6 100

2,620 2,805 1,535 20,065

13.1 14.0 7.6 100

Different tenures, different households?

157

but 12 per cent of SO cases were for elderly purchasers and 10 per cent entered through ‘other’ SO products. SE purchasers bought mainly through Open Market HomeBuy. The spatial pattern of sales shows a similar pattern to that before 2007, except that the proportion of SO in the East region doubled, while higher proportions of SE HomeBuy were reported in the London/South and the East regions than before 2007. This pattern is the outcome of S106 agreements (see Chapter 6) and the allocation of subsidy available for social rented as well as intermediate products. Table 8.8 shows that the pattern with respect to incomes is, in many ways, similar to the period before the crunch. In particular, nearly 90 per cent of those using the two schemes in London and the South regions are those who have moderate incomes (between £15,000 and £45,000). The big difference is with respect to the SE HomeBuy schemes in the North. The majority of post-2007 purchasers through this scheme were better off (only 15 per cent had incomes of less than £15,000 while 31 per cent had incomes between £ 25,000 and £45,000). Post-2007 purchasers were more likely to be single-person households, followed by couple households. Lone-parent and two-parent households appeared to be losing out. There were also large changes in the age of the household head with much higher proportions of younger households in the North (43 per cent of SO and 46 per cent of SE HomeBuy purchasers were less than 29 years old). However, a quarter of SO in the North was for older people (50⫹ years old) reflecting the different mixes of products. Finally, in London and the South, there were slightly more ethnic minority purchasers, a matter of concern as a strength of SE HomeBuy had been to help enable such households to move to more appropriate housing. Another obvious change since the credit crunch is that the vast majority of households in both schemes come from the private sector, with only 6–9 per cent from the social sector. This change is greatest in the SE HomeBuy scheme (over 50 per cent came from either the owner-occupied or private rented sectors). There were also changes in the types and size of properties purchased between pre- and post-downturn as the programme moved even more towards new build. Table 8.9 shows that there were increased proportions of flats even in the Northern regions for SO (40 per cent) and for SE HomeBuy properties in London and the South region (34 per cent). However, the majority (76 per cent) of SE HomeBuy purchasers in the North were still looking to the market for existing houses. These changes directly reflect what is currently available both from the market and the schemes.

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Table 8.8 Household attributes post-2007: regional analysis (%). SO London/ South

Annual income

0–15,000

15,000–25,000 25,001–45,000 45,001⫹ Total Household Single type household Couple household Lone-parent household Two-parent household Multi-adult household Total Age 0–29 30–49 50–64 65⫹ Total Ethnicity White Mixed Black Asian/Chinese/ other Total Economic Working status Retired Unemployed/ inactive Total Previous Owner tenure Private tenant Renting LA Renting HA Family/friends/ temporary Total LA, local authority. Source: CORE (2007–09).

SE HomeBuy North

London/ South

North

8

34

2

15

38 50 4 100 56

44 21 1 100 50

23 66 9 100 34

54 31 – 100 43

26

27

29

28

4

7

7

16

9

9

22

11

5

7

8

2

100 48 46 5 1 100 81 4 8 7

100 43 32 15 10 100 93 2 2 3

100 48 50 2 – 100 84 3 7 6

100 46 46 8 – 100 100 – – –

100 98

100 83

100 99

100 96

1 1

14 3

– 1

1 3

100 5

100 23

100 5

100 15

47 2 4 42

30 2 5 40

48 2 6 39

42 3 6 34

100

100

100

100

Different tenures, different households?

159

Table 8.9 Property attributes post-2007 (%, £). SO

Property type

Flat/maisonette House/bungalow Bedsit/other Total 1 2 3⫹ Total

Bedrooms

Property value (median)

SE HomeBuy

London/South

North

London/South

North

73 26 1 100 30 58 12 100 £161,829

40 60 – 100 10 58 32 100 £109,938

34 65 1 100 14 50 36 100 £148,116

23 77 100 17 60 23 100 £117,723

Source: CORE.

In both schemes and all regions, the dwellings purchased have become smaller. This is particularly true in pressured areas. In London and the South, nearly 30 per cent of SO dwellings and 14 per cent of SE HomeBuy had only one bedroom. There are important differences in property values between pre- and postdownturn. The evidence for SO (Figure 8.11) suggests that property values have continued to rise across the country, especially in the North and the Midlands and to a lesser extent London and the South, and the East. As in the period 2000–05, SE HomeBuy properties were somewhat cheaper than SO in the Southern regions (Figures 8.11 and 8.12). However, the rate of price increase was somewhat greater. The pattern of SE HomeBuy price increases is similar to that of SO, with SE HomeBuy purchasers in London and the South buying dwellings that

200,000 150,000 100,000 50,000 0 London/ South

East

Midlands

North

England total

SO (2000–05)

148,632

130,000

91,561

78,497

134,006

SO (2007–09)

161,829

140,721

116,438

109,938

145,119

Figure 8.11 SO property value. Source: CORE.

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Making housing more affordable: the role of intermediate tenures

160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 London/ South

East

Midlands

North

England total

HomeBuy (2000–05)

135,266

128,000

98,000

83,030

126,651

SE HomeBuy (2007–09)

148,116

132,705

107,021

117,723

141,267

Figure 8.12 HomeBuy property value. Source: CORE.

2000 1500 1000 500 0 London/South

East

Midlands

North

England total

SO (2000–05)

1668

1567

1256

1264

1541

SO (2007–09)

1496

1370

1195

1143

1390

Figure 8.13 Monthly income: SO. Source: CORE.

are about 9 per cent more expensive than in 2005 and people in the North paying about 40 per cent more than in the earlier period. The incomes of those taking up the schemes show a consistent pattern across the regions, indicating that SE HomeBuy purchasers are earning on average 5 per cent more than SO purchasers, and purchasers in London and the South are about 20–30 per cent better off than those in the Northern regions across the two schemes. Figures 8.13 and 8.14 show the differences in monthly incomes between the pre- and post-downturn period. SO purchasers across all regions on average had incomes 10 per cent lower than before the market downturn. The pattern of SE HomeBuy purchasers’ income is more complex. Recent SE HomeBuy purchasers in London and the South, and the

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2000 1500 1000 500 0 London/ South

East

Midlands

North

England total

HomeBuy (2000–05)

1303

1661

1350

1680

1600

SE HomeBuy (2007–09)

1734

1672

1539

1456

1455

Figure 8.14 Monthly income: HomeBuy. Source: CORE.

PIR (median)

8.0 6.0 4.0 2.0 0.0 London/ South

East

Midlands

North

England total

SO

6.4

6.1

6.1

5.9

6.3

SE HomeBuy

4.7

4.8

4.6

4.9

4.9

First time buyer

5.5

4.6

4.3

4

4.8

Figure 8.15 PIR: SO and HomeBuy, 2007–09. Source: CORE.

Midlands are earning much higher incomes than before (33 per cent higher in London and the South, 14 per cent higher in the Midlands). However, those in the Northern regions are less well off than before the market downturn (Figure 8.14). Figure 8.15 shows that SO purchasers continue to face the highest PIRs, 30 per cent worse than either first-time buyers or those purchasing with an SE HomeBuy mortgage. Finally, we look at the PIRs of the two schemes and how they compare with those for first-time buyers. First, PIRs have worsened for all three groups since 2005 (Table 8.10). However, the impact for SE HomeBuy has been relatively small, at only 0.2 per cent, except in the North where it is considerably higher at 0.7 per cent. The worsening in PIR among SO households is generally much larger at around 0.8 per cent, rather more than for the average first-time buyer. Again the impact is greatest in the North at 1.4 per cent.

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Table 8.10 PIR: SO and SE HomeBuy for different time periods. Region

SO

SE HomeBuy

First-time Buyers*

London/South East Midlands North Total London/South East Midlands North Total London/South East Midlands North Total

Median (2000–05)

5.7 5.3 5.1 4.5 5.5 4.5 4.6 4.4 4.1 4.5 4.7 4 3.7 3.2 3.8

Median (2007–08)

6.4 6.1 6.1 5.9 6.3 4.7 4.8 4.6 4.9 4.7 5.5 4.6 4.3 4 4.8

Source: CORE. *Nationwide live tables.

Thus the evidence from the post-credit crisis period is that those able to purchase under government-sponsored schemes especially SO faced worsening problems of affordability measured in PIR terms. Whether this was reflected in higher costs to the purchasers is unclear as this depends on the individual household’s financial package. An important issue is whether SO and SE HomeBuy products meant that more households were able to buy housing or whether the housing purchased was larger or higher quality or in a better location. The answer is that in general they bought more valuable housing than first-time buyers. This probably reflects the extent to which SO properties in particular have been located in more expensive areas, rather than the size of the dwelling, as SO units were generally small.

Conclusions The government-sponsored SO and SE schemes have clearly helped address different household groups. In the period up to 2005, before the schemes were modified, the distinction was very clear cut. SO was concentrated on single people and couples, while HomeBuy was taken up mainly by more settled family households. These differences in household attributes were generally consistent across the country, except to the extent that some retirees obtained SO specifically in the North.

Different tenures, different households?

163

A core issue in assessing the importance of these schemes is which income groups they served. On average, SE HomeBuy purchasers had considerably higher incomes than SO purchasers across the country. Equally, in both of the schemes, incomes were much higher in the South than in the North. In London and the South East, average incomes were almost £30,000 per annum implying that purchasers had to have household incomes above the national average to be able to afford to buy. A second issue relates to the value of the properties purchased. The evidence here suggests that both SO and SE HomeBuy dwellings were, if anything, more expensive than the properties bought by first-time buyers, except in the London/South region. For SO properties, the explanation may well lie in the fact that available units were new, more likely to be in highly valued areas, and increasingly in mixed tenure developments, rather than in overpricing. Equally SE HomeBuy purchasers were looking for larger dwellings. Although the values of the properties were relatively high, the actual payments made by the purchasers through the two schemes were significantly reduced by the subsidy. But because average incomes were low as compared to first-time buyers, cost-to-income ratios were far worse for SO and SE HomeBuy than the average within the market sector. The cost of housing for these purchasers was often well above the affordability benchmark for that income group. Even so, the vast majority were able to make their payments and many were able to move on to full home ownership fairly rapidly (Cho and Whitehead, 2006). Since the financial crisis, both schemes are more likely to support single and couple households rather than lone- or two-parent households, younger households rather than middle aged and older people and working households rather than retired/economically inactive households. There is an increasing proportion of purpose-built flats and dwelling sizes have become smaller. Most importantly, the income of SO purchasers has fallen while property prices have become more expensive across all regions. As a result, affordability has worsened considerably. The picture is rather different for SE HomeBuy where both incomes and property prices have risen in a similar way, so that affordability has worsened only slightly, except in the North. Finally, the question still remains as to whether those within this general income group who actually use the schemes are those who could have afforded a home with little or no subsidy. The limited comparative evidence with first-time buyers suggests that other market options might well have been available especially outside London and the South East. However, households would have had to fund larger regular monthly repayments.

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Overall those who have been helped by the schemes are very much the groups for which the schemes were intended. Similarly, the two broad categories of scheme do indeed serve different groups. The evidence on SO suggests that, while the scheme has the benefit of adding to the stock at less subsidy than social renting, it is a relatively expensive approach. SE, however, provides wider choice and better affordability but for generally higher-income households. Government has now decided that the priorities lie with the new-build programme, but this will imply less choice and probably relatively higher subsidy into the longer term.

9 Targeting groups: key workers’ needs and aspirations Kathleen Scanlon

Introduction Chapters 7 and 9 are devoted to key workers because much of the intermediate housing in England is built or set aside specifically for them; indeed, the terms ‘key worker housing’ and ‘intermediate housing’ are sometimes used interchangeably (if inaccurately). Helping teachers and nurses to acquire suitable housing is a political goal that few would oppose, and key worker developments are often acceptable to neighbours who would object to other types of affordable housing. This chapter uses the findings of research carried out into key workers in London to examine the effects of key worker housing shortages on the labour market. It also discusses the sorts of housing London’s key workers have now, what types of households they live in and, importantly, their housing aspirations.

Who are key workers, and what is the rationale for providing targeted support to them? Key workers are normally defined as providers of essential local (usually public) services whose pay cannot be adjusted to reflect variations in the local cost of living – particularly in the cost of housing. Essentially, these are public-sector workers on national pay scales. The professions most commonly defined as key workers for the purposes of targeted housing Making Housing More Affordable: The Role of Intermediate Tenures, edited by Sarah Monk and Christine Whitehead © 2010 Blackwell Publishing Ltd.

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assistance are teachers, nurses and police officers. Sometimes workers such as bus drivers are included – although bus companies are now private, they provide a public service. And some local authorities have argued that waiters and shop assistants should be treated as key workers, because they provide essential services. Definitions vary across programmes, and have tended with time to widen – e.g., in London the definition of key workers includes the three professions named above, plus local authority planning officers, probation officers, social workers and several other professions.1 The mismatch between housing cost and key worker salaries could in principle be addressed in one of two ways: either salaries could be increased or housing costs could be subsidised. The first option, though attractive to free-market economists, is little seen in practice (even in the USA, where salaries for many public-sector workers are set locally, key workers face housing affordability problems). Policy makers tend to regard the issue as a housing-market problem, rather than a labour-market problem. Key worker housing (and intermediate housing generally) is mainly an issue of the south of England. The problem is most acute and affects most people in London, but other cities, including Cambridge and Brighton, have also been grappling with it for several years. Public-sector workers based in and around London receive a salary enhancement that was originally supposed to compensate for the extra costs of living in the London area. However, the value of this London allowance or London weighting has been eroded over the years, and it is now a relatively small sum (a maximum in 2007/08 of £5,779 per year for nurses, for example) that is far from compensating for the additional cost of housing in London, particularly for new entrants to the housing market. There are six main reasons that key workers have particular problems, and these reasons help to define what we mean by a key worker. 1. Most key workers are paid on national wage scales, which are determined by national wage bargaining. Their employers have only a limited ability to make additional payments to attract and retain workers. Even bus operators have implicit wage rates embedded in their regulatory framework. 2. Public-sector wages are transparent, so employers normally cannot pay different amounts to people in the same position. In particular, they cannot normally pay new entrants more than existing employees doing the same job, even though it will usually be the former group that faces the greatest housing difficulties. 3. Their employers are usually public or publicly regulated, and cannot directly vary their revenues in response to a change in wages. If the labour market demands a higher wage from a private-sector employer, it will obviously affect the firm’s net revenue – but the employer can vary its methods of production, prices and even location in response

Targeting groups: key workers’ needs and aspirations

167

to labour-market factors. The options open to a school or hospital – or indeed a London bus company – are far more limited. 4. Wage bills make up a very high proportion of cost for these employers, so any increase in wages affects service levels significantly. 5. Some key workers need to be able to get to work quickly at all hours. They need to live near their workplace, and if that is in, say, the centre of London, then they will inevitably face high housing costs. 6. Key workers’ skills are often easily transferable to another location – and for most of these professions, there are employment locations across the country. This is not the case in all professions. Therefore, if key workers in a high-cost location want to improve their housing situations, they can usually find jobs relatively easily in lower-cost areas. If the key worker problem were to be treated as a labour-market issue alone, wages for all employees in high-cost areas would have to rise to a level that produced adequate levels of new recruits and reduced turnover. In addition, employers would have to pay different wages within highcost areas (such as London), in order to reflect differences in non-pecuniary costs and benefits in various employment locations. So, for instance, teachers at a problem-filled school in a poor area would receive higher wages in order to compensate for the stress of teaching in such a school; wage differentiation would also be required to ensure that the best teachers taught in the worst schools. This type of differentiation is not possible in the British system. Labour-market solutions would also be expensive, because wage parity would require that all workers doing the same job (in the same conditions, etc.) received any salary increase – even those who were long-time owneroccupiers. Those younger workers who are not yet in owner-occupation are worst affected by housing costs, but they cannot be paid more than those with longer service and expertise. Given that employers cannot address key worker housing problems through pay alone, are there justifications for them providing help with housing in particular? Several have been put forward. First, it is one way of targeting assistance to employees who most need it (although in-kind help is a taxable benefit). Second, help with housing may be more valued than other kinds of benefits. Third, employees who receive help with housing may remain in their jobs for longer. Fourth, it may be important to the employer that particular workers live near their jobs, and provision of housing assistance can ensure this. Finally, some public employers, including local authorities and National Health Service (NHS) trusts, may be able to supply housing or land at belowmarket prices. This can make housing assistance look like a relatively low-cost way of addressing recruitment and retention problems.

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The case of London In assessing the problems caused by a shortage of affordable housing for key workers, policy makers have focused primarily on its effect on their recruitment and retention. Both the shortage of affordable housing and its effects on the labour market are particularly marked in London. The issue was first addressed in a 2000 report by the Mayor of London’s Housing Commission, Homes for a World City, which included an annual target of 7,500 new intermediate homes for people on moderate incomes who could not afford to buy at market prices (Greater London Authority (GLA), 2000). The shortage of affordable housing in London arises from both supply and demand factors. London’s housing supply is very inelastic – the city’s tight planning constraints, including the Green Belt, limit new housing construction. And because London is so large, and is surrounded by a hinterland with similarly high house prices, key workers cannot simply commute from nearby low-cost areas as they could in smaller conurbations. Demand for housing is strong, fuelled partly by a growing population. After a long decline after World War II, the city’s population began to rise again in the early 1980s. The GLA estimates that the number of households in London grew by 115,000–149,000 between 2001 and 2006,2 while only 106,335 new dwellings were constructed in London during the period.3 In addition, London is one of the main centres of the global financial services industry, with 26 per cent of those in employment in London working in the banking, finance and insurance sectors (versus 16 per cent in the UK as a whole).4 The high salaries earned by many of them stoke demand for owner-occupied housing. This supply inelasticity in the face of rising demand had led to high and (until recently) rising house prices. The average house price in London in September 2009 was £306,963, compared to £155,885 for England and Wales as a whole.5 Average prices by borough ranged from £201,726 in Newham to £712,190 in Kensington and Chelsea. Holmans (2001) shows that the cost of housing in the UK has risen faster than incomes of all types and in particular faster than incomes in public-sector services – and that this difference is widest in London. Over the 30-year period from 1970, earnings rose by 1.8 per cent per annum across the country as compared to a 2.8 per cent per annum rise in house prices. In London, the gap was substantially wider – earnings grew 2.2 per cent per annum, while house prices grew 3.7 per cent annually. An accelerating rate of house-price inflation since 2001 widened this gap further (although the fall in property prices since 2007 has reversed this somewhat).

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169

In addition, not all groups in the London labour market experienced even this rate of earnings growth, and increases in London allowances have generally been well behind both changes in living costs and private-sector regional earnings differentials. The differences between key worker pay and private-sector pay are largest in London. In many other parts of the country, public-sector workers on national pay scales are well paid compared to average private-sector workers. This is not the case in London. The large financial services industry in particular is characterised by high salaries. Given the supply constraints, strong overall demand for housing and their own relatively low wages, it is no surprise that key workers – particularly those in single-income households – have difficulty affording owneroccupied housing in London. Table 9.1 shows that bus drivers, nurses, teachers and police officers in London earn more than their counterparts in other parts of the country (the difference is smallest for teachers and greatest for bus drivers). But an average-priced London house at the end of 2007 cost 9 times as much as the average police officer earned and 13 times a bus driver’s wages. Even houses in Newham, London’s cheapest borough, are out of range for single-income key worker households: to buy an average-priced house in Newham would cost more than 6 times a police officer’s income and more than 9 times that of a bus driver. Conservative lenders will give mortgages of up to 3.5–4 times household income, so it is clear that many key workers in London will be hard-pressed to attain owner-occupation at market prices. London’s government, the GLA, in 2001 blamed the ‘critical problems in the recruitment and retention of staff for London’s essential services’ largely on the lack of housing for key workers.6 Table 9.2 shows that vacancy rates for nurses and teachers are generally more than twice as high in London as in the UK as a whole. Staff turnover in London’s hospitals and schools is also higher than in the rest of the country, leading to staffing gaps and expensive recruitment programmes. In addition, the age profile of key workers in London is polarised: they tend to be either just starting their careers or nearing the end of them. London is seen as a challenging and prestigious place for aspiring teachers, nurses and police officers to train. However, when they reach the age where they want to start a family, many leave Greater London because they cannot afford appropriate housing there. Alternatively, they may simply change jobs to get better pay. The range of other opportunities is greater in London and surrounding areas than elsewhere in the country, so it is easy for key workers such as bus drivers to find better-paid jobs in other industries. Finally, housing costs account for a far higher proportion of household expenditure in London than elsewhere, while the housing itself is generally smaller and often of lower quality. The average home in London is a

170

Occupation

Bus driver Nurse Teacher Police officer

UK median gross pay (£)

London median gross pay (£)

London pay as % of UK pay

2007

2008

2007

2008

2007

2008

20,369 22,502 30,623 32,695

20,954 23,353 31,553 33,695

26,604 27,188 32,558 38,131

29,133 28,145 33,560 40,733

131 121 106 117

139 121 106 121

Average London house price as multiple of London salary

December 2007 (£352,159) 13.2 12.9 10.8 9.2

July 2009 (£306,963) 10.5 10.9 9.1 7.5

Average house price in Newham as multiple of London salary

December 2007 (£253,294) 9.5 9.3 7.8 6.6

July 2009 (£201,726) 6.9 7.2 6.0 5.0

Source: Office of National Statistics (2007, 2008) (earnings data based on two-digit SOC codes); Land Registry house-price figures for December 2007 and July 2009.

Making housing more affordable: the role of intermediate tenures

Table 9.1 Key worker housing affordability in London.

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171

Table 9.2 England and London vacancy rates (%). England

Nurses Teachers

London

Previous year

2009

Previous year

2009

3.1 (2002) 1.5 (2001)

3.1 0.6

6.1 (2002) 3.5 (2001)

5.1 0.9

Source: Llewellyn Davies and LSE London (2003), DfES (2008), NHS (2007).

two-bedroom flat, while the average in the UK as a whole is a three-bedroom semi-detached or terraced house with a garden. The dramatic house-price falls experienced in the UK and London since late 2007 have made housing somewhat more affordable for key workers, as Table 9.1 shows. In December 2007, the average-priced house in London cost about 13 times a bus driver’s salary and 9 times as much as a police officer earned. By July 2009, these multiples had fallen to about 10 and 7, respectively. Although this was a significant drop, such prices were still unaffordable for the majority of key workers. However, there are large price differences across London. In Newham, the London borough with the cheapest owner-occupied housing, price falls since late 2007 were steeper than in London as a whole. The average-priced Newham house in December 2007 cost 9.5 times as much as a bus driver earned and almost 7 times as much as a police officer, but by July 2009 the multiples were 7 and 5, respectively. These figures are close to the national ratio of average house prices to average earnings, which is about 6. In addition, key workers, who are employed by the public sector (except bus drivers), enjoy greater job security during an economic downturn.

Findings of research into key worker housing needs in London The remainder of this chapter draws on information from three pieces of research that shed light on how housing problems affect key workers, and their housing needs and aspirations.

The effects of housing problems: nurses, teachers and bus drivers in London In 2002, a study7 was undertaken to investigate the effect of London’s high house prices on the recruitment and retention of workers in three occupations: nurses, teachers and bus drivers. It also examined their current residential patterns. Workers in these occupations differed from one another in terms of earnings, traditional housing patterns, gender mix and career

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profiles, but together were representative of most of the key workers who earned their living in London. The research was limited to those nurses and teachers employed in the public sector, since this was where wages were rigid. Bus drivers, who had for some time been employed in the private sector, were included because regulation of the sector imposed constraints on employers similar to those experienced by public-sector employers. Combined, these groups made up a sizable chunk of London’s overall labour force – more than 120,000 nurses, teachers and bus drivers worked in Greater London. A wide definition of key workers, covering public-sector occupations with average salaries below the £30,000 threshold (in 2003) for effective access to the open housing market in London, suggested that there were around 667,000 such posts in London. The research combined analyses of a range of existing, but largely unpublished, data sources with detailed case studies of key workers and managers at 12 workplaces: three hospitals, three primary schools, three secondary schools and three bus garages across London. The workplaces were chosen to represent a range of housing-market and labour-market conditions. The case study analysis included structured interviews with managers as well as workplace surveys of 445 key workers – 149 nurses, 159 teachers and 137 bus drivers.

Shortages and turnover of key workers Shortages of key workers were found to be very much higher in London than in other areas of England. Table 9.2 gives figures taken from the 2002 research, as well as the most recent vacancy figures available. While the percentages of vacancies have dropped overall for both nurses and teachers, the relationship between London and national vacancies is consistent: London vacancy rates were, and still are, about twice as high as national rates.

Departure from London This would not necessarily have been a serious problem if the nurses, teachers and bus drivers were moving among hospitals, schools and bus companies in London; however, case studies showed that this was not the case. Instead, teachers and nurses were leaving London and bus drivers were leaving the occupation. Of those surveyed, 37 per cent of nurses and 32 per cent of teachers said they would actively look for a new job in the next year. Some 21 per cent of all nurses and 13 per cent of all teachers would seek a job in the same profession outside London (the equivalent of around 9,500 nurses and 8,000 teachers). A somewhat lower percentage of bus drivers (24 per cent) said they would look for a new job in the next year. Of these, 39 per cent did not

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know what or where the job would be and 33 per cent intended to move to a different occupation in London. Case studies showed that those key workers planning to leave London tended to have some characteristics in common. Nurses leaving London were more likely to have a partner whose job affected where they lived, and to have been in nursing for more than 10 years. Teachers leaving London were more likely to live in rented accommodation, to have lived in London for less than 20 years, to lack family ties in London, and to have a partner whose job affected where they lived. Bus drivers leaving the occupation were more likely to earn a low wage compared to other bus drivers and to live in social rented housing. The study indicated that shortages of key workers in London were caused by a combination of both housing- and labour-market factors, probably in that order, including a shortage of suitable affordable housing, pay, and working conditions and hours. About half of key worker shortages could be linked to a lack of suitable, affordable housing. In surveys, 91 per cent of nurses and teachers and 80 per cent of bus drivers agreed that ‘high housing costs are forcing people to leave London or leave the profession’. Key workers who were seeking work outside London were asked why they were doing so; the three most common reasons given were housing related. Moving away from London would give them access to ‘cheaper accommodation’ (62 per cent); ‘better accommodation’ (52 per cent) or the ‘ability to buy accommodation’ (46 per cent).

Key worker housing patterns The housing patterns of London’s key workers, in terms of location and housing tenure, were far from homogeneous. Tenure varied by occupation, as shown in Table 9.3. Nurses typically rented in the private sector (43 per cent), while teachers were in owner-occupation (also 43 per cent) and bus drivers lived in rented social housing or in owner-occupied homes (each 32 per cent). Conversely, teachers and nurses were unlikely to live in social housing, with only 13 and 8 per cent, respectively, in that tenure.

Table 9.3 Housing tenure (%).

Owner-occupation Renting from private landlord Renting from council/AHP Others Source: Llewellyn Davies and LSE London (2003).

Nurses

Teachers

Bus drivers

25 43 8 25

43 36 13 10

32 20 32 17

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In terms of residential location, teachers and nurses tended to live in areas with a lot of private rental housing, and were less likely to live in areas that had expensive owner-occupied housing. Bus drivers were concentrated in areas of cheap owner-occupied housing, and did not tend to live in private rental areas. London key workers were found to live relatively close to their place of work, with bus drivers living closest and teachers furthest away. Those working in central London lived further from work than those working in the suburbs. The following section explores this question further.

Where did key workers live in relation to work? Teachers, nurses, police officers and bus drivers in London (2001) On its creation in 2000, one of the first acts of London’s new overall metropolitan council, the Greater London Assembly, was to establish an all-party committee to look into the housing needs of key workers. The report8 of this committee provides some useful information about how far key workers lived from their jobs, and whether they wanted to live closer. Key workers were surveyed in employment locations in both inner and outer London. Professions included nurses, teachers, bus drivers and police officers. Table 9.4 shows that bus drivers and nurses tended to live closest to their work, with about 40 per cent of each living within three miles. Of bus drivers surveyed, only 12 per cent lived further than 10 miles from their depot. Police officers lived furthest away – only 20 per cent lived within three miles of work, while 38 per cent lived over 10 miles away. Teachers fell somewhere in the middle – 79 per cent lived between 1 and 10 miles from their school. Although police officers lived furthest away from their work, they were least likely to want to live closer (Table 9.5). It may be that they actively avoided living close to their workplaces for reasons of privacy and security (especially if they worked in high-crime areas). Conversely, nurses

Table 9.4 Distance from residence to work. Distance

Less than 1 mile 1–3 miles 3–5 miles 5–10 miles 10–25 miles Over 25 miles Source: GLA (2001), Appendix 4.

Bus drivers

Nurses

Teachers

Police

21 21 29 17 8 4

26 12 2 31 24 5

6 27 23 29 10 6

2 18 11 31 31 7

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Table 9.5 Desire to live closer to work by occupation (%). Want to live closer to work?

Bus drivers

Nurses

Teachers

Police

64 36

61 40

49 51

27 73

Yes No Source: GLA (2001), Appendix 4.

Table 9.6 Incomes from teaching. Percentages of

Salary

Less than £15,000 £15,000–20,000 £20,001–25,000 £25,001–30,000 £30,001–35,000 £35,001–40,000 More than £40,000 Total numbers

All teachers

4.6 6.5 25.5 18.3 14.4 14.4 14.4 153

Teachers who owned homes

Teachers who did not own homes

4.7 7.0 9.3 16.3 20.9 19.8 22.1 88

4.7 6.3 48.4 21.9 6.3 7.8 4.7 65

Source: Scanlon and Whitehead (2004).

and bus drivers were found to live closest to their jobs, but nevertheless in both cases over 60 per cent of workers surveyed wanted to live closer still.

Which key workers had housing problems, and what were their housing preferences? Teachers in south London (2004) A 2004 study9 examined the housing situations of teachers in four south London boroughs. It was aimed at determining which sorts of teachers experienced housing problems, and what types of housing they needed and wanted. It also looked at the extent to which housing issues influenced teachers’ career decisions. Much of the information came from a survey of teachers in eight state schools in four south London boroughs.

Salaries of London teachers In 2004, there were about 9,000 full-time equivalent teachers working in the state sector in the boroughs of Croydon, Southwark, Lewisham and Lambeth. As Table 9.6 shows, about 25 per cent of the teachers surveyed earned between £20,000 and £25,000 from teaching (not all worked full time). Few earned less than this and 14 per cent earned more than £40,000

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from teaching. Household incomes were generally higher, reflecting the fact that many teachers were in two-income households, while only 14 per cent of teachers earned more than £40,000 from teaching, nearly half of teachers surveyed reported a total household income of over £40,000. Interestingly, 24 per cent of teachers surveyed were repaying student loans; the average monthly repayment was £103.

Home ownership, income and household type Most teachers in London, as in the rest of the country, are already homeowners. According to the Labour Force Survey, 82 per cent of London teachers were owner-occupiers in 2004 (versus 90.5 per cent nationally), whereas the figure for the LSE sample was 58 per cent. According to the LSE survey, teachers who already owned homes were more likely to be married or living with a partner, to have children and to have higher incomes than those who did not own homes. About a fifth of the teachers who responded to the survey were not UK nationals; of this group only 27 per cent were owner-occupiers. Of the teachers surveyed, more than half (58 per cent) were already owneroccupiers. Teachers who were owner-occupiers tended to earn more than teachers in general, and far more than non-owner-occupiers. Some 63 per cent of homeowning teachers earned at least £30,000 from teaching, versus 43 per cent of all teachers and only 19 per cent of non-homeowning teachers. Of nonhomeowning teachers, 59 per cent earned £25,000 or less from teaching, with 48 per cent earning between £20,001 and £25,000 – within the salary range of teachers just starting out in the profession (known as newly qualified teachers, or NQTs). Evidence from the LSE survey showed that 69 percent of teachers who were owner occupiers were married or living with a partner, versus 49 percent of all teachers surveyed. Single people living alone also accounted for a significant proportion of teacher owner-occupiers (23 per cent) (Table 9.7). The single largest category of teacher non-owner-occupiers was single people sharing accommodation with unrelated people (35 per cent). The percentage of non-owner-occupiers who were single parents (13.8 per cent) was twice as high as for owner-occupiers (6.8 per cent).

Teachers who wanted to move Only 35 per cent of teachers surveyed were single, but they made up 54 per cent of teachers who wanted to move.10 Of those teachers wanting to move, 13.6 per cent were single parents, versus 9.8 per cent of all teachers (Table 9.8). Teachers who were married or living with partners were more likely to be satisfied with their current housing situation – they accounted

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Table 9.7 Household types of London teachers. Percentages of

Household type

Single, living alone Single, sharing Single parent Married/living with partner, no children Married/living with partner, children Others Totals (number of replies)

All teachers

Teachers who owned homes

Teachers who did Teachers who not own homes wanted to move

17.6

22.7

10.8

17.3

7.6 9.8 22.9

4.5 6.8 26.1

35.4 13.8 18.5

23.5 13.6 21.0

26.1

37.5

10.8

17.3

5.9 100 (153)

2.3 100 (88)

10.8 100 (65)

7.4 100 (81)

Source: Scanlon and Whitehead (2004).

Table 9.8 London teachers: housing tenure, number of children and desire to move. Percentages of Number of children living at home

0 1 2 3 4 5 Totals (number of replies)

All teachers

63.4 11.8 15.0 8.5 0.7 0.7 100 (153)

Teachers who owned homes

53.4 11.4 20.5 13.6 1.1 0 100 (88)

Teachers who did not own homes

76.9 12.3 7.7 1.5 0 1.5 100 (65)

Teachers who wanted to move

71.6 14.8 7.4 4.9 1.2 0 100 (81)

Source: Scanlon and Whitehead (2004).

for 49 per cent of all teachers, but only 38 per cent of teachers wanting to move. Some 31 per cent of teachers wanting to move had children; roughly half were single parents and half were married or living with a partner. Of those with children, about half had one child and half more than one. This suggests that any dedicated housing provision for teachers should include some units large enough to accommodate such households. Single-parent teachers and single sharers were most likely to want to change where they lived, and married people with children least likely

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Table 9.9 Teacher household types and desire to move. Would you like to change where you live? Household type

Yes

No

Percentage wanting to move

Single parent Single, sharing with unrelated person Other Single, living alone Married/living with partner, no children at home Married/living with partner and children Total

11 19 6 14 17

4 7 3 12 16

73.3 73.1 66.7 53.8 51.5

14

26

35.0

81

68

Source: Scanlon and Whitehead (2004).

Table 9.10 Teacher housing tenure and whether they wanted to move. Would you like to change where you live? Housing tenure

Yes

No

Use rent-free Rent Have a mortgage on a percentage Buying with a mortgage Own the property outright Total

7 43 2 26 3 81

0 10 1 42 15 68

Percentage wanting to move

100.0 81.1 66.7 38.2 16.7

Source: Scanlon and Whitehead (2004).

(Table 9.9). Renters and those living rent-free (which included those living with their parents) were most likely to want to move, and outright owners least likely (Table 9.10). The most common reasons for wanting to move were to secure a larger dwelling or to purchase a dwelling/live independently (Table 9.11). Very few respondents were motivated by a desire to move closer to their place of work – this was mentioned as a factor by only 2 per cent.

Housing preferences The research found a fairly high level of satisfaction with current accommodation. Of the teachers surveyed, 81 per cent were very or fairly satisfied with their current accommodation and only 11.8 per cent said they were ‘fairly dissatisfied’. Nevertheless, a majority of those surveyed (54 per cent) said they would like to change where they lived (see the previous section).

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Table 9.11 Important reasons for wanting to move (teachers who wanted to move). Percentage of teachers ranking factor as Most important

To get larger/better dwelling Want to live independently Want to buy Other reasons Good local schools for own children Personal reasons To get smaller/cheaper dwelling Cannot afford current dwelling To have better access to current job To move to a better neighbourhood Better access to partner’s job

17.3 8.6 6.2 6.2 2.5 1.2 1.2 1.2 1.2

Subsidiary

35.8 11.1 18.5 9.9 14.8 4.9 3.7 1.2 1.2 1.2

Source: Scanlon and Whitehead (2004).

Of those who wanted to move, most (58 per cent) wanted to move into a house rather than a flat, and the vast majority (85 per cent) wanted to buy rather than rent. A small subset of teachers wanted to move but preferred to rent their new accommodation. (This group totalled only 12 persons in the survey, so the analysis was based on a very small sample.) Of this ‘rental preference’ group, 75 per cent were not UK nationals. None of them had children; 67 per cent were either single living alone or single sharing, while 25 per cent lived with a partner or spouse. It might be supposed that teachers just starting their careers would be most likely to want to rent, but of the ‘rental preference’ group, 33 per cent had been teaching for more than five years; the median time working as a teacher was 4.2 years (Scanlon and Whitehead, 2004). The survey asked about attitudes to different sorts of subsidised housing schemes – the choices given were ‘houses for sale’, ‘houses for rent’, ‘flats for sale’ and ‘flats for rent’ (Table 9.12). Interest was greatest for schemes leading to owner-occupation: 82 per cent of teachers surveyed said they would definitely/possibly be interested in programmes offering subsidised houses for sale, and 62 per cent expressed interest in programmes offering subsidised flats for sale. The interest in subsidised renting was somewhat lower, with 46 per cent expressing definite or possible interest in subsidised rental flats, and only 41 per cent in subsidised rental houses. Some 40 per cent said they ‘would not consider’ subsidised rental houses, suggesting that this housing type is seen as more suitable for owner-occupation than for rental. Teachers were also asked how they would feel about being housed near other teachers. Most teachers wanting to move had no preference either

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Table 9.12 Attitudes to various types of subsidised housing (teachers who wanted to move).

Percentage of who

Would definitely be interested Might be interested Probably would not be interested Would not consider

Houses for sale

Flats for sale

Flats for rent

Houses for rent

56.2

40.5

23.5

17.6

26.0 10.4

21.6 2.7

22.1 10.3

23.5 14.7

11.0

31.1

41.2

39.7

Source: Scanlon and Whitehead (2004) survey. Columns do not add to 100 because some respondents said they ‘had no plans to move in next five years’.

Table 9.13 Attitudes to living in housing especially for teachers (teachers who want to move). Per cent

Would prefer to live near other teachers Would prefer not to live near other teachers Have no strong feelings either way

5.1 33.3 60.3

Source: Scanlon and Whitehead (2004) survey. Columns do not add to 100 because some respondents said they ‘had no plans to move in next five years’.

way, but those who did state a preference were six-to-one against the idea (Table 9.13). The research supported the hypothesis that there is a strong link between the cost of housing and teachers’ career decisions. Seventy-three per cent of all teachers said the cost of London housing posed a ‘quite serious’ or ‘very serious’ problem for them personally, and 65 per cent of teachers surveyed said the cost of housing would be very important in their future career decisions.

Conclusions It seems clear that housing problems have been at the root of labour shortages in some key public-sector professions in London, and that housing policies could therefore help alleviate these shortages. However, discussion of a generic ‘key worker housing problem’ can obscure important differences both among affected professions and geographical areas, and within them. In terms of professions, there is a distinction to be drawn between bus drivers, whose skills are transferable across a range of industries, and teachers and nurses, whose skills are sector-specific. In both cases, though, workers can

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relatively easily find similar jobs, or jobs using similar skills, in cheaper areas outside London. In geographical terms, London has a wider range of housing possibilities than other cities – as evidenced by the range of house prices between the boroughs of Barking & Dagenham and Westminster. But for London key workers who do face housing problems, the gap between what they can afford and what is on offer is much larger than elsewhere, and distances between central London and more affordable locations are greater. This distance is however shrinking as a result of the recent downturn in property prices, particularly in London, which might allow more key workers to fulfil their housing aspirations without having to move out of the city; indeed, statistics showed that the number of households moving out of London fell sharply after mid-2007 (Hollis, 2009). One argument often advanced for the provision of key worker housing is that it allows employees to live closer to their workplaces. Employers may prefer this for reasons of operational efficiency; governments may promote it for reasons of sustainability. However, not all key workers want to live closer to work. While nurses and bus drivers generally express a preference for living closer, police officers and teachers do not. In the absence of further research, the housing preferences of other qualifying professions can only be guessed at, but there is no reason to assume necessarily that distance from work is a key issue for them. Although key workers don’t necessarily want to live closer to work, they do clearly want to live in owner-occupied housing. But while data on housing aspirations can be useful, aspiration and need or demand are not synonymous. Some people’s aspirations may be realistic, even modest, while others’ may belong to the realms of fantasy. The public sector does not have a duty to meet everyone’s housing aspirations, and political choices must be made. Of course, a sizeable proportion of key workers already are owneroccupiers – around half of London’s teachers and police officers own their own homes. Also, while low incomes are an important part of the key worker story, it should be recognised that many key workers are in twoincome households, and they are most likely to be in owner-occupation already. Those facing the most constraints are single-income households with children – their incomes are low, but they need space (an expensive commodity in London). Although owner-occupied homes are what key workers aspire to, intermediate rented dwellings may be a better policy option in many cases, particularly because it is easier to ensure that they stay in the intermediate sector. Teacher surveys also indicate that they are more interested in houses than in flats. Broadly, then, many key workers aspire to owner-occupied houses (as, indeed, do most of the adult population). Shared ownership programmes, for which key workers are often eligible, can help meet this

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aspiration in an affordable way, although the number of homes built or purchased through these programmes falls far short of demand. In order to keep costs down, most of these homes have been relatively small, and thus unsuitable for families. An important subset of key workers, particularly teachers and nurses, is made up of professionals from overseas. They may or may not intend to make a long-term career in the UK. To what extent should they be eligible for special housing assistance? At the moment, only EU/EEA nationals may apply – whether there is pressure to extend this right to other nationalities depends partly on the degree to which London’s public sector comes to depend on them.

Notes 1. 2. 3. 4. 5. 6. 7.

8. 9. 10.

Housing Options (2007). GLA (2007). Department of Communities and Local Government (2008). NOMIS (2008). Land Registry (2009). Online house price index, accessed 19 September 2009 at www.land registry.gov.uk. GLA (2001). Llewellyn Davies and LSE London (2003). The research was carried out by Llewellyn Davies consultants and researchers from the London School of Economics. It was commissioned by Keep London Working, a group of major London employers that were particularly concerned with issues of housing in London. GLA (2001). Scanlon and Whitehead (2004). The research was commissioned by the Family Housing Association, based in south London. The 2004 survey asked about the make-up of teachers’ households, about housing tenure, and about whether the teachers would like to move. The intention was to carry out separate analyses of the group of teachers who would like to move, as this group would probably include any teachers moving into subsidised accommodation. However, a surprisingly high proportion of respondents (53 per cent) said they would like to move, and it was not possible to distinguish between those who actually were likely to do so and those who were not. This should be borne in mind when looking at the analyses in Tables 9.9–9.13.

10 Shared ownership: Does it satisfy government and household objectives? Anna Clarke

Introduction Policies to support intermediate housing tenures in England have had quite clear goals (Munro et al., 2005) even though the specific instruments have changed over time (see Appendix 1). Households who purchase intermediate products have well-articulated reasons. However, there is relatively little evidence as to whether the stated policy aims are achieved, whether households get what they want and expect, and whether government and individual objectives are consistent with one another. To provide some insight on these questions, the chapter presents a case study of one specific product, exploring the policy objectives for the scheme, the purchasers’ own objectives and then the extent to which both are met on the ground. The case study focuses on new-build shared ownership – a scheme which has been in place since 1980 in more or less the same format. Its key attributes at the time of the research included: • It applied only to new-built properties (and those who have since come up for resale on a shared ownership basis). • Households purchased between 25 and 75 per cent of their property on a leasehold basis from a housing association, which owned the freehold. • A rent set by the housing association was charged on the remainder of the property, at a rate that was in the region of 3 per cent of the property value.

Making Housing More Affordable: The Role of Intermediate Tenures, edited by Sarah Monk and Christine Whitehead © 2010 Blackwell Publishing Ltd.

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• Households could usually ‘staircase up’ if they could afford it in order to become outright owners, or they could sell the proportion they owned to a new shared owner nominated by the housing association (or as a fall back, after a period of time, they would be permitted to sell it on the open market). • If households got into financial difficulties and were in danger of losing their home, many housing associations would allow them to staircase down, so that they owned a smaller share.

Research methods The case study draws on wider policy literature in order to clarify formal objectives for shared ownership at the time of the research. The main research involved two postal surveys with different groups of clients of two of the major housing associations in the London area which specialise in shared ownership provision (Clarke et al., 2007). The first covered households who had moved into shared ownership in the London area within the last 12 months, and the second covered those who had been shared owners for three to four years and so were in the ‘settled’ phase of shared ownership, and had developed a pattern of paying bills, mortgages and other costs. Households were asked about their personal and financial circumstances and also their reasons for applying and their experiences of shared ownership. Postal questionnaires were sent out to 600 households who had moved into shared ownership properties within the last 12 months and 546 households who moved in between three and four years ago.1 Reminders were sent out two weeks later to those who had not yet replied. The questionnaire was also put on the web and households invited to complete their survey on-line. Survey response rates were 33 per cent for both surveys. Returned surveys were generally well completed with most giving full answers to all questions, including the open-ended ones. Response rates to income questions were very high (95 per cent). Detailed analysis of response suggested no significant differences between those who had and had not replied in terms of size of household, ethnicity, income, property price or previous tenure. There was some difference with respect to age and the results are weighted accordingly. In addition to the postal survey, a total of 21 telephone interviews were carried out with a sample of survey respondents who had indicated that they would be happy for a researcher to contact them in this way. Data from other sources were also drawn upon, including data from the London Home Ownership Group that collects data about low-cost home

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ownership sales across London, and from the Survey of English Housing in order to compare shared owners with other first-time buyers.

Policy objectives The objectives of the new HomeBuy schemes were identified by government (ODPM, 2005, p. 9).2 This scheme is the successor to the earlier scheme under which most households in the survey had purchased.

Achieving value for money Households on moderate incomes often have difficulties in affording home purchase in today’s UK housing market, but may not be able to easily access social rented housing in an increasingly pressurised sector; equally they do not need so much subsidy. Shared ownership requires less subsidy to build than social rented housing does (see Chapter 6). This is because only the rental component of the home is subsidised while a proportion is sold at market value. The rent charged for shared ownership is generally higher (in proportion to the value of the unsold equity) than the rent for social rented housing. Shared ownership can therefore offer a means of meeting the housing needs of low- to-moderate income households, whilst offering better value for money for the public purse than social rented housing. Households can also be expected to require less long-term subsidy than renters, because they build up an asset that they can then rely on should they suffer a fall in income, and in particular when they come to retire. Moreover as owners they have no rights to Housing Benefit.3

Freeing up social housing Shared ownership could reduce the pressure upon the social rented stock either by diverting some of the better-off applicants for social rented housing into shared ownership, or by persuading existing social tenants to leave the sector for shared ownership. This has been termed the ‘double whammy’ effect, whereby both acute housing need by the poorest households seeking social rented housing and the aspirations of better-off existing tenants for home ownership can be met simultaneously. It is for these reasons that existing social tenants are usually given the highest priority for shared ownership schemes, and those on housing registers are also prioritised.

Enabling more people to share in increasing asset wealth Asset-based wealth is highly inequitably distributed in the country at present. The government therefore seeks to extend wealth to lower-income

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households through extending home ownership. Further, increasing owner-occupation is an explicit aim of the Labour government: There are plenty of families who want the chance of homeownership and have the steady income to support it, but they can’t keep up with rising house prices. That’s why it is so important to promote more shared equity schemes to give them a chance to get their first foot on the housing ladder (Yvette Cooper, Housing Minister: ODPM News Release (2005/0263)). Labour’s election manifesto of 2005 set an explicit objective of increasing by a million the number of owner-occupiers within the next term of government, and included within this ambitions figure are those that will be shared owners (The Labour Party, 2005). Evidence has for many years suggested that owner-occupation is the long-term aspiration of the majority of households in England, including many currently within the social rented and private rented sectors (Forrest et al., 1992; Hamnett, 1999; Smith, 2004). Expanding home ownership therefore has a strong electoral appeal. There is a further thread running through current governmental statements of policy that home ownership offers external benefits to society including in particular neighbourhood benefits (see Chapter 2). Homeowners, including shared owners, are seen to have a greater stake in their neighbourhood and therefore more incentive to look after it. With home ownership expanding into new areas and new groups, today I see Britain as one of the world’s greatest wealth owning democracies where the widely held chance for not just some but all to own assets marks out a new dimension in citizenship and makes Britain a beacon for the world. Assets for all enabling opportunity for all (Gordon Brown, MP, at the launch of ‘HomeBuy: Expanding the opportunity to own’). The idea is that citizens in a ‘wealth-owning democracy’ will form more sustainable communities because homeowners have an economic incentive to look after both their own property and the wider neighbourhood, which will affect their property value. Finally, it is part of the policy objectives that for many households it will offer ‘a step on the property ladder’. They may then be able, as their income or savings increase, to step up to full owner-occupation either by buying out the housing association, or by selling their property to a new shared owner and purchasing an open market property.

Creating mixed, sustainable communities Shared ownership has been seen as an important feature of both urban regeneration and new housing development as a necessary element in avoiding

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polarisation between the increasingly poor residents of social housing and the high earners currently able to access owner-occupation (Martin, 2003). The government’s objectives for shared ownership state that: Enabling people to buy their home can create a better balance of housing types and tenures, and a mix of incomes, for instance if it encourages people on higher incomes to stay in predominantly social rented areas. This can help to promote more sustainable communities and to tackle concentrations of deprivation, which have a negative impact on people’s life chances (ODPM (2005, p. 9)).

Households’ objectives Households entering shared ownership in many senses want what all households want, a good quality home in a pleasant area that they can afford. Home ownership is also the tenure of choice of most UK households. While the previous section examined stated policy objectives for shared ownership, this section draws on the survey findings in order to explore households’ objectives. The literature surrounding demand for shared ownership generally considers households’ ultimate tenure aspirations to own their own home and assumes that this aspiration will lead those who cannot afford outright owner-occupation to seek shared ownership (Home Ownership Taskforce, 2003a). Concern has, however, been expressed that the market for shared ownership is a volatile one (Opinion Research Services, 2004) and that the potential client group do often have other options (such as private rented housing or moving to a cheaper area) and cannot all be assumed to be seeking shared ownership (Cambridge Centre for Housing and Planning Research, 2005). At the time of this research, the housing market was booming. The recent downturn and substantial drop in first-time buyers both for market housing and shared ownership have caused further concerns that (shared) ownership may not be many households’ first choice of tenure (Burgess et al., 2008, 2009). Establishing levels of demand for shared ownership is hard as it is such a small and relatively new tenure, so demand may be curtailed by lack of supply or knowledge about the schemes (Cambridge Centre for Housing and Planning Research, 2005; see also Chapter 11). Yet the future sustainability of shared ownership is dependent upon households being confident that they will be able to leave the tenure if they wish, finding buyers for their part share (Wallace, 2008). Establishing the motivations of households entering the tenure is therefore helpful in considering future levels of demand. It is also interesting to consider the experiences of households living in the tenure in order to see whether households’ objectives and expectations are realised.

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These distinct questions were addressed in the two surveys – one of new purchasers and the other of households who were established shared owners. The surveys asked those moving in about their motivations and those who had purchased three to four years ago about their experience of shared ownership. The survey of new shared owners looked in more detail at why households applied for shared ownership. Not important at all

100% 90% 80% 70%

Not very important

60% 50%

Somewhat important

40% 30% 20%

Important

10% 0% Improving Acquiring my quality of assets housing through home ownership

Having secure tenure

Reducing Increasing Moving to a my housing size of better costs home location

Very important

Figure 10.1 How important were the following factors in influencing your decision to apply for low-cost home ownership? Source: Survey of those moving in within the last 12 months.

As shown in Figure 10.1, improving their quality of housing, security of tenure and acquiring assets through home ownership were the three key factors, important for nearly all households. Moving to a better location, reducing housing costs and increasing the size of their home were also important to most. Those moving from the private rented sector were more likely to say that having a secure tenure was important to them. Some respondents gave more personal reasons such as ‘mature first-time buyer seeking to leave the family home’ and ‘downsizing due to divorce’ to explain their reasons for seeking shared ownership. Overall, these findings suggest a mixture of reasons for entering shared ownership, some of which were home ownership related, but others relate more to the quality, size and location of the home.

Does shared ownership meet its policy objectives? This chapter next draws on both secondary sources and the two surveys in order to consider what evidence is there on the success, first with respect to policy objectives and then in relation to householders.

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Achieving value for money As shown in Chapter 6, shared ownership requires less of a subsidy to build and can therefore more easily be achieved through planning gain alone. Households in the survey of new purchasers had purchased an average of 41 per cent of their property. The amount of property requiring subsidy is therefore less per household than for social renters. Some doubts have been raised as to whether the subsidy for shared ownership is being well targeted at those most in need. Shelter, for instance, has argued that aspiring homeowners priced out of the market are a different group from those who are ‘homeless, severely overcrowded or otherwise living in extremely poor conditions’, and that the current government’s focus on shared ownership is meeting the needs of this first group, possibly at the expense of the latter group (Shelter, 2005). The survey of the new shared owners however suggested that many had come from situations of housing need such as overcrowded housing: I was homeless living on my sister’s sofa as I couldn’t afford private rent. I was living in the local area in private rented housing. I’m on my own with a young child. It was a 3-bedroom house so I was sharing with others. In the last three months I was there someone else had moved out, so I had to pay all the rent myself. I was living previously in private rented housing sharing with five others. I needed more control over my domestic situation. I would have liked to share with just one or two others but that was not affordable in the private sector. I was living in a shared ownership one bedroom flat with Family HA. I was there for three years but by the end of that time I was married with one child and another one on the way. The evidence from the surveys does however suggest that the client group for shared ownership is not homogenous and some at least are in similar levels of need to those allocated social rented housing. The shortage of social rented housing is severe in most of London, where these surveys were carried out with many districts only able to house those who are actually homeless, or in severe housing need. Shared ownership is not, generally, intended to meet the most severe housing needs, but rather to meet lesser needs with lower levels of a public subsidy. Whether this is in fact better value for money is therefore a political judgement. This subsidy for shared ownership may also be required for a shorter duration as many households will move out of shared ownership and into full owner-occupation, using the equity they have built up to help them on their way, but without requiring any further subsidy or incentive (such as the Right to Buy). This was not something that was looked at by these

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surveys. It has been the subject of recent research (Wallace, 2008), though the extent to which this happens is still unclear and likely to be highly affected by the cycle of the housing market and regional differences. It is also difficult to establish from these surveys the extent to which shared ownership may help households to be self-sufficient at times of hardship or in old age. The vast majority of shared owners in the surveys were of working age and households generally contained at least one person in full-time work, both when they purchased and after three to four years. Shared ownership could reduce the pressure on social rented housing and achieve better value for the public purse by diverting some of the applicants into shared ownership instead, as discussed below.

Freeing up social housing Shared ownership can also benefit those in severe housing need indirectly, by enabling better-off social tenants to move out, thus freeing up social rented housing. The extent to which this is happening is easier to quantify. Nine per cent of the households moving into shared ownership in the survey of those who had recently moved in had moved from the social sector (Figure 10.2). Similar numbers moving from the social sector are found across London; data from the London Home Ownership Group suggests that the proportion moving from social housing to shared ownership varies between housing associations but is generally between 4 and 25 per cent. It is also possible that some households may have been diverted from social housing into shared ownership instead. Households who purchased Local Authority, 3% Other, 20%

Housing Association, 9%

Friends or family, 40% Private rented, 34% Figure 10.2 If shared ownership didn’t exist, where is it likely that you would be living now?7 Source: Survey of those who moved in between three and four years ago.

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three to four years ago were asked where they thought they would have been living, had they not entered shared ownership (Figure 10.3). In addition to the households who were previously living within the social sector, at least a further 12 per cent believed that their housing need would have been (or would have become) sufficient for them to obtain social rented housing within three to four years. This suggests that shared ownership is diverting some households away from social rented housing, albeit a minority. These proportions are perhaps surprisingly low, given the high priority given to existing social tenants in most allocations systems for shared ownership schemes. One possible reason is the more attractive financial package offered by the Right to Buy scheme which most council tenants as well as some housing association tenants are still eligible for. The impact of the 2004 reductions in Right to Buy subsidies would not yet have taken effect in the data examined here. Another possible explanation is the low-income levels of most households within the social sector, something that may increase as a barrier in future given the rising cost of even part ownership coupled with the rising proportion of homeless (and mostly poor) households entering social housing (see Chapter 11). The survey of recent entrants did however find that some of the households leaving the social sector stated that they would have moved out anyway, even without shared ownership, either into outright owner-occupation or private rented housing. The 9 per cent may therefore be an overestimate of the proportion of shared ownership purchases that do in fact create an additional social rented letting. Other Somewhere not in London With family/friends In council or HA rented home In private rented home As homeowner in smaller property As homeowner in cheaper area 0%

5% 10% 15% 20% 25% 30% 35% 40% 45%

Those who would not have moved

Figure 10.3 12 months.

Those who would have moved

Previous tenure of households entering shared ownership in the last

Source: Survey of those moving in within the last 12 months.

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Enabling more people to share in increasing asset wealth One key issue here is that of targeting. Are the households moving into shared ownership those who would otherwise have been unable to enter the housing market? As shown in Chapter 8, the client group for shared ownership products can vary between regions, products and over the housing market cycle. The two surveys give some insight here into the profile of the client group entering shared ownership in the Greater London area in 2001–02 and 2004–05. The recent entrants’ survey showed that the average household income of those entering shared ownership in 2004–05 was £29,200. Data from the London Home Ownership Group suggest that this is fairly typical of London Housing Associations’ clients, whilst a nationwide survey of shared owners suggested that average household income was around £21,200 (Housing Corporation, 2005). This compares to an average of £40,300 for firsttime buyers within the open market in London and the South East in 2003.4 Shared owners in the recent entrants’ survey also had lower deposits available, with a median of only £500, representing only 0.3 per cent of the average full property value. This echoes other research into shared ownership which also suggesting that half have deposits of less than £1000 and most of the rest have less than £8000 (Housing Corporation, 2005). This contrasts with private-sector first-time buyers who had a median deposit of 12 per cent of the property value (CML, 2005). In this respect, the policy would certainly appear to have extended access. The ability to accept people with small deposits may be an increasingly valuable aspect of shared ownership in the current financial climate with declining numbers of mortgages available for over 90 per cent of the property value. This means that shared ownership is more accessible to those with lower incomes and also to those who lack capital (for instance, from parents who are able to help out). Average incomes of course disguise the extent of the range of different household incomes. Ninety per cent of households buying into shared ownership in the two London housing associations that took part in the survey had incomes of between £15,000 and £45,000, which suggests that most would have struggled to afford outright home ownership in London. As shown in Figure 10.3, 29 per cent of households who had been in shared ownership for three to four years thought that they would have become (or remained) homeowners5 without shared ownership, either through moving to a cheaper area (which generally meant further from their places of work, and in many cases further from family and friends) or by moving to a smaller property. For some households, moving to a smaller property would have meant being overcrowded. However, shared owners often purchase properties one bedroom above standard, so could possibly have bought adequate housing in the open market. Some households thought that they would have entered owner-occupation within the

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last three to four years, but at a later date than was possible with shared ownership. The remaining 71 per cent of households thought that, three to four years later they would still have been living in the private rented sector, with family or friends or in social rented housing. The implication of this is that around these households were being enabled to enter home ownership sooner than they might otherwise, or when they might otherwise never do so. A related point, discussed above, was that homeowners had a greater stake in their neighbourhood and would therefore look after it better. It is therefore worth exploring whether shared owners perceive themselves to be homeowners and could be expected to behave as owner-occupiers in this respect. The housing associations who are marketing shared ownership, and to some extent the government’s promotional material, are keen to sell it as a form of owner-occupation: It is termed ‘low-cost home ownership’ (rather than shared ownership), and leaseholder issues are dealt with by a ‘post-sales support team’. Yet it is itself a hybrid tenure, part leasehold, part rental. The two surveys again offer some insight into the ways in which shared owners perceived themselves. Overall, the survey found that shared owners do regard themselves as homeowners. The Housing Associations’ marketing of shared ownership as a form of owner-occupation does appear to have been highly successful: I know that it’s part theirs, but that doesn’t bother me. It still feels like ours. We own 25 percent of the property and we consider it ours – the fact that it is shared ownership doesn’t affect how we use it. This sense of themselves as homeowners may have been helped by the knowledge that there was the option in the future of purchasing the remaining share: I consider it our house, and I think I still have the idea that we will eventually own it all. Overall, therefore, shared owners do perceive themselves as homeowners and so could be expected to contribute to their community and society much in the same way as full owners would do.

Creating mixed, sustainable communities Within new estates, the presence of shared ownership, alongside social rented housing and market housing, in a new estate may help to widen the range of residents and reduce polarisation between tenures.

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The two surveys carried out here were unable to explore impacts on the new neighbourhoods of the presence of shared owners. Moving to a better area was a motivating factor for around half in seeking shared ownership, but not something that many mentioned as a benefit from the tenure. The survey of recent purchasers also found some evidence that escaping from unpopular housing estates in pursuit of a better neighbourhood, schools and a garden was a strong motivating factor for some households coming from the social sector, which raises some concerns on the possible impact on the areas of social housing that remain.

Are households’ objectives met? As shown above, the two surveys suggested that the immediate objectives of households entering the tenure were to acquire assets through home ownership, improve their quality of housing and their security of tenure. Moving to a better location, reducing housing costs and increasing the size of their home were also important factors to most. This section considers how well these objectives were met. The second of the two surveys asked households who had been in shared ownership between three and four years what differences shared ownership had made to their financial situation and to their life in general, in order to assess how well their households’ objectives are in fact met. The question was asked in an open format for respondents to answer in their own words. Figure 10.4 shows that a sense of being ‘on the property ladder’ featured most often. Households in this survey had entered the tenure in 2001/02 and so had seen the values of their properties rise substantially in the three to four years they had been resident, reinforcing the sense that they had made a good investment. They were well aware that they would otherwise have been unable to get onto the property ladder. This rise in house prices has, however, limited the opportunities for this cohort of shared owners to step up into full owner-occupation. A minority of those buying into shared ownership three to four years ago had managed to staircase up to own a larger share, and quite small numbers had actually moved to 100 per cent ownership, or sold it in order to move into full owner-occupation. The only ones found to have done so in this research had moved away from London. This confirms a previous survey of shared owners which found that half had been in their homes for over six years and that two-thirds did not think that they were likely to move (Housing Corporation, 2005). This same research found that nearly half of shared owners thought that they would eventually own their home, but it is clear from the survey evidence that for many this is likely to be a very long-term aspiration.

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Now on the property ladder/good investment Higher outgoings Better quality of life Security of housing Lower outgoings Allowed to stay in London/local area More control over housing/independence Now have own home Increased status/less stigma Easier availability of credit Better health Other 0

5

10

15

20

25

30

35

40

45

Percentage of respondents raising the issue

Figure 10.4 What differences has shared ownership made to your financial situation? What other differences has it made to your life? Source: Survey of those who moved in three to four years ago.

The ability of households to staircase up or out of shared ownership may be highly subject to fluctuations in the housing market, as well as to household’s changing income levels and propensity to move away to cheaper locations. Those purchasing in these surveys had done so at a time of rapid house price inflation. They were therefore unable to increase the share they owned without a substantial increase in income. Selling up and purchasing a property outright was also not likely to be an affordable option for most unless they moved to a substantially less expensive area. The second most often mentioned benefit of shared ownership was the better quality of life residents now enjoyed. In many cases, this was very much related to the better quality or size of housing they were now enjoying: It’s given me the chance to get on the property ladder, me and my wife now have some privacy as we were living with relatives – Six people in one house is pretty crowded. Hopefully as we have a two bed house now we can start thinking about having kids. My son and I have more space to invite friends to stay. My son is proud of our home due to the garden. We suffered socially before. Improving security of tenure was the other main motivation for households entering shared ownership, and also the next most often mentioned benefit of shared ownership.

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I haven’t had to move for the last three and a half years, which is a blessing as I have been moving all my life. Reducing housing costs, however, was an important objective for 67 per cent of households entering the tenure but only mentioned as a benefit by 11 per cent of households resident three to four years, most of whom had moved from private rented or owner-occupied housing. In contrast, 30 per cent of households mentioned that shared ownership had made their monthly outgoings higher. Becoming shared owners made substantial changes to the monthly outgoings of most households. Those who had previously been living in social rented housing, with their parents or in some cheaper shared housing in the private sector, had found that their monthly outgoings increased once they were independent householders with mortgages. Some had expected this increase and accepted the higher costs in return for the other benefits of shared ownership. Others however stated that that shared ownership was not as affordable as they had hoped. An objective analysis of these households’ incomes and housing costs showed that the average household had an income of £29,200, bought 41 per cent of a property worth £179,000 and paid £746 a month in total housing costs (taken to include rent, mortgage and service charges), representing 31 per cent of their gross household income. This is on the borderline of what would generally be considered affordable, and is somewhat more than private sector first-time buyers pay as a proportion of their income if they borrowed 4 times their salary at typical mortgage interest rates of 5.5 per cent. As shown in Figure 10.5, there was also considerable variation in the proportion of income needed to fund housing costs. The reason for this is the practice of both mortgage lenders and housing associations of ‘ring fencing’ the rental component of shared ownership’s costs from a household’s income and applying a standard lending multiplier to the remainder of the income to calculate the maximum mortgage affordable. This has the effect that lower-income households (who buy a smaller share of their property and hence pay a larger rent in addition to the maximum mortgage they can afford) pay an overall larger share of their income in housing costs. In these surveys, those on the lowest incomes were paying the highest proportion of income in housing costs and were more likely to state that they found it hard to keep up with their repayments. Virtually all households in this survey succeeded in meeting their repayments, though rates of reported difficulties with making payments were roughly twice those experienced by private-sector first-time buyers in London and the South East.6 In terms of other expectations of shared ownership, relatively few households said that it had in fact enabled them to move to a better location, but many emphasised how it had enabled them to stay in London, or their local area when they might otherwise have been forced to move away in pursuit of

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50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Under 10%

10–20%

20–30%

30–40%

40–50%

Private sector first time buyers in London and the South East with incomes under £52,000

50–60%

60–70%

Shared owners in survey

Figure 10.5 Housing costs as per cent of gross income, households buying within the last 12 months. Source: Survey of those moving into shared ownership within the last 12 months, and Survey of English Housing 2003–04 data on households buying properties with a mortgage in London and the South East Regions, whose previous tenure was other than owner-occupation.

cheaper housing to buy. This was not a scheme aimed primarily at key workers, but many households did work in the public or voluntary sectors where salaries are relatively low and said that they would otherwise have been forced to leave their jobs and move away in order to afford home ownership. Some of the impacts of shared ownership mentioned in the survey of those who have moved in three to four years ago were factors not previously mentioned as expectations at the outset. Many households mentioned the increased sense of independence and status they now experienced as homeowners: It’s allowed me to join home-owning masses. As a single parent it makes me happier to know that. We have escaped from the stigma of social housing tenants. We live in a normal street and feel proud to feel normal. I feel I have achieved (50 percent of) the goal I needed to before my 30th! I feel more respectable now.

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These views reflect what has been termed a ‘positive discourse’ in relation to owners-occupation in England that associates it strongly with a range of positive factors (Stephens et al., 2005). The converse of this is that households who rent are seen as either having made a ‘deviant’ choice (Gurney, 1999) or having failed in some way. Having previously failed to achieve something that they felt society expected of them, new shared owners in this survey were now proud to be (part) homeowners. Few households had articulated this as a motivation behind their decision to apply for shared ownership, yet three to four years on, many could identify a wider benefit in terms of the increased social status of themselves and their families.

Conclusions In terms of policy objectives, shared ownership clearly offers many of the benefits of owner-occupation to a group of households, most of whom would not otherwise be able to access it. Many have been sharing housing with family or friends for many years and want to have a place of their own, in a secure tenure. These objectives are largely met by shared ownership. Those moving from the worst situations of housing need were generally the most pleased with shared ownership and the good quality of housing it afforded them. Most households also seek lower housing costs, and whilst some households did find their costs lower, or no higher, many others find that shared ownership is more expensive than they had hoped. Those buying the lowest proportions were the most likely to find the overall costs difficult, something that could become a more significant issue in the future, as 25 per cent shares on shared ownership properties become more available in all of the new HomeBuy schemes. The strongest motivation to emerge for seeking shared ownership for households entering the tenure in the early years of this decade was as a means of getting a foot on the property ladder. This may be a very vulnerable motivation to rely on in terms of ensuring there is sufficient demand for these products at all times in the housing market cycle. The research has suggested that the objective of producing more mixed communities is something that should not be considered by looking at the new estates that include shared ownership in isolation. Most new shared ownership housing in England is within a mixed tenure S106 sites or other small concentrations of new affordable housing (see Chapter 6). A substantial proportion of social rented housing, however, is on estates which remain heavily dominated by that tenure. Freeing up social rented housing for those most in need implies that better-off social tenants should be encouraged to move into shared ownership. This can only mean

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that social rented housing becomes even more the preserve of the poorest. Encouraging better-off social tenants to leave unpopular social housing could potentially serve to heighten the social problems of such estates. This is especially likely to be the case where shared ownership runs alongside the Right to Buy, which is known to be more popular in more mixed estates. Only tenants of unpopular social housing would be likely to choose shared ownership over the Right to Buy. Exercise of the Right to Buy on popular estates means that popular social housing is removed from the tenure, whilst on unpopular estates the better-off households remove themselves, leaving their housing for those with fewer options. The survey of recent purchases carried out for this research also found some evidence of people in unpopular housing estates looking to shared ownership as a means of leaving the estate, echoing concerns that were raised by the Low Cost Home Ownership Taskforce (Home Ownership Taskforce, 2003b). There are some households currently accessing the tenure who would be able to afford to purchase smaller accommodation within the private market that would meet their needs (these issues are discussed further in Chapter 11). Those entering shared ownership are also not an entirely distinct group from households who would otherwise be entering social rented housing. This research suggests approximately one in four households entering shared ownership is either moving from the social sector or would be likely otherwise to have ended up there. The remaining three out of four households were mostly in some degree of housing need, very often in shared housing with family or within the private rented sector. Their housing need was not severe enough for them to access social rented housing in a highly pressured sector, and some would not have been seeking such accommodation as they strongly aspired to owner-occupation. Housing these households meets less pressing housing needs than could be met by helping more households into social rented housing, though it does so at lower cost in terms of government subsidy per dwelling and may generate longer-term savings to government.

Notes 1. This was a 100 per cent sample of those who had moved in three to four years ago, and around 80 per cent of those who had moved in over the last 12 months. 2. There are also two further stated objectives of shared ownership: that it will aid recruitment and retention of key workers, which is discussed in detail in Chapter 8, and that it will contribute to overall housing supply. This last objective is very simple – new-build shared ownership properties contribute to the overall housing supply, as do new homes of all tenures. 3. Poorer homeowners are eligible to claim help with meeting the interest component of their mortgage costs but only in certain circumstances and after a period of three months, unlike housing benefit which can be paid as soon as a households’ income is low enough.

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4. Survey of English Housing, own analysis of those who bought as first-time buyers within the last 12 months in 2003–04 living in London and the South East. 5. Some of the client group had previously lived in owner-occupation, often with a partner from whom they had since separated. 6. Survey of English Housing data suggests that 11 per cent of households find it difficult to keep up with their mortgage payments, compared with 25 per cent in the London-based surveys of recent purchasers and those who purchased three to four years ago. 7. The numbers do not add up to 100 per cent because respondents were allowed to give more than one answer.

11 Working with government policy in the East of England: a case study of implementation Sarah Monk

Introduction The East of England is a region with both major housing pressures and areas of lesser demand. Planning within the national policy framework and guidelines presents major challenges, and the potential for using intermediate tenures to address housing need should be considerable. To start with some ‘stylised facts’ about the region: The East of England is close to London with many areas that are within a reasonable commuting distance from the capital. Adjacent counties such as Hertfordshire and Essex, together with regional cities like Cambridge, Norwich and Peterborough, are less than one hour away by train. This naturally affects house prices. In addition, many of these more accessible places have their own dynamic local economy, such as Cambridge and Norwich, both university cities with local clusters of science and technology-based industries. Here the age distribution of the population includes large proportions of younger households wanting to enter the market for the first time. It is in these types of places, with high relative house prices even in the recession, that the intermediate market should have a role to play. This region thus provides an excellent example of the way housing demand varies and thus how important it is to locate newbuild intermediate housing in the right place. Unlike the areas accessible from London, much of the rest of the region is quite remote, based largely on

Making Housing More Affordable: The Role of Intermediate Tenures, edited by Sarah Monk and Christine Whitehead © 2010 Blackwell Publishing Ltd.

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agriculture with seasonal employment and low incomes. The main housing need in those areas is for social rented housing. This chapter, based on research undertaken for the East of England Regional Assembly, examines the region’s attempt to implement and respond to changing government policy on intermediate housing over the past five years. Regional assemblies1 were charged with producing targets for new housebuilding for their constituent local authorities (LAs) as part of the spatial planning process and then to monitor housing outputs against these targets. In the East of England, given its proximity to London, there has been enormous pressure for additional housing development. The region contains all or part of three of the four national growth areas defined in the Sustainable Communities White Paper (ODPM, 2003a): the London–Stansted–Cambridge–Peterborough corridor, Milton Keynes South Midlands and Thames Gateway Essex. Yet there has been a shortage of infrastructure, particularly roads, which remain congested and provide ammunition for those who oppose further development. Also part of the Assembly’s role was to produce an affordable housing policy based on up-to-date evidence of housing needs across the region. The resulting requirements for additional affordable housing, including intermediate housing, have to be funded, and the Assembly had to make the case for funding to central government each year. The government then provided a ‘regional pot’ of money, based partly on the evidence provided and partly on assumptions about the use of S106 contributions (see Chapter 6). The purpose of this chapter is to look at the lessons to be learned in terms of trying to target particular groups of households using products developed by central government in a region with wide variations in housing market conditions. It shows how difficult it is for such a region to balance government subsidy and developer contributions in order to meet its housing supply targets while at the same time managing to assist what are seen as the appropriate groups – where there is a balance to be achieved between providing intermediate housing and meeting ‘need’ for social rented housing. First, the chapter describes the driver for the research, before outlining the problems as seen by the Working Group. Next it looks at the actual supply of intermediate housing and then demand, using the most recent data available (2007). Solutions to the problems that were considered by the Working Group are then described and the chapter concludes that the region and its LAs were all doing the best they could in the circumstances but national policy limited what they were able to do.

The driver The driver for the research within the region was the Intermediate Market Working Group, a subcommittee set up by the Assembly’s Housing and Environment Panel to monitor changes in the intermediate market and

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on the basis of this to advise the Assembly in developing its affordable housing policies. The research was thus a series of pieces of work mirroring the changing national policy and process requirements. The chapter explores how the Working Group, which reported back to the Regional Assembly via the Housing and Environment Panel, responded to frequent policy and product changes, in the context of their own regional (and local) concerns about who needs subsidised housing. The Working Group was composed of Assembly staff and representatives from Housing Corporation regional investment managers, the government regional office (GO-East), the six County Councils in the region, housing associations (HAs) that were also Zone Agents2 for intermediate housing and a selection of LAs. Each of these representatives had slightly different concerns. The Assembly’s role was very much to develop the evidence base to feed into policy making. The Housing Corporation investment manager’s role was mainly to inform and advise particularly on what can and what cannot be done in terms of funding, investment and how funds should be used by registered social landlords (RSLs). GO-East’s role was to interpret government policy at regional level and to act as a go-between, feeding new information through to the region and also providing regional responses and questions to the central government. The County Councils have a more strategic role but have responsibilities for education, health, social services and the police, most of whom are considered to be key workers. LAs’ concerns vary according to their political stance, but most of their officers, whether housing or planning, are concerned about housing affordability and are willing to use any available government funding to try to provide more affordable housing. There were four main pieces of research: CCHPR (2003, 2005), Monk et al. (2008b) and CCHPR with SQW (2009). In addition, during 2006–08 members of the CCHPR team were retained by the Working Group specifically to advise them on the intermediate market. The first piece of research was commissioned in order to update the evidence base supporting the affordable housing figures in the Regional Spatial Strategy (RSS). A ‘top-down’ approach was used (see Chapter 3), which suggested that 23,400 additional homes, 7,200 affordable and 16,200 market, would be required each year to 2016 (CCHPR, 2003). Subsequent work broke down the affordable housing figure into social rented and intermediate housing (initially seen as key worker housing as that was the then current government initiative) and produced a modest requirement for such housing (CCHPR, 2004). An update (Monk et al., 2008b) found a very big increase in the need or demand for intermediate housing, which by then served a wider group than key workers. Most recently, research was commissioned (CCHPR with SQW, 2009) which, reflecting the beginnings of the housing market downturn, found a lower requirement for intermediate housing although a slightly higher requirement for affordable housing overall.

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By the time the final study was conducted, two new shared equity products had just been introduced. However, the Working Group knew little about them and were still very much involved with the previous products – shared equity for existing houses, shared ownership for newly built houses and also for social tenants to part-own their current home. Of these, the new-build products were of greatest concern. This partly reflected a view among most members of the group that products assisting purchase of existing homes simply fuelled demand and did nothing about expanding supply, and partly the need for evidence to support planning policies on new-build affordable housing. Social HomeBuy was seen as a fairly undesirable product as it was less generous than the old Right to Buy and did not release a property that could be let to someone else. It was therefore seen as preferable to help existing social tenants into new-build shared ownership products if they could afford it. The background in terms of changing government policy can be found in Appendix 1. One issue that concerned the Working Group in relation to government policies was the definition of key workers. While the government policies have fairly consistently defined a ‘core’ group of public-sector employees as key workers – nurses, teachers, police and fire fighters – the regions have contested this definition, arguing that there were difficulties in recruiting other types – and grades – of public-sector staff. In response, the government asked the regions each year how they would like to expand the definition to include locally important key worker groups. After consulting with all LAs, the East of England region added medical secretaries, medical receptionists, teaching assistants, learning assistants and care workers employed by LAs as these were positions that were difficult to fill. The East of England also added that those eligible should have a household income of £60,000 or less, and this was taken up by central government in the eligibility criteria for the HomeBuy suite of products. Other regions have used broader definitions in response to the government’s consultation, e.g. the South East’s definition of key workers includes all those ‘making a direct contribution to the local economy’ which arguably could cover almost anyone in local employment. The Working Group thus had a large amount of information to absorb and understand, including a range of methodologies for estimating intermediate housing requirements in the region, information on the changing products including eligibility and funding, plus data on current supply and actual and potential demand. Some of this information is reproduced here, as background to a discussion of the concerns and difficulties the group faced and how these were resolved. The overall story, then, is one that might be termed ‘baffled by innovation’, as the Group had real problems in trying to implement government policies in a way that would best support regional policies and also maximise the amount of funding that

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would be allocated to the region – the regional ‘housing pot’. As a rapidly growing region, they were naturally concerned that growth should be supported financially in terms of affordable housing as well as the necessary infrastructure.

The problems The main concerns of the Working Group were that the then current range of products did not appear to be meeting what the group perceived as the real need – i.e. the lower end of the income range of those eligible for intermediate housing – and that New Build HomeBuy (NBHB) in particular was proving difficult to sell. With hindsight, this second concern probably reflected the onset of the housing market downturn and the recession. At the time stakeholders were concerned about the nature of the products, their location (for NBHB, of necessity on market housing sites which might not necessarily cater for key workers or others on moderate incomes) and their affordability. Whether the Working Group had any real capacity to influence the nature of the products provided so as to help better-off social tenants is debateable, but they did have power to recommend changes, both to the government via the Regional Assembly, to LAs in terms of setting local policies and to individual RSLs who could in principle change certain aspects of the products themselves.

Affordability Affordability was seen as an increasing problem. Interviews with stakeholders conducted as part of the latest study (CCHPR with SQW, 2009) suggested that the products were no longer affordable for lower-income working households, particularly NBHB. This was thought to be because the rents charged on the portion of the unsold equity were too high and because as house prices have risen it has become more expensive to purchase the equity share. As house prices continued to rise, the price of a share of the equity of a dwelling increased, meaning that people needed to be earning higher incomes to be able to afford them. Rather than helping people into home ownership with incomes around £20,000 a year as was previously the case, HomeBuy agents reported that the required income of those able to afford HomeBuy had risen. In some cases only households with incomes close to £60,000 a year, the region’s and later the government’s maximum, were able to purchase NBHB. It was felt that those on lower incomes were being priced out of accessing intermediate housing. This left a gap between those who were eligible for social rented housing and those who could actually afford intermediate products.

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The evidence bore out these concerns. Research undertaken as part of the Strategic Housing Market Assessment3 in the Cambridge sub-region in the summer of 2007 showed that the average incomes of eventual purchasers were generally higher than the average of all applicants. This was true across the range, so lower quartile incomes of purchasers exceeded the lower quartile household incomes of applicants. Applicants’ incomes were generally between £24,000 and £25,000 right across the sub-region (Cambridgeshire Horizons, 2008). However, the research found that savings have a major impact on affordability. Of those applicants with savings, the mean income in the sub-region as a whole in 2007 was just under £18,700. A significant number of purchasers with low incomes had high savings for a deposit. In some cases, the deposit had been used to purchase a full 50 per cent share, with a relatively low rent paid on the remaining equity. It appeared that some former owneroccupiers had acquired such deposits after a relationship break-up involving the sale of the previous home. Relatively, few applicants or purchasers were from the social rented sector, under 10 per cent. However, at least 42 per cent of purchasers were on a LA housing register, suggesting that the HomeBuy programme was meeting this target, to the extent that these households were no longer competing for social rented housing. Marketing the products There were also some perceived problems with the new products. Open Market HomeBuy (OMHB) was seen as inflationary, as it provided a subsidy to purchase an existing dwelling without replacing it with a new one. It therefore fuelled demand. Yet it was more popular than NBHB because it allowed greater choice. The HomeBuy agents reported that they were having difficulties in selling the NBHB homes. Participants in focus group discussions undertaken as part of the 2007 research (Monk et al., 2008b) said that some HAs struggle to market properties effectively, as they have little marketing experience. It was suggested that there are benefits to be gained from HAs behaving more like private developers by marketing new units ‘off-plan’ (i.e. in advance of building) in order to avoid the difficulties of selling all the units at once. The procedures involved in applying for intermediate housing were described as being very bureaucratic. It was felt that the product range and the system of application and purchase needed simplification. Number of bedrooms The intermediate housing arrangements allow households to buy properties with a spare bedroom and this is what most households do. There is

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a clear demand from purchasers to buy a home with a ‘spare’ bedroom. There is very little demand for one-bedroom accommodation, even amongst single people. But affordability issues mean that some single people will only be able to afford a one-bedroom property. This is particularly true of Cambridge, where there is a high demand from single people. It is also important in areas with low household incomes and few small privatesector dwellings. As most applicants are young, there is the likelihood that a proportion of couples will have children and consequently would have to move if unable to purchase a two-bedroom property or a home capable of easy extension. This can be very difficult due to the shortage of shared ownership properties on the market. The Cambridge sub-regional research noted that NBHB units tend to be smaller properties, whereas there was unmet demand for larger units. All of these issues were seen as contributing to making it difficult to ‘sell’ new shared ownership homes despite the perceived – and evidenced – need for intermediate housing. Rental charges The rent charges were described as making the products less affordable, as did the service charges in flatted developments. However, it was argued that RSLs do not have to charge a high rent, and could in fact charge less with the use of grant. The fact that it is permissible to set rents at 2.75 per cent means that some HAs do so in order to ‘save’ grant and cross-subsidise social rented units. Some RSLs were reported as charging higher rents than the current ceiling of 2.75 per cent of value set by the Housing Corporation, either as a result of historic Housing Corporation approvals for new-build property which then took longer to complete, or because they did not use grant to finance the new dwellings. Where social housing grant is not required, RSLs do not have to abide by the 2.75 per cent rule.

The rental charge on NBHB The argument that some RSLs charge a higher rent than would be permitted under the Housing Corporation’s cap of 2.75 per cent is supported by data provided by one of the housing sub-regions. This is illustrated in Table 11.1. These figures are district averages of actual sales as a snapshot in April 2007. The data show that rents charged on the share owned by the RSL are as high as 3.75 per cent. As noted earlier, some of these properties may predate the Housing Corporation cap of 2.75 per cent or may have been delivered through planning gain rather than grant, in which case the cap does not apply.

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Table 11.1 Rent charged as a percentage of the value of the RSL’s share. Rent as % of share value

One-bedroom flat Two-bedroom flat

District District District District District District District District A (%) B (%) C (%) D (%) E (%) F (%) G (%) H (%)

3.75 3.75

2.69 2.28

3.00 3.00

2.00 2.00

2.5 2.3

2.45 2.5

3.10 3.00

3.7 1.92

Source: HomeBuy data (2007).

It does suggest that some HAs are charging rents that make the product unaffordable to many eligible applicants. If lower rents were charged, a wider range of households in terms of incomes might be encouraged to take up shared ownership or be realistically able to afford it. A worked example of purchasing a shared ownership flat is given in Table 11.2. It shows the income required to afford to purchase a 50 per cent share in a new property if housing costs are not to exceed 28 per cent of gross household income. It illustrates the effect of varying the rental percentage that is charged. Lowering the percentage charge can make the property affordable to people on lower incomes. However, even for a one-bedroom flat with a relatively minimal rental charge of 1 per cent, an income of between approximately £23,470 and £27,500 is needed to be able to afford to purchase a 50 per cent share. This means the product is still unaffordable to those on lower incomes. Table 11.2 also shows the impact in terms of proportion of household income spent on housing of lenders allowing a higher-income multiple than assumed, as there was evidence that this had been happening. Using an income multiple of 3.5 shows that the income required is lower, but people would be spending a much higher proportion of their limited income on housing. The table shows that the way in which most intermediate housing providers calculate the salary required to afford the properties means that purchasers could spend up to 39 per cent of their income on paying for their housing. This is because in practice lenders permitted loans equivalent to 3.5 times income (half income). This could well not be affordable for many households, although as shown in Chapter 10, shared owner households often pay large proportions of their income on housing and are still able to cope so long as they do not suffer any substantial change in their circumstances. However, if RSLs respond to pressures on affordability by reducing the percentage sold, the proportion of income required to pay overall housing costs will rise even higher as the rental element (and for new-build flats, accompanying service charge) increases. The data show the importance of having a cap on the rental element of NBHB. LAs could play a stronger role in determining what is affordable

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Table 11.2 Income needed to purchase 50% of a flat at different rental rates. Rental charge as % of value Property type

One-bedroom flat Open market value Share available Value Rent Service charge Monthly mortgage based on 5.5% over 25 years Total outgoings per month Income required based on 28% grossa Income required based on 3.5 ⫻ income Outgoings/gross incomeb Two-bedroom flat Open market value Share available Value Rent Service charge Monthly mortgage based on 5.5% over 25 years Total outgoings per month Income required based on 28% gross Income required based on 3.5 ⫻ income Outgoings/gross income

3.75%

£152,000 50% £76,000 £238 £83 £494

2.75%

2%

1%

£174

£126

£63

£815

£751

£703

£640

£34,911

£32,196

£30,161

£27,446

£25,561

£24,789

£30,161

£27,446

38%

£170,000 50% £85,000 £266 £102 £559

36%

35%

33%

£195

£142

£71

£927

£856

£803

£732

£39,724

£36,688

£34,412

£31,376

£28,700

£27,850

£27,213

£26,363

39%

37%

36%

33%

Source: HomeBuy data (2007). a The figures include estimates of the income required on the assumption that repayments would amount to no more than 28% or 25% of gross salary. Total monthly outgoings are converted into annual outgoings, and these are then divided by 0.28 to get the income for which annual outgoings are 28%. b Most of the providers will actually use a 3.5 ⫻ multiplier (or even 4 ⫻) plus rent and service charge to derive the salary. This equates to an average of 35% or 36% of gross salary.

locally. They could also consider more guidance on affordability of units delivered through planning gain, rather than leaving it to be determined by HAs. The data relate to actual sales in 2007. HomeBuy agents reported in 2008 that homes were increasingly going only to people on incomes close to the

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£60,000 a year maximum. Therefore, the products were no longer reaching their target group of low-income working households.

Supply The Working Group monitored supply in terms of completions against policy targets, looking at total new housing completions and affordable housing completions, both social rented and intermediate housing.

Completions The East of England Regional Assembly set a target in the draft East of England Plan (RSS) of 7,200 social rented housing units per annum or 30 per cent of overall provision. This target was based on the first two affordable housing studies (CCHPR, 2003, 2004). The Government’s proposed changes (December 2006) increased overall provision to 26,830 per annum for the period 2006–21 and indicated that, at the regional level, the delivery of all affordable housing should be monitored against a target of 35 per cent of overall provision, i.e. 9,390 per annum. The data show that completions of affordable housing have not been sufficient to meet these regional targets. Between 2001 and 2005/06, about 14,000 affordable dwellings were built in the region. This represents about 13 per cent of overall completions in that time as compared with the target of 35 per cent. Over the last decade there has, however, been an increase in the number of affordable dwelling completions. In 2005/06, affordable completions were just over 4,000, double those achieved in 2001/02 (EERA Annual Monitoring Report, 2006) but still only 16 per cent of the overall number of completions. The current downturn in the market could affect affordable housing completions in one of two ways. Either they fall along with falling market housing completions, because the main source of funding is S106 (see Chapter 6), or they could increase because government funding has been targeted at affordable housing. In the last recession (1990–94), affordable housing output rose. The government’s housing market stimulus package has involved bringing forward funds for the whole period 2008–11. A total of £76.59 million has been brought forward in the East of England, which should produce 2,300 affordable homes, of which only 354 were social rent, the rest some form of low-cost home ownership (LCHO; HCA, 2009). This is interesting given the difficulties faced in selling NBHB. Much of the current year’s provision – 78 per cent – is in the form of HomeBuy Direct, a new shared equity product available on specified new-build properties and providing a 30 per cent equity loan on the sale price. This funding is one-off, and HomeBuy Direct forms only 27 per cent of the overall LCHO funding

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for the region 2008–11 (and only 11 per cent of total funding for affordable housing). The success of this product will provide a test of whether it was the equity loan that most key workers preferred, or the ability to purchase in the open market rather than a newly built property. As concerning is the fact that there will be less funding available in 2010 and 11.

Affordable housing completions Affordable housing completions rose between 2003/04 and 2005/06 in line with total housing completions (Figure 11.1). The data for this period show a marked increase in intermediate housing units being delivered relative to the number of social rented units (Figure 11.2). The CORE data show that the overall number of HomeBuy units increased in 2005–06 (Figure 11.3). Data show wide variation across the region, and also over time. In contrast to previous years, the amount of NBHB was far greater than the amount of OMHB in 2005–06.

30,000 25,000 20,000

Affordable housing

15,000

All housing

10,000 5,000 0 2003–04

2004–05

2005–06

Figure 11.1 Proportion of total housing completions that are affordable units. Source: HSSA (2006), http://www.communities.gov.uk/housing/housingresearch/housingstatistics/ housingstatisticsby/localauthorityhousing/dataforms/hssa/hssadata200708/

120 100 80 % SR

60

% SO

40 20 0 2004

2005

2006

Figure 11.2 Tenure split between social rented (SR) and shared ownership (SO) of new affordable housing completions. Source: HSSA (2006), http://www.communities.gov.uk/housing/housingresearch/housingstatistics/ housingstatisticsby/localauthorityhousing/dataforms/hssa/hssadata200708/

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1000 800 600

OMHB

400

NBHB

200 0 2003–04

2004–05

2005–06

Figure 11.3 Total HomeBuy provision in the East. Source: CORE.

OMHB is overwhelmingly houses, reflecting that people generally purchase houses rather than flats (Survey of English Housing). NBHB is predominantly delivered as a mixture of flats and houses. The proportion of houses has been increasing over time to reflect these preferences. On supply, then, the Working Group reluctantly concluded that affordable housing targets in the region have not been met over the past 10 years. Of the affordable housing that has been built, the proportion that is intermediate housing has steadily increased. This reflects national patterns (see Chapter 6) and particularly the ability to use intermediate housing to ‘cross-subsidise’ the social rented housing that LAs in the region perceive to be most needed.

Demand for HomeBuy products The Working Group examined two sets of data on demand. The first was HomeBuy data collected by the four Zone Agents in the region. These were datasets created by entering the details from application forms and tracking applicants’ progress towards successful part purchase. The second set of data was the CORE census of sales by HAs. These data sources are examined in turn.

Applicants In order to analyse the nature of applicants for HomeBuy, a snapshot overview was taken by using HomeBuy data for applicants accepted on 31 August 2007 in each of the nine housing sub-regions across the region – Bedfordshire, Cambridge, Greater Norwich, Greater Haven Gateway, London Commuter Belt, Peterborough, Rural East Anglia, Thames Gateway, and Yarmouth and Lowestoft. These sub-regions are designated as local housing markets in the Regional Housing Strategy (RHS). It should be noted that the HomeBuy

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er th O

br re id at ge er N T or ha w Lo m ic e h nd s G on at C ew om ay m u R te ur rB al el Ea t st A H ng Ya av lia rm en ou G at th ew an ay d Lo w es to Pe ft te rb or ou gh

am

G

C

Be df or

ds

hi re

1000 900 800 700 600 500 400 300 200 100 0

Figure 11.4 HomeBuy applicants accepted on 31 August 2007 by Sub-Region. Source: HomeBuy data.

Not clear

With job

Shared owner

Temporary accommodation

Private renting

Homeowner

HA tenants

Family/friends

Council tenants

1400 1200 1000 800 600 400 200 0

Figure 11.5 Current tenure of housing association applicants. Source: HomeBuy data.

data are collated by Zone Agents from what should be standard application forms, but there are discrepancies, e.g. it is not always clear where an applicant lives as they may have given the address of their employer. Figure 11.4 shows that the number of applicants varied across the housing sub-regions, reflecting the different sizes of the sub-regions. Applicants were most commonly previously living with family/friends or in private rented accommodation (Figure 11.5). Most applicants were in the 25–39 age band (Figure 11.6). The applicants were overwhelmingly White British. The majority of applicants were single people with no children (46 per cent) and 45 per cent of applicants were key workers as defined by government guidelines with the regional additions. Most who were accepted as purchasers had an income between £20,000 and £29,999 (Figure 11.7). Key workers

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600 500 400 300 200 100 0 18–24

Figure 11.6

25–39

40–50

Over 50

Age of applicants.

Source: HomeBuy data.

1600 1400 1200 1000 800 600 400 200 0 £0–10,000

Figure 11.7

£10,000– 19,999

£20,000– 29,999

£30,000– 39,999

£40,000– 49,999

£50,000– 59,999

£60,000 and over

Income of applicants.

Source: HomeBuy data.

comprised 84 per cent of applicants for OMHB, but only 11 per cent of applicants for NBHB (Figure 11.8). This may reflect the fact that NBHB does not offer the same degree of choice as OMHB in terms of where applicants can buy – most key workers do not wish to live in ‘key worker ghettos’ to quote a respondent to a survey of hospital workers (CCHPR, 2002a). It also reflects the prioritising of key workers by Zone Agents in terms of meeting their demands for open market homes. Turning to those applicants who were successful in buying a HomeBuy product, the CORE dataset of RSL sales was used. This showed that NBHB was purchased by households buying a property with more bedrooms than they would strictly need, so the majority of two-bedroom NBHB properties were bought by either single adults or couples with no children. This creates households with a spare bedroom. In contrast, in social rented housing,

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two-bedroom dwellings are used to house families with children (see Figures 11.9 and 11.10).

OMHB

NBHB

Key worker

Key worker

Non-key worker

Non-key worker

Figure 11.8 Proportion of key workers applying for OMHB and NBHB. Source: HomeBuy data.

2000 1800 1600 1400 1200 1000 800 600 400 200 0 Household

1 elder

2 elders

1 adult

2 adults

1 adult 2+ adults and and 1+ children 1+ children

Other

Figure 11.9 Household composition in two-bedroom social housing. Source: CORE.

The data suggest that, rather than targeting housing need, the system is enabling mainly childless single people and couples to access larger accommodation than the minimum according to the bedroom standard4 and allows it to be less fully occupied than is the norm for social tenants. LCHO has historically permitted this ‘under-occupation’ and perhaps in this way plays a wider role in the creation of mixed and balanced communities. It also reflects the hybrid nature of the product, as although subsidy is involved, the properties are partially market units and so the product has to meet aspirations in addition to fulfilling need. The HomeBuy products are therefore meeting the government’s aim of expanding home ownership. Importantly, the location of demand is quite restricted. The work undertaken by CCHPR in 2004, which focused on affordability in the context of

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350 300 250 200 150 100 50 0 Household type

Single elder

Elderly couple

Single adult

Two adults

1 adult and children

2+ adults and children

Other

Figure 11.10 Household composition in two-bedroom NBHB. Source: CORE.

recruitment and retention problems among public-sector workers, included case studies in Fenland in Cambridgeshire and Broxbourne, St. Albans and Hertsmere in Hertfordshire, plus Waveney in Suffolk. These areas were selected to reflect the extremes of house prices in the region, with very high and much lower demand. Fenland and Waveney are lower demand areas. In its Core Strategy Submission, Waveney District Council (2008) reports stubbornly high unemployment, low earnings and notes that it is recognised by the EU, national and regional agencies as demanding economic and social regeneration. It suffers from low productivity and low investment and is consequently a lowwage economy by UK norms, with low aspirations amongst its population. Evidence gathered in the case study research suggested that housing availability and affordability were not problems in this area. In Fenland, interviews with the police, a local school and the NHS Hospital Trust suggested that while there were perceived affordability problems, these were related to the Cambridge area rather than Fenland itself, and neither the police nor the school found problems of recruitment or retention in Fenland. The other three case studies showed a different picture. St. Albans district is an affluent and prosperous area located close to London. It has virtually zero unemployment (the lowest in Hertfordshire) and house prices are amongst the highest in the UK (CCHPR, 2004). All the employers contacted suffered from persistent vacancies and difficulties in recruitment. The recruitment and retention problems in Hertfordshire were perceived as related to the cost of housing. Housing affordability problems in Broxbourne and Hertsmere were less severe and recruitment and retention figures reflected this. However, there were few intermediate housing schemes available in any of these higher demand areas, and properties were quickly taken up, particularly by public-sector workers.

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The research showed that apart from the London commuter areas of parts of Hertfordshire and Essex, the only other locations within the region where intermediate housing in the form of NBHB was actually in demand were Cambridge, Norwich and Peterborough. The location of new supply is therefore enormously important if intermediate housing is to be an effective alternative tenure for those unable to access full market housing.

The proposed solutions Smaller shares In order to try and help those who can no longer afford the products, HAs were selling smaller proportions of the equity to some applicants. However, there were concerns that lowering the equity share may not be financially viable either over the longer term for HAs or for applicants as the rent on the unsold equity would be too high to make the product a sensible option given the additional costs of repairs and maintenance. The NBHB product may not be very attractive to purchasers either, for the same reasons. The Cambridge sub-regional research (Cambridgeshire Horizons, 2008) concluded that it will be critical to keep the additional rent payment down to a maximum of 2.5 per cent on the unsold equity when people purchase smaller equity shares. Yet most HAs were actually charging more than this, especially where they had been able to develop or purchase the dwellings without the need for Housing Corporation grant. Indeed, with the housing market downturn, some HAs have purchased units without grant from developers unable to sell them on the open market.

Intermediate renting Intermediate renting was one element of the Key Worker Living Programme and has until recently been confined to this market. However, in its 2008–11 Prospectus, the Housing Corporation indicated that it can be available for other groups and the Homes and Communities Agency appears to be supporting this. The data on intermediate renting in the East of England suggest that at present this is very limited indeed, although the information is not complete. Intermediate renting could perhaps be expanded, however, as one of its key roles is to assist those unable to secure mortgage finance, such as some key workers from overseas. Intermediate rent may be a more affordable tenure for those in the lower-income brackets. Participants at the focus groups suggested that increasing the availability of intermediate rent may help those who can afford more than social rent but who cannot afford home ownership.

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Whilst most applicants for NBHB have incomes between £20,000 and £29,999, applicants for intermediate rent have incomes between £10,000 and £30,000. For example, in terms of accepted applications, out of the 56 in Hertfordshire in 2007, 28 were in the income range £20,000–30,000 and 15 in the range £10,000–20,000. These examples show that intermediate renting may be able to assist those on lower incomes who might not be able to afford NBHB. This suggests that intermediate rent may be a very viable alternative product for key workers and others on low incomes, which supports the findings of the Evaluation of Key Worker Living (Final Report) published by DCLG (GKN Consulting Ltd and Centre for Urban and Regional Studies, University of Birmingham, 2006). This found that intermediate renting appears to offer an affordable housing solution for key workers at an earlier stage in their career when they do not expect to remain in the same job for long. For example, major teaching hospitals provide training and experience for ambitious key workers who always intend to move away for a permanent position. If intermediate renting can encourage such mobile staff to remain a little longer in post, e.g. a second year, this would have major positive impacts on turnover and on the numbers of more experienced staff available. However, at present intermediate renting remains a very tiny proportion of the market.

Baffled by innovation? It is clear that there are problems on the ground in implementing the constant changes in intermediate products that are announced by central government. These new products may be innovative, but for those with little experience of intermediate housing in any form, it is difficult to get to grips with the changes and to know how to deliver them to the right group of people. While the research was being undertaken, two new shared equity products with different shares and different treatment of interest on the equity loan were introduced. These proved far more popular than the previous straightforward shared equity scheme and as a result the HA scheme’s waiting list has closed and the government scheme has been withdrawn. However, at the time of writing the HomeBuy website provided seven different options (plus the two that have been withdrawn), each with its own terms and conditions, eligibility and cost. The Working Group’s main concerns were, first that a number of newbuild shared ownership units were slow to sell, and second that the current intermediate products (simple shared equity and shared ownership) were increasingly unaffordable to lower-income working households. As a result, only applicants at the top end of the income range (close to the £60,000

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maximum) were able to purchase. This might be one reason why the new homes were not selling well although it could also be related to the type of scheme, its location and what else was currently available in the open market, e.g. below lower quartile prices. Discussion produced other concerns related to these overall problems. However, it revealed that many stakeholders were finding it difficult to understand new-build shared ownership fully. They were particularly concerned about defining affordability and meeting the full range of the intermediate market. It was felt that the Regional Assembly needed to provide help for LAs that were ‘struggling’ with affordability criteria. One suggestion was to follow what was seen as good practice in the region, such as Chelmsford’s approach. Chelmsford District Council had decided to define who was eligible for shared ownership by comparing with entry level private renting, not home ownership. They saw the private rented sector as an intermediate tenure in its own right (however, that is because rents were low compared to the costs of owner-occupation – this is not always the case, as they are separate markets and it depends on supply and demand in each one). One problem related to the fact that new-build shared ownership was delivered through the planning system (see Chapter 6). Developers were said to be holding ‘beauty contests’, phoning around asking RSLs5 who will pay the highest price for the completed units. Developers are saying they don’t care about the tenure so they don’t worry about with or without grant – it is up to the RSL to make a bid and they will choose the highest. So they are shifting all the risk on to the RSL, and it is up to them to get grant (RSL). But it was argued that if this did not happen, the grant could be reduced as the price paid by the HA would be lower. The problem was how to stop RSLs competing with each other when invited to do so. One approach cited was the Bristol ‘Matrix’6 whereby affordability was estimated for different parts of the city and the matrix set out what the HA would pay the developer for a particular type and size of unit in each area. Provided this was set out in the S106 agreement, it was thought to be unlawful (in breach of contract) for a HA to pay more. However, this was difficult to enforce as when a HA pays more than specified, no one complains because the price is confidential. It was said that People need to understand that if the typical new property is £200,000 the RSL has to sell it for that amount – that is the bottom line that no-one seems to understand. So HomeBuy is very different from social renting where the price is not relevant when setting the rent (HomeBuy Agent).

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One problem was felt to be the ‘mindset’ of HAs who see shared ownership (NBHB) as cross-subsidising social rented housing. This also applied to LAs who want the maximum social rented units they can get, and only want intermediate tenures if they have to make a scheme ‘stack up’. But LAs need to think about balance, choice and flexibility. These issues are related – thus one argument was that you should not use a matrix approach saying this is the price that all HAs will pay the developer, the approach should not be about price but about affordability – so you might want the affordable housing to be priced quite high. The affordability has to come from the SHMA7 (LA). Meeting the full range of the intermediate market was seen as being about the overall dwelling balance. St Albans takes different areas and works out the proportions of one-bedroom, two-bedoom flats, houses, etc. based on the SHMA. In area A only intermediate rent is affordable, whereas households living in area B can access shared ownership. This allows an element of choice – if you want to live in the highest demand area because of schools, etc., then you have to rent – if you want to own, then you have to live in a cheaper area. There was a view that LAs need to consider the role of the intermediate market more carefully. Chelmsford was seen as ahead in this respect, as they did not support some bids for grant funding, and only supported others conditionally, because they were not convinced that they would reach the right people. In some very high-priced areas, RSLs should be asking – why do we want to put LCHO there? How does this fit with mixed communities? There would be areas where some additional subsidy would meet real housing need, but others where people were getting shared ownership who could have purchased on the open market, in a cheaper area or a smaller dwelling. RSL practice is to ensure that the overall balance of the scheme allows them to purchase a maximum 50 per cent share, but this could allow some dwellings to be sold at a 75 per cent share, and others at only 25 per cent. RSL bidders should be having a debate with the LA to see whether there is enough flexibility in the scheme to enable exchange of shares, or whether more subsidy is needed to make the scheme viable overall. The Working Group had agreed to produce some guidance for LAs so a simple excel spreadsheet (partly illustrated in Table 11.2) was produced based on a one- to two-bedroom flat and a two- to three-bedroom house. Using local lower quartile house prices and the average social rent in the district would produce the upper and lower limits of the income range for which these types of dwelling would be affordable with a 50 per cent share and a rent based on 1.75 per cent of the full value. The point would be that different prices, rents and shares could be plugged into the spreadsheet to

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find out the combination that would be affordable for households in different areas and on different incomes within the overall income range targeted by the government policy (£20,000–60,000 a year). The spreadsheet was ‘tested’ by several LAs across the region to provide feedback on whether it was simple to use, how easily it could be updated (i.e. with new average prices and social rents, plus the sale price of the dwelling itself). Actual schemes could be plugged in, or averages for the district or parts of the district could be used to provide guidance to S106 negotiations and the price paid by the HA to the developer. The feedback from the testing and resultant discussion produced some further problems. There was debate about whether HomeBuy was assisting home ownership or simply assisting people to find a decent home when they could not afford purchase but were not eligible for social rented housing. In other words, was it a tenure in its own right, or a foot on the home ownership ladder? A problem was identified when the methodology defines the range of the intermediate market because some LAs have found that developers will always go for the top of that range rather than providing a spread across the range. Thus for example PPS3 defines those who can afford more than social rent as intermediate, but if intermediate is defined as those who can afford Housing Corporation intermediate rent which is 50 per cent above social rent, it makes a big impact on who is eligible. One way of ensuring that developers do not just provide for the top of the range might be to calculate the price that RSLs will pay the developer and put that in the S106 agreement. If the method of calculating the price, such as the Bristol matrix, was set out in the S106 agreement, would it be unlawful for an RSL to pay more? If they pay more, they would have to charge a higher rent on the unsold share, so the prospective purchaser has to pay more than 30 per cent of income or cannot afford the unit, so once again only the top end of the intermediate market is being addressed. The feedback found that the spreadsheet did not meet the requirements of LAs. Specifically, it used the average social rent as the lower bound, and some people thought this was wrong as it bore no relationship to the ability to afford intermediate tenure. Even adding an arbitrary £30 a week to the social rent, so that the income range for intermediate housing excluded those who could afford only just more than the social rent and so might be considered marginal purchasers in terms of affordability, still produced an income figure which was felt to be too low for shared ownership. The fact that at lower levels of income, no suitable product is available might be used as an argument to seek products with higher levels of subsidy. The Zone Agent responded by saying that if people can afford to buy a house at the lower quartile price in the open market, it is not appropriate to offer them subsidy. The issue is whether the intermediate products should only meet housing need, or whether they should also meet aspirations. The

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teacher on over £32,000 may aspire to own an ‘average house’ at £200,000 but in reality they could afford to buy a property at lower quartile prices. Most people enter home ownership with a view to ‘trading up’ as they can afford it. LCHO products are not an effective use of subsidy if they enable people to make the leap sooner, rather than helping those who could never afford to buy at lower quartile prices in the open market. One of the problems is the premium on new build that leads to higher prices for these units (HomeBuy Agent). The solution was felt to be that the LA could use the lower quartile new-build price on a scheme-by-scheme basis to calculate eligibility criteria. However, others felt that this was no better in principle than the matrix approach used by Bristol.

Conclusions In conclusion, on the demand side, the profile of HomeBuy applicants has not changed over the past five years (CCHPR, 2004). The majority of HomeBuy applicants were single people with no children, nearly half (45 per cent) were key workers, most were previously living with family/ friends or private renting, most were aged between 25 and 39 years, and most applicants who were accepted had an income between £20,000 and £29,000. The key questions raised by the case study relate to whether newly built homes for sale on a shared ownership basis can be sold, i.e. is there really a demand for them? Roughly 80 per cent of take-up of intermediate housing in the region is for shared equity rather than shared ownership. Only a fifth of those eligible want to part-own a new-build home using the shared ownership approach. This reflects the fact that households with incomes at the top of the eligibility range (£60,000 per annum) want and can afford shared equity as a means of becoming homeowners. In other words, there has been a complete mismatch between what is available and what is needed. The study showed that the location of the shared ownership products is crucial, yet this is difficult to determine in advance because overall few new shared ownership units are built across the region each year. Equally the form of the offer matters – and HomeBuy Direct as a shared equity product with quite a large zero interest loan might prove more desirable than the traditional new-build shared ownership provided by HAs. The case study illustrates some of the difficulties in introducing innovation from above. The new products were not developed at local level on the basis of experience and understanding of local housing markets. The LAs and HAs in the region were struggling to deliver the target numbers of affordable housing units in ways they were not familiar with – they

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were experienced in delivering social rented housing for people in priority housing need and usually with extremely low incomes. To use precious subsidy for those not in priority need was clearly difficult for some. Others accepted the mixed communities argument in which shared ownership enables the upper range of lower-income households to get a foot on the home ownership ladder, and this view was reinforced by the increasing affordability problems of shared ownership products. The irony was that there was an overwhelming view that the products should provide for the whole of the intermediate market income range, yet in practice they had become affordable only to those at the top end. The solution would appear to be greater subsidy, although the use of intermediate rent might fill part of the gap. A further irony is that shared ownership of newly built homes still requires subsidy for schemes to ‘stack up’, yet rents charged by HAs tended to the maximum allowed by the Housing Corporation. One might expect homes with subsidy to at least have rents set as a proportion of the relevant (subsidised) social rent for a similar property. As a result, many new homes are not in fact affordable for the targeted households on a shared ownership basis.

Notes 1. Regional assemblies will be abolished from spring of 2010 and their strategic planning role has already switched to Regional Development Agencies. 2. In order to simplify the allocation process for intermediate housing products, the Housing Corporation selected certain housing associations in the region as Zone Agents, now HomeBuy Agents, to provide a one-stop shop for prospective purchasers, rather than having to apply separately to each housing association producing new shared ownership homes. 3. According to government planning guidance, LAs are required to conduct Strategic Housing Market Assessments to inform their local planning policies and as evidence to support the need for affordable (including intermediate) housing. 4. The bedroom standard classifies the number of bedrooms a household requires so that no one has to share a bedroom unless they are: (a) a couple, (b) both aged under 10, (c) both aged under 21 and of the same sex. No more than two people may share a bedroom. Note: Sometimes the age of 16 is used rather than 21. 5. HAs are also termed RSLs when they are registered with the Housing Corporation (now Tenant Services Authority). The two terms are used interchangeably here. 6. Bristol City Council has developed a matrix of prices that RSLs will pay developers for different sized properties – both social rent and shared ownership – in different areas of the city. This is updated annually. Available at http://www.bristol.gov.uk/ccm/content/Housing/ affordable-housing/affordable-housing-information-for-developers-and-housebuilders.en 7. Strategic Housing Market Assessments form part of the evidence base for affordable housing policies (see DCLG, 2007b).

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Section E Intermediate housing and the economy

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Introduction to Section E: intermediate housing and the economic cycle

The final section helps to bring us up to date by examining the impact of the economic cycle on the viability and success of low-cost home ownership schemes. From the point of view of providers, the specific schemes available in England have been easiest to implement during periods of rapidly rising house prices. This has meant that there has been enough value uplift available for all – for developers who have been happy to make contributions to ensure they can get started on available sites, housing associations who have been enabled to recycle receipts to expand supply and participants in the schemes who have achieved ‘a foot on the ladder’. However, rising house prices in relation to income has shifted the client base often to those on incomes well above the average in the areas in which the schemes have been funded. This itself raises issues about the role of government support for intermediate tenures as compared to more vulnerable groups. For the vast majority of the period examined in this text, rising house prices were seen to be the norm. But especially after 2004, the gap between incomes and house prices widened unsustainably. Then the credit crunch occurred and the world of intermediate housing changed dramatically – putting at risk the whole policy initiative. Chapter 12, by Jones, examines the earlier period assessing the processes and outcomes of the Homebuy scheme in Wales – where the scheme had remained almost unchanged for a decade – from trough to near peak of the economic cycle. The chapter shows how very different groups of people were able to benefit at different stages in this cycle – as well as in different housing market areas. It raises questions about whether standardised

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schemes can ever achieve appropriate targeting. Yet this must be set against the experience in England of rapidly changing criteria, increasing complexity and over-regulation. One of the continuing concerns about shared ownership has been the inherently tight linkages between the provision of market and affordable dwellings. Many had predicted that any downturn would undermine output targets. What they had not predicted was the shortage of mortgage finance and the particular difficulties of obtaining funding for schemes aimed at marginal purchasers. Burgess in Chapter 13 traces the outcomes of the credit crunch and the subsequent recession on the shared ownership market. The chapter examines the difficulties that have arisen for developers, housing associations, government and prospective purchasers – and how these problems have been addressed. At the time of writing, the immediate difficulties have been addressed mainly through additional subsidy and transfers to social and intermediate renting. It is far too early to assess how much damage has been done to the long-term prospects for intermediate tenures.

12 Intermediate housing products and the housing cycle Michael Jones

In 1995/96, the government introduced a new, simplified Homebuy product in Wales. This replaced earlier shared ownership products and became the forerunner for the subsequent range of Homebuy shared equity products in England, introduced from 1998 (Jackson, 2001). Unlike England, where the products marketed under the HomeBuy brand have undergone many changes, the Welsh Homebuy product has remained almost unchanged since its introduction. It offers a repayable but interest-free shared equity stake of 30 per cent of the purchase price of a property. The only modification to the programme was the introduction of a 50 per cent loan rate in rural areas from 2001. While the Homebuy product in Wales has remained essentially the same from 1995/96, the housing market in Wales, as in the UK more generally, has moved from the trough to the peak of the house price cycle. This chapter describes the Homebuy scheme as it operated in Wales over the 10 years from 1995/96 to 2004/05, including some important features of its administration, and the resulting wide range of households that were assisted through Homebuy. It then analyses the distributional consequences of the scheme over the housing market cycle, from its trough in 1995/96 to near its peak in 2004/05, and the different characteristics of Homebuy households in metropolitan, urban and rural housing markets in Wales.

Making Housing More Affordable: The Role of Intermediate Tenures, edited by Sarah Monk and Christine Whitehead © 2010 Blackwell Publishing Ltd.

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The chapter is based on research commissioned by the Welsh Assembly Government, and published as A Review of Low Cost Home Ownership Policies in Wales (Welsh Assembly Government, 2006).

The Homebuy product and the housing cycle Any programme whose objective is to assist marginal purchasers to enter owner-occupation by enabling them to purchase at less than the full market price is obviously dependent upon changes in full market prices. This chapter explores the extent to which changes in the housing market in Wales associated with the economic cycle affected the types of household assisted by the Homebuy scheme. It also looks at regional differences at the same stage of the cycle. Intermediate housing market products are often standardised and do not adapt to reflect different conditions in the housing market. The same product is offered at the bottom of the cycle as at the top. The volume of funding is not directly linked to the expansion or contraction of the ‘intermediate’ market. The result of this is that intermediate housing market products are likely to be available to, or to assist, very different groups at the bottom of the housing market cycle to those at the top of the cycle.

The Homebuy scheme in Wales In the Welsh Homebuy scheme, the purchaser owns 100 per cent of the property: there is no equity ‘share’ held by a third party. The purchaser obtains a normal loan from a mortgage lender, secured by a first charge on the property. The equity stake, either 30 per cent in urban areas or 50 per cent in rural areas, is provided by a housing association, and secured by a second charge on the property. The equity stake is not costless simply because no interest is charged: like HomeBuy in England, it is a repayable loan, where the repayment required is linked to the market price of the property. The funds for the equity stake are provided from the Social Housing Grant (SHG) programme. SHG is provided by the Assembly, and distributed by local authorities to housing associations operating in their area. Local authorities are responsible for setting the strategic aims of Homebuy in their areas, and housing associations are responsible for the day-to-day administration of the Homebuy scheme. If the purchaser sells the property, they must repay the loan based on the relevant proportion of the sale price, either 30 or 50 per cent, to the housing association. If the price of the property has risen, the housing association will receive a surplus above the original SHG contribution. Conversely, if the price of the property has fallen, then the housing association may be repaid

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less than the original SHG contribution, and suffer a loss. So it is a form of risk sharing, whereby the purchaser only bears 100 per cent risk on the 70 or 50 per cent for which they have a normal mortgage – the risk on the other portion of the value is borne by the housing association and ultimately by central government as these are public funds. In practice, the rapid rise in house prices between 1995/96 and 2005/06 meant that, following contribution repayments by Homebuy purchasers, housing associations were estimated to have received between £5 million and £6 million over and above the repayments of the original equity share funded by SHG. These funds were available to housing associations to recycle into further Homebuy contributions, or to apply to any of their approved housing functions. Between 1995/96 and 2005/06, some 2750 dwellings were purchased under the Homebuy programme in Wales, and by 2005/06 some 600 had already repaid the Homebuy contribution. This programme represents a very small fraction of the housing market in Wales. There are roughly 56,000 homes bought every year in Wales; therefore, there are about 14,000 homes purchased in the bottom quarter of the market and 5600 purchased in the bottom decile. Even if the 200 Homebuy purchases each year were all concentrated in the bottom decile of the market, it is unlikely that they would exert any additional inflationary pressure on house prices. In practice, very few of the properties bought under the Homebuy scheme were in the bottom decile of the market, and many were not in the bottom quartile. The reasons for this were connected with the policy and administrative arrangements for the scheme.

The administration of Homebuy in Wales The administration of the scheme itself was carried out on behalf of local authorities by the housing associations which operated in that area. As each tranche of grant was announced, housing associations would advertise the availability of Homebuy. The numbers of applicants would quickly exceed the funds available, and the application lists would then be closed until the next round of funding became available. In practice, local authorities offered little or no strategic policy guidance to housing associations. As a result, housing associations simply worked through the list of applicants in date order. There was little or no attempt to prioritise applicants according to any criteria of need. Housing associations administering the Homebuy programme were required, by the Welsh Assembly Government, to ensure that applicants were either already social housing tenants, or were eligible to be a tenant and to be in circumstances such that in other circumstances the housing association would offer them a tenancy.

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In practice, housing associations kept separate waiting lists for Homebuy applicants, and it appeared clear that applicants were applying for Homebuy, not for rehousing. Housing associations were, in general, dealing with applications in date order, rather than by applying any test of housing need or likely priority of rehousing. A high proportion of Homebuy purchasers were among household types which were unlikely to have been in circumstances which would lead to an offer of rehousing. In urban areas, for instance, the proportion of single people and childless couples assisted by Homebuy varied between nearly half in SE Wales and nearly three-quarters in Cardiff. Housing associations administering the Homebuy programme were also required by the Welsh Assembly Government, to assess whether households were able to sustain the financial demands of home ownership. Most housing associations attempted to assess applicants against this criterion by determining the maximum purchase price that the applicant could afford from their net disposable income. As house prices rose from the late 1990s onwards, associations found that these assessments were regularly undermined by the loosening of lending criteria by the lenders, who were offering increasing multiples of income above those considered prudent by the housing associations. One housing association had increased its income multiple for affordability assessments from 3 times single incomes and 2.25 times joint incomes in April 2004, to 3 times single and 2.5 times joint by April 2005, and to 3.75 times single and 3.5 times joint by September 2005. Even so, the maximum mortgage estimates which the housing association was making of prospective purchasers’ capacity were failing to keep up with the mortgage certificates which prospective purchasers were able to obtain from mainstream high street lenders. The speed of these changes within the mortgage market meant that those housing associations which attempted to make affordability assessments were forced to change the basis of these assessments, in order to reflect the commercial offers being made to prospective purchasers. Examples of this problem included the case of a machine operator, earning £19,500 per annum in 2004, who was assessed by the housing association as having a maximum mortgage capacity of £56,220, but who obtained a mortgage certificate from the Halifax for £63,523. In another example, an agency support worker earning £18,300 in 2004 was assessed by the housing association as having a maximum mortgage capacity of £62,727, but obtained a mortgage certificate from the Halifax for £70,530. Two further features of the administrative policy of Homebuy in Wales affected the type, and price, of the property that applicants were able to afford. The first of these was that the equity contribution was expressed as a percentage of the purchase price. This meant that if an applicant could afford a significant deposit, then the deposit had a gearing effect on the size of the equity contribution. For the small minority of Homebuy purchasers who had

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a significant deposit, the scheme effectively increased the equity contribution available in proportion to the deposit. This can be illustrated by the case in a rural area, with the 50 per cent Homebuy rate, of a household with a single earner with a gross annual salary of £14,500, and a deposit (a gift from a parent) of £32,500. The purchaser obtained a mortgage for £44,500, which together with the deposit of £32,500 totalled £77,000. This in turn attracted an equity share of £77,000 and enabled the purchaser to buy a four-bedroom home costing £154,000. In practice, a noticeable feature of purchasers in all areas was that very few put down any deposit from their own resources. Almost all purchases were entirely funded by mortgages, and by the very substantial ‘deposit’ represented by the equity share. Less than one in five (19 per cent) of purchasers contributed any deposit towards the cost of purchase, and nearly two-thirds of the deposits were for sums less than £5,000. Only 7 out of 93 purchasers surveyed contributed a deposit in excess of £5,000. Four of these came from savings, two from parental gifts and one from equity from the sale of a former owner-occupied home. The second of these effects of the administration of the scheme was that the maximum purchase price eligible for Homebuy was linked in each area to the cost limits (the Acceptable Cost Guidelines, or ACG) for housing association new-build schemes. However, while ACG limits for new housebuilding are set for every Community Council1 area in Wales, to reflect local circumstances, the ACG limits used for Homebuy are set across each local authority area at the highest ACG band found in that area. In Rhondda Cynon Taf, one of the local authorities in the former coal mining area of the South Wales Valleys, for example, the ACG limit is set at the level of the highest band, Band 6, even though most of the county borough is covered by lower ACG bands. As a result, purchasers could buy larger or more desirable property than their immediate needs by purchasing in the cheaper parts of each local authority area. The use of ACG limits as the maximum for Homebuy purchases also resulted in large anomalies between different local authority areas. At one extreme, in Rhondda Cynon Taf, a family with one child would be eligible to buy a property worth £70,000 more than the average (mean) property price in the area, whereas at the other extreme, in Ceredigion, a rural local authority in coastal West Wales, a family with one child would only be able to purchase a property in the bottom quarter of the market.

Who was the Homebuy scheme for? The Homebuy scheme offered a simple, readily understandable, product offering prospective house buyers a 30 per cent deposit in the form of an

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interest-free loan. However, when combined with very limited funding, only sufficient to allow some 200 households to be assisted each year among the 56,000 house buyers in Wales, it is unsurprising that the scheme was oversubscribed each year within days of being announced. As already noted, no policy guidelines were adopted, either at the national or local authority level, which would enable the limited funds available to be rationed, or targeted, towards particular household types, or circumstances, that would meet broader strategic housing objectives. As a consequence, the housing associations responsible for administering the scheme largely worked through applications in simple date order. In practice, this produced a very wide variation in the circumstances of the households who were assisted to purchase through Homebuy. Three examples of individual cases illustrate the range of different functions which the Homebuy programme appears to have fulfilled over the period. In the first example, in 2003/04, a housing association tenant, a single parent with one child, was working as a nursing assistant in the NHS and earned £13,040 basic and a total of £16,000 including overtime. The Homebuy scheme enabled her to buy a two-bedroom terrace house for £87,500, with a mortgage for £70,000 and a 20 per cent equity share of £17,500. This appears to represent very good value: the equity share was provided through a S106 agreement, without the need for public funds, and had the dual benefit of helping one household into owner-occupation and of creating an additional social housing letting. Even if a 30 per cent SHG contribution had been required, the expenditure of £26,250 would still appear to represent good value for money in relation to the total benefit created. In the second example, also in 2003/04, a couple without children, a researcher in the voluntary sector and a part-time teacher, earning £37,386 between them, were able to buy a three-bedroom house for £140,000, with a mortgage for £98,000 and a 30 per cent equity share of £42,000. In this case, the equity share was again provided through a S106 agreement, and had no public expenditure implications. However, it is not clear that the use of £42,000 of resources to enable a childless couple to purchase a three-bedroom house is a focused use of scarce resources. In 2004, 25 per cent of the housing market in Cardiff was cheaper than £112,950. Assuming an income multiple of 3.25 times joint income, the couple could have obtained a loan of £120,000. It would appear implausible that a professional couple could not afford to buy without assistance. In the third example, in 2005/06, a couple, each aged 21 and without children, both in administrative jobs and earning £27,700 between them,

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were able to buy a two-bedroom house for £120,000, with a mortgage for £84,000 and a 30 per cent equity share of £36,000. Both were living with their parents, and had no savings. While similar examples were not uncommon, it is not clear that the purpose of the Homebuy scheme was to provide deposits equating to 18 months’ net earnings to 21 year olds living at home with their parents.

The housing market cycle: house prices and earnings Figure 12.1 and 12.2 show how the geography of house prices that existed in 1996 had been transformed in the house price boom by 2005. In 1996, the average price of a terraced house was less than £65,000 in virtually all parts of Wales (the darkest areas on the map). Only in the most expensive areas such as parts of rural Pembrokeshire, the Vale of Glamorgan and Cardiff, prices were higher, while in the former coal mining areas of the Valleys, the average terraced house costs less than £20,000. By 2005, the picture has been transformed. The darkest areas, where the average price was under £65,000, are now confined to the Valleys. In South Wales, prices over £200,000 for a terraced house have appeared in Cardiff and in a handful of higher demand areas such as the Vale of Clwyd, Aberdyfi, Fishguard, Tenby and around Cowbridge. However, while the average house had increased in value by two and a quarter times, and lower-priced houses had increased rather more, by two and a third times between 1999 and 2005, earnings had risen by barely more than a quarter, as shown in Figure 12.2. As a consequence of the increasing disparity between earnings and house prices, households must be able to provide increased deposits at all points in the market. Tables 12.1–12.3 clarify how changes that occurred between 1999 and 2005 in incomes and house prices modified the size of the deposit required to purchase the average, the median and the lower quartile house. Table 12.1 shows that over the period earnings rose by 27 per cent. It is clear from Table 12.2, however, that house prices over the period rose by more than 127 per cent, with lower-priced houses rising by slightly more. As a result, while a purchaser on average earnings could afford to buy the average house without a deposit in 1996, by 2005 the same purchaser, borrowing the same multiple of income, would have required a deposit of over £59,000 to buy the same house (Table 12.3). Table 12.3 further clarifies that in 1999, houses below the average price, perhaps 60 per cent of the housing market, were potentially available to people on average earnings. The lower quartile price house could be afforded, without a deposit, by a purchaser earning 58 per cent of average earnings.

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Legend No data ⬍£20,000 £20,001–35,000 £35,001–45,000 £45,001–55,000 £55,001–65,000 £65,001–75,000 £75,001–100,000

Figure 12.1 Average house prices (terraced) 1996.

The standard measure for determining the ‘poverty line’ in Britain is usually taken to be that a household is in poverty if the equivalised net income of the household is less than 60 per cent of the median income. House prices in Wales in 1999 were so low, relative to incomes, that households ‘on the poverty line’ could afford to buy in the bottom quarter of the housing market.

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237

250 Change in average gross weekly % earnings since 1999

Percentage increase

200

Percentage increase in lower quartile house prices 1997–2005

150

100

50

0 1999

2000

2001

2002

2003

2004

2005

Figure 12.2 Wales: Percentage increases in average earnings and house prices 1999–2005. Source: A Review of Low Cost Home Ownership Policies in Wales, Welsh Assembly Government (2006).

Table 12.1 Average earnings: 1999 and 2005 compared.

Average gross weekly earnings Average gross annual earnings Maximum mortgage @ 3.5 times single earner

1999

2005

£ 358.7 £18,652 £65,283

£ 454.4 £23,629 £82,701

% increase

126.7 126.7 126.7

Source: Welsh Assembly Government (2006).

Table 12.2 Average house prices: 1995 and 2005 compared. 1999

Average (mean) house price Median house price Lower quartile house price

£62,710 £53,500 £37,950

2005

% increase

£141,908 £124,995 £ 89,000

226.3 233.6 234.5

Source: Welsh Assembly Government (2006).

Table 12.3 Deposit required: house price less maximum mortgage potential. 1999

Deposit required to purchase average house Deposit required to purchase median house Deposit required to purchase lower quartile house Source: Welsh Assembly Government (2006).

–£ 2,573 –£11,783 –£27,333

2005

£59,207 £42,294 £ 6,299

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A single earner, earning £208 per week gross, or 58 per cent of average earnings, only marginally above the ‘poverty line’, would have been able to afford to buy a home in the bottom quarter of the market in 1999, without needing a deposit. However, by 2005, a prospective purchaser on the average earnings of £454 per week would barely have been able to afford to buy the bottom quartile price house. The income required to purchase in 2005 had more than doubled, while actual average earnings had risen by only a quarter. The Homebuy scheme, offering the equivalent of a 30 per cent deposit, in the form of the equity share, would have enabled a prospective purchaser in 1999 earning two-thirds of average earnings to buy the average house, and a purchaser earning only 41 per cent of average earnings (significantly below the ‘poverty line’) to purchase in the bottom quarter of the market. In an extreme case in 1995/96, a single parent whose previous relationship had broken down and who was being bought out by her former partner was enabled to purchase a two-bedroom new-build terraced house, despite being on Income Support. The property was valued at £43,950, and the combination of the Homebuy 30 per cent equity share of £13,185, equity from her former home of £5,688, and a mortgage from a mainstream lender of £25,077 based solely on her income from income support and child benefit, was sufficient to fund the purchase. By 2005, a prospective purchaser on average earnings would have required a 30 per cent deposit to afford the median price house, and a purchaser earning three-quarters of average earnings would only have a choice in the bottom quarter of the market, even with a Homebuy 30 per cent equity share. The introduction of the 50 per cent equity share in rural areas appears to enable a prospective purchaser on three-quarters of average earnings to have a choice in the bottom half of the market, but the figures shown in Tables 12.1–12.3 are for house prices averaged across Wales as a whole. Lower quartile prices in rural areas are often above the Wales average: the lower quartile price is 135 per cent above the average for Wales in Ceredigion, 124 per cent in Pembrokeshire and 118 per cent in Powys, although only 103 per cent higher in Gwynedd and actually lower, at 97 per cent, in Carmarthenshire. In general, the introduction of the 50 per cent equity share in rural areas has not enabled purchasers on below-average earnings to regain the position that they occupied in 1999.

The changing characteristics of Homebuyers over the10-year period When Homebuy was introduced, in 1995, the average price of houses bought by first-time purchasers was £38,336, and the average weekly earnings of

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full-time male workers were £321. By 2005, the average price of houses bought by first-time purchasers was £107,857, an increase of 281 per cent, and the average weekly earnings of full-time male workers were £462, an increase of 44 per cent. Since the Homebuy scheme has remained unaltered in urban areas over the 10-year period, offering prospective purchasers a 30 per cent equity share, it is clear that either the incomes of purchasers must have risen by more than the increase in average earnings, or that the price of property purchased using Homebuy must have fallen very significantly relative to the average price of houses in the market. In practice, the average price of a house purchased using Homebuy has remained very close to the average for all first-time buyers, although the type of house purchased has changed significantly. The most significant change has been in the type of household purchasing through Homebuy. The characteristics of Homebuy purchasers in 1995 and in 2005 can be compared from data obtained from a sample of files of sales administered by Charter Housing Association (currently by Fairlake Properties Ltd., a member of the Seren Group). The Charter programme is concentrated in Newport, Torfaen and Monmouthshire. In this sample, the early Homebuyers2 in 1995 bought houses with an average price of £42,650, slightly higher than the average for all first-time buyers in Wales, although the geographic concentration of the Charter programme in Newport, Torfaen and Monmouthshire may account for the difference. By 2005, Homebuyers were purchasing houses with an average price of £107,228, or almost exactly the same as the average for first-time buyers in Wales. The average price had therefore increased by 251 per cent. Total household incomes in the sample had also risen, from an average of £11,732 in 1995 to an average of £27,412 in 2005, an increase of 241 per cent, slightly less than the increase in house prices, but very significantly more than the increase in average earnings over the period of 144 per cent. The average income multiple had only risen slightly, from 2.58 per cent in 1995 to 2.68 per cent in 2005. While the income multiples used by lenders had increased over the period, it is clear that Homebuy purchasers in 2005 were coming from a significantly higher earning bracket than those in 1995. They were higher earners, but borrowing similarly prudent multiples of income, rather than households from the equivalent earnings bracket overstretching themselves by borrowing at ever higher multiples of income. The type of household assisted by Homebuy had also changed markedly between 1995 and 2005. In 1995, 50 per cent of the sample were either single people (interestingly, all female) or single parents. By 2005, the proportion of purchasers who were single people, or single parents, had shrunk to 20 per cent, and the single people were all male.

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This shift in household type resulted in a sharp increase in the proportion of households with two earners. In 1995, 70 per cent of purchasing households had only one earner. By 2005, 70 per cent of purchasing households had two earners. In 1995, just over half of the couple households had either a non-earning partner, or housewife, or a partner in only part-time employment. By 2005, less than 10 per cent of couple households had a non-earning partner, and less than 10 per cent had a partner in part-time work. This change in household composition reflects not only an increased proportion of women in work, but also the necessity of two incomes to support house purchase. Out of 18 couples where both members were in work, 7 had roughly equal incomes for each partner, while in 11 cases one partner earned twice as much or more than the other. The equality, or disparity, of incomes can affect the amount borrowed, dependent upon the policy of the lender. The nature of employment had also clearly changed over the 10-year period. From the evidence on case files of job titles, it is possible to make some estimate of the extent of the change in earnings and occupations that has occurred. • In 1995, a forklift truck driver earned £9,500, whereas in 2005 a forklift truck driver earned £24,500. • In 1995, a warehouseman earned £11,020, whereas in 2005 the two warehousemen in the sample earned £23,000 and £20,125, respectively. • In 1995, a community support worker earned £11,052, whereas in 2005 a support worker earned £20,000. • In 1995, a phonebank clerk earned £9,752; in 2005 the nearest equivalent was a call centre manager, earning £26,167. • In 1995, an area sales manager for Avon cosmetics earned £13,374; in 2005 the nearest equivalent was a sales manager for a major hotel earning £32,514. • In 1995, a design engineer earned £13,500 and had a non-working partner, whereas in 2005 an electronic engineer earned £26,000 and had a working partner earning £13,717 as a rehousing officer, while a mechanical engineer earned £35,500 and had a working partner earning £12,000 as a supply teacher. The evidence shows that the Homebuy programme is assisting either households whose pay, for relatively similar work, is at least double that of 1995, or households whose jobs are significantly higher graded, or both. Despite the change in the characteristics of households assisted by Homebuy, the extent of borrowing and indebtedness had hardly changed over the 10 years, with the average mortgage rising as a multiple of income from 2.58 times household income in 1995 to 2.68 times in 2005. In 1995,

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the lowest multiple, of 1.59 times earnings, and the highest, of 3.32 times earnings, were both obtained by single nurses. In 2005, income multiples ranged from a low of 1.94 times household income for a household with two earners with a joint gross income of £47,500, to a high of 3.88 times income, although this was a case of a dual earning household where only one income could be taken into account, because one partner was selfemployed with less than three years of accounts to prove income. This suggests that the Homebuy programme has adjusted to the change in house prices relative to incomes by shifting up the income scale, and by supporting dual earner households, rather than by assisting lower-paid households borrowing at the higher multiples of earnings that were available in the mortgage market of 2004/05. This may reflect the emphasis on assessing affordability operated by housing associations, although in practice most accepted the judgement of mortgage lenders, or it may reflect the fact that Homebuyers, with the equivalent of a 30 per cent deposit, could then afford to take a more risk averse approach to borrowing. Interestingly, the average age of Homebuy purchasers had fallen, from 34 in 1995 to 31 in 2005. The trend among first-time buyers in this period has been the reverse, but there is no indication of any reason why this age shift took place. It is possible that the availability of the large deposit represented by the Homebuy loan was enabling Homebuy households to purchase earlier than households dependent upon building up savings for a deposit. The immediate previous tenure of Homebuy purchasers was fairly similar between 1995 and 2005. The most significant change was a rise in the proportion of purchasers who were private-sector tenants, presumably reflecting the growth in the private rented sector itself that has occurred over the past 10 years. A significant shift also occurred between 1995/96 and 2004/05 in the type of property bought by Homebuy purchasers. In 1995, purchasers were buying in a falling market. All except one bought houses on private developments, often by national housebuilders such as Westbury and Barratt. Two bought new-build homes. Only one purchaser bought a former council house, previously sold under the Right to Buy. All bought two- or threebedroom homes, with just over 40 per cent buying two-bedroom homes. Nearly 60 per cent bought semi-detached or end terraced properties, and one purchaser was able to buy a detached house. In 2005, again nearly all purchasers bought two- or three-bedroom homes, except for two who bought four-bedroom homes (one a single parent with one child, the other a couple with four children). Over 80 per cent bought a threebedroom home, and nearly half bought either a semi-detached or end terraced property. Only one bought a flat. However, there was a clear shift in the market segment in which purchasers were buying; in 2005, 60 per cent of

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purchasers had bought a former council property, previously sold under the Right to Buy.

Differences between urban, metropolitan and rural Homebuy purchasers Not only were there clear differences over time in the types of households assisted into home ownership through Homebuy, but there were also equally important over geography, between metropolitan, urban and rural areas within Wales. The characteristics of Homebuyers in 2004/05 in the capital city, accessing the Cardiff Council Homebuy scheme, were different to those of Homebuyers in the mainly urban and commuting areas of Newport, Torfaen and Monmouthshire in SE Wales, utilising the national Homebuy scheme. These differed again from the characteristics of Homebuy purchasers in the rural areas of Ceredigion and Carmarthenshire in West Wales, utilising the national Homebuy scheme offering the 50 per cent contribution applicable in rural areas. Cardiff Council operates a scheme virtually identical to Homebuy, but without using SHG. The scheme is only available for new-build housing, because it relies on the provision of land made available by developers under S106 planning agreements, combined with some further subsidy from funds recycled from previous sales, to achieve a 30 per cent reduction in the price to purchasers. As might be expected, the purchasers exhibit more ‘metropolitan’ characteristics than those in other schemes. Just under half (42 per cent) of all purchasers in Cardiff were single, in contrast to only one in eight (13 per cent) in SE Wales and only one in ten (10 per cent) in West Wales. This was partly reflected in the different mix of properties available, with 9 per cent of the new-build properties purchased in Cardiff being either studio or one-bedroom flats, compared to none in either SE or West Wales. Over half (56 per cent) of single people purchased two-bedroom flats or terraced houses. Nearly three-quarters of all purchasers (72 per cent) were either single people or childless couples. This contrasts sharply with SE Wales, where just under half (47 per cent) of purchasers were childless households, and with West Wales, where only a quarter of purchasers were childless. No childless couple purchased a one-bedroom property: just over half bought two-bedroom properties and just under half purchased three-bedroom properties. As a result, nearly three-quarters (71 per cent) of all two-bedroom properties were bought by childless households, as were just over half (55 per cent) of all three-bedroom properties. Among couple households, 95 per cent were dual earning households (in the only couple household with one earner, the partner was disabled), an even

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higher proportion than the 90 per cent in SE Wales, and markedly different to the 60 per cent in West Wales. The average gross annual income of the sole or higher earner was £17,920, and that of the second or lower earner was £10,377. The average household income, for both single and dual earner households, was £22,728. These averages are below the average earnings for the main earner in SE Wales of £20,877, and the resulting higher average household income of £27,165. The lower incomes of the main earner in Cardiff, compared to that in SE Wales, may be the result of the slightly lower average of purchasers in Cardiff at 28, compared to 31 in SE Wales. The average age of single purchasers was 29, while that of couples was 27. The characteristics of purchasers in rural areas, who had access to the 50 per cent rate of contribution, were analysed from case files of purchases in 2004/05, in Ceredigion and Carmarthenshire. Homebuy purchases in these areas were administered by the housing association Cantref. Homebuy purchasers in rural areas were more likely to be couples with children. Only two of the purchasers were single, a proportion even lower than in SE Wales, at 10 per cent, and neither was ‘young and single’: one had a child visiting at weekends, the other had two adult children. Four households were childless couples, and the remaining 14 households all had children. Two of these households were single parents. Overall, 80 per cent of purchasers were in couple households, a similar proportion to SE Wales, but a higher proportion had children. However, a noticeably smaller proportion of couple households had two earners, at just over 60 per cent compared to the 90 per cent in SE Wales, and a number of the second earners had very low earnings. Only in two cases the earnings of the lower-earning partner were more than two-thirds of the earnings of the higher earner. These differences may have reflected differences in the age of children, the availability of childcare, the availability of work and social attitudes. Incomes also appeared to be lower than in SE Wales. The housing association, Cantref, had a reasonably comprehensive financial assessment, collecting data on net monthly earnings and also other sources of income such as child benefit, working tax credit/child tax credit and maintenance payments. An attempt was also made by Cantref to assess household expenditure, and to estimate the ‘free cash flow’ available to service a mortgage. Although it is not possible to calculate gross earnings directly from net, multiplying net earnings by 1.2 as a possible grossing up average produces a reasonable estimate. There were very significant differences in average earnings between Homebuyers in SE Wales and those in Ceredigion/ Carmarthenshire, which are shown in Table 12.4. Income from welfare benefits and other sources were an important part of household incomes among Homebuy purchasers in rural areas. The data collected by Cantref also included details of income from benefits and child

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Table 12.4

Earnings in urban and rural areas compared.

Average gross earnings

SE Wales

Ceredigion and Carmarthenshire

Main earner Second earner Average household earnings

£20,877 £10,313 £27,165

£15,500 £ 1,285 £18,500

Source: Welsh Assembly Government (2006).

maintenance, and these contributed very significantly to raising household incomes for households with children. Overall, income from these additional sources in households with children added nearly 50 per cent to earnings, and constituted almost a third (31.6 per cent) of net household income. Since most mortgage lenders were taking these additional sources of income into account when assessing lending multiples, it is clear that this income added very significantly to the ability of qualifying households to afford house purchase. Conversely, the lack of such additional income would have diminished the ability of childless households to compete in the housing market. The average price paid by purchasers in Ceredigion was £123,000, and in Carmarthenshire was £110,000. In both areas, the average price paid was above the average price paid in Wales by all first-time buyers. Even with the higher percentage of Homebuy loan available in rural areas, households needed to borrow more in relation to income than in SE Wales. Income multiples (grossing net earned income up to gross by multiplying by 1.2) were significantly higher than those in SE Wales: 3.03 in Carmarthenshire and 3.61 in Ceredigion, even though these include income from benefits, unlike the figures in SE Wales. However, mortgage payments (at least in the first two to three years of the mortgage) were estimated to be only 23 per cent of total net household income in Ceredigion, and 21 per cent in Carmarthenshire. Eighty per cent of households were able to buy a semi-detached or end terraced house and 70 per cent were able to buy a three-bedroom (or in one case, a fourbedroom) property. As in urban areas, 60 per cent of all purchases were of former council houses previously sold under the Right to Buy. Households in Carmarthenshire were the same age as those in SE Wales, at 31, but those in Ceredigion were noticeably older, at 36. The previous tenure of purchasers also showed significant differences to SE Wales. Ninety per cent of purchasers in Ceredigion were previously living in the private rented sector, as were 50 per cent of purchasers in Carmarthenshire. Only 15 per cent (three households) were living with parents, compared to a third in SE Wales, and only 15 per cent of households were social housing tenants, again compared to a third in SE Wales.

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Although Cantref operated in Ceredigion, Carmarthenshire (and Pembrokeshire), areas substantially covered by the ‘rural’ definition, and hence offering the 50 per cent Homebuy scheme, none of the locations in which Homebuy purchasers bought a home could be described as ‘deep rural’. The affordability of rural housing has a particular significance in Wales, where rural areas, and their farming communities, have traditionally been viewed as the core of Welsh culture and vital to the continuing existence of the Welsh language. In common with rural areas across most developed countries, rural areas of Wales suffer from a declining economic base, with fewer people employed in farming or forestry, and a shrinking service base with the closure of village post offices, shops and local schools. At the same time, these areas are under pressure from in-migrants from urban areas, seeking a more desirable lifestyle, and usually able to outbid local people for the limited supply of housing. The rural local authorities in Wales, with access to the higher 50 per cent Homebuy rate, had not developed any strategies which focused the limited supply of Homebuy funding to address problems specific to rural areas, such as assisting local people to buy in small ‘deep rural’ villages or hamlets. In practice, nearly all Homebuyers in rural areas bought homes either in the main towns, in immediately adjoining villages, or within easy commuting distance. None had bought in the rural areas most under pressure from declining local populations or under pressure from in-migrants.

Conclusions The result of offering the same Homebuy product, with a 30 per cent equity contribution, at both the trough and the peak of the housing market cycle, resulted in a radical shift both in the type of households assisted and in the properties which they were able to purchase. Over the 10 years from 1995/96 to 2005/06, there was big movement from single to couple households (and a gender shift from single female purchasers to single males), to households with two earners, to households with higher incomes; and a downward shift in the homes purchased, from houses on private estates to former council houses. The type of house purchased, however, remained the same, with the majority of purchasers buying two- or three-bedroomed, semi-detached or end terraced houses. Borrowing multiples over the 10-year period remained very similar, suggesting that the Homebuy programme did not encourage households on lower incomes to overstretch themselves during periods of rising prices, but rather assisted higher-earning households to purchase at prudent multiples of income.

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The lack of any strategic policy by local authorities on the application of the Homebuy product to local housing markets resulted in markedly different types of household being assisted. These differences reflected the characteristics of local housing markets, rather than any explicit targeting of strategic groups by the local authority. As a result, in the metropolitan housing market of Cardiff, higher proportions of single people, and of childless working couples, were assisted when compared to other mainly urban housing markets in South Wales. However, the types of property purchased were similar: in Cardiff, three-quarters of two-bedroom and half of threebedroom homes were bought by childless households. The evidence suggests that one of the functions of Homebuy had been to enable assisted households to purchase a larger, or more desirable, property than their immediate needs or budget would otherwise have allowed. In Wales, the national Homebuy policy had only made one change in response to the housing market cycle, by introducing the 50 per cent equity contribution in rural areas from 2001. This had clearly enabled a different group of households to gain access to home ownership in rural areas. These households were more likely to be couples, more likely to be living in the private rented sector rather than with family and friends or in social housing, more likely to have children, to be somewhat older, to have lower earnings, and in particular to have markedly lower partner earnings. The lower earnings in rural areas also meant that house purchase was dependent in many cases on additional sources of income from welfare benefits and maintenance payments. The type of property purchased, however, was very similar: mainly three-bedroom, semi-detached or end terraced houses, nearly two-thirds of which were former council houses. Overall, the policy of offering the same product to support low-cost home ownership across the housing market cycle meant that a markedly different group of households were assisted at the trough of the market, compared to the group that were assisted at the peak. Rather than the policy adapting to changed market conditions, the policy had required the assisted households to adapt.

Notes 1. Equivalent to parish council. 2. ‘Homebuyer’, with a capital letter, is used to refer to purchasers using the Homebuy scheme.

13 The impact of the economic downturn on low-cost home ownership in the UK Gemma Burgess

Introduction Low-cost home ownership (LCHO) in England during the last few years was mainly developed to help potential purchasers who were becoming increasingly unable to access owner-occupation as house prices rose more rapidly than incomes. Shared ownership in particular was also intended directly to increase the supply of affordable homes. As we have already seen, the availability of these subsidised products was quite limited and concentrated in buoyant housing market areas. There was thus generally high demand for these products. The financial crisis and downturn in the UK economy dramatically changed the housing market environment. In particular, the mix of falling house prices, fears of further falls, tighter constraints on mortgage funds, increasing evidence of short-term working and unemployment, and general lack of confidence about the future massively reduced effective demand and the number of transactions taking place in the housing market. This combination of factors has particular impacts on the LCHO sector. First, it might anyway be assumed that as the general market declined, the size of the intermediate market would also reduce and the demand for shared ownership would fall as the gap between average house prices and

Making Housing More Affordable: The Role of Intermediate Tenures, edited by Sarah Monk and Christine Whitehead © 2010 Blackwell Publishing Ltd.

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incomes gets smaller. Second, there are reasons to expect the impact actually to be greater, including: • because households buying these products are anyway likely to be more marginal – so that concerns about falling prices and unemployment are likely to be higher and the difficulties of obtaining a mortgage greater; • the specifics of the products, particularly New Build HomeBuy (NBHB), because it involves new dwellings where house price falls are often greater and a complex product that financial institutions find problematic, working against LCHO; • changes in the broader housing market mean that the range of opportunities for buyers changes – so LCHO is not necessarily so attractive. In this chapter, we look at what actually happened specifically to the newbuild shared ownership (NBHB) market in the first years of the crisis. The chapter reports on research undertaken in 2008/09 examining how actors in this market responded to the very different new environment. The focus is on what happened to sales in different regional housing markets, including the impact of competition from the new shared equity products being offered by the major housebuilders. The chapter also looks at who now appears to want shared ownership products offered by Housing Associations (HAs), the difficulties they face given the changing financial market and local market conditions and the strategies HAs have adopted in response to changing circumstances. We conclude with some reflections on what the future of shared ownership products might be, examining the potential role of these products in this uncertain market and in the future.

The research The research on which this chapter is based was conducted for the Tenant Services Authority (formerly the Housing Corporation) by the Cambridge Centre for Housing and Planning Research (Burgess et al., 2008, 2009). The research was commissioned before the impact of the credit crunch had fully been felt and began when the enormity of the impacts was first being recognised in May and June 2008. Further research took place between October 2008 and January 2009. Over this period interest rates fell considerably. The main objective was to examine the effects of the changing financial and housing markets on shared ownership. The second phase of the research aimed to understand the nature of regional markets for shared ownership since the downturn and to assess the impacts of private developer shared equity schemes on HAs. The research explored how the government’s existing HomeBuy products were competing with the new HomeBuy Direct, now being offered by the major housebuilders. The scheme directly competes

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with NBHB shared ownership because the properties are on similar, or even the same, estates and the first-time buyers go through the same agents. The research was undertaken through a series of semi-structured interviews with Housing Associations, Housing Corporation investment managers, developers of market housing and major mortgage lenders. Some quantitative data analysis was carried out on secondary data from the COntinuous REcording system (CORE) sales census, Land Registry house prices and Office for National Statistic (ONS), Council of Mortgage Lenders (CML) and Department for Communities and Local Government (DCLG) data. However, the degree to which these sources could shed light on what was happening at the time was limited by the time lag between when sales are agreed and when they appear in the data systems.

The nature of the downturn in the UK The credit crunch began in August 2007. There was a reduction in available credit, followed by lack of confidence, a shrinking of the economy and a real impact on incomes. Demand for housing fell. However, over the longer-term demand is expected to return as credit availability and confidence in the economy improves. A credit crunch is a rapid fall in the general availability of loans, which is often coupled with a rapid rise in the cost of borrowing, investment capital becomes difficult to secure and normal economic activity, which depends on the flow of credit to finance it, becomes disrupted (Chartered Institute of Housing, 2009). It was a worldwide phenomenon, and was triggered by the securitisation (bundling up and onward sale) of large amounts of very risky mortgage loans made in the USA during a major housing boom (Chartered Institute of Housing, 2009). When the US housing bubble burst in 2006, huge amounts of securities based on the repayment streams from these mortgage loans and traded between financial institutions or used as collateral for interbank loans could not be priced, leading to a drying up of interbank lending (Chartered Institute of Housing, 2009). The present crunch has complex roots and has had a global impact. Many commentators highlight the multi-directional linkages between financial conditions, house prices and macroeconomic circumstances (Goodhart and Hofmann, 2008; Muellbauer and Murphy, 2008). The impact of the credit crunch was soon felt in the UK, first in the finance and housing sectors and then in the wider economy. The financial crisis spread to most financial institutions. The wider UK economy then moved into a recession which is expected to be of much longer duration than originally predicted. The economy shrank for the first time in 16 years between July and September 2008. Unemployment rose and appeared likely to rise further over 2010; there were increased redundancies and falling levels of job

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vacancies. Rising unemployment poses a threat to the economy because of the knock-on effects on consumption, such as homebuyers falling behind with their mortgages and shoppers reducing their general spending. The mortgage and housing crisis in the UK saw dramatic declines in liquidity in the finance market as a whole (the credit crunch) which particularly hit the mortgage market. Lending criteria were quickly tightened in the wake of fears about default (which began as what has been termed the ‘sub-prime’ crisis). There was a rapid reduction in the demand for housing in the context of great uncertainty and tightened lending. The impact on the UK housing market was also dramatic. Confidence and demand fell across the housing market and house sales fell significantly. Land Registry data showed that between May 2008 and August 2008, transaction volumes decreased by 46 per cent compared to the same period in 2007. House prices fell considerably when the credit crunch and its implications began to impact on the market. The April 2009 Land Registry House Price Index data showed a fall in house prices of 16.2 per cent over the year. The length of time taken to sell properties increased and repossessions also rose, although not as steeply as expected. Construction activity fell dramatically as developers reduced output; the five largest housebuilders announced large-scale job losses in 2008. Mortgage lending decreased significantly; the fall in mortgage approvals between November 2007 and 2008 was 67 per cent, according to the CML. The number of homes being repossessed rose sharply in 2009. Even in early 2010, the problem is growing as the economy remains in recession and more people become unemployed. In response to the crisis, there were a number of government initiatives including a new intermediate market housing product, HomeBuy Direct; suspension of stamp duty on properties purchased at £175,000 or less; a mortgage rescue scheme that enabled households to move to partial ownership; and a Home Owner Mortgage support scheme. The most important of these was HomeBuy Direct, which is another form of shared ownership on an equity loan basis but applies to market housing put forward by developers.

LCHO in the downturn The LCHO sector receives considerable public subsidy, so it is vital that the products are continually monitored to ensure that they are meeting policy goals and making the best use of public funds. We would expect that when the economy enters a downturn, and house prices fall relative to incomes, then the need or demand for intermediate housing would also fall. But the financial crisis, followed by recession, created a complex set of economic conditions that have not simply made housing more affordable through price falls, particularly as a result of the lack of mortgage finance and higher deposit requirements.

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The next section details the research findings. It looks at the variations in regional new-build shared ownership markets and the dynamics of these markets at the local scale. It explores the finance-related problems that have arisen due to the downturn. It reflects on current tensions between the original policy goal of shared ownership housing products and the need to manage risk in the current economic climate, as well as the problems that have arisen in maintaining the supply of affordable housing as the building of market housing has collapsed. After the credit crunch began in August 2007, house prices fell dramatically in the UK. However, whilst house prices fell, affordability did not improve as lending was tightened with greater deposit requirements making it difficult for all potential property buyers to access mortgages. The overall lack of access to mortgage finance due to the credit crunch led to greater risk aversion and conservatism amongst lenders. This conservatism especially affected shared ownership as the products are very complex and buyers have often been considered to be ‘sub-prime’ and more risky by lenders. Shared ownership is aimed at relatively marginal buyers and the recession that followed the credit crunch led to rising unemployment and greater uncertainty. As a consequence, the market for shared ownership declined, mirroring the overall reduction in property transactions. Whilst demand for shared ownership remained in the higher value areas, the difficulties of securing a mortgage when properties were being regularly down valued and finding a large enough deposit made the products more difficult to access. Nevertheless, shared ownership played a very important role in the postcredit crunch and recession housing market because the government saw investment in intermediate products as one way to keep the housing market moving. Funding for already existing intermediate products was reduced or removed; instead, public funds were used to support a new shared equity product, HomeBuy Direct. Intermediate products became a key item on the housing policy and political agenda. The major housebuilders, struggling to sell their new-build properties, entered this market and created their own shared equity and shared ownership products in conjunction with the government but in competition with affordable housing providers (AHPs). So whilst overall sales fell, intermediate products played a key role in a difficult housing market.

Differences in regional markets for HA shared ownership Although the intermediate market is relatively small in terms of the number of units delivered in comparison with the overall market for new-build housing, it has its own dynamics. Whilst the research took place within a depressed general housing market, there was significant variation in sales

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of shared ownership units offered by HAs between regions, within regions and even within localities. HAs in the North West and the West Midlands regions of England saw the largest decline in sales of shared ownership, mainly apartments. These regions had already seen a slowing of overall sales even in the buoyant market, so it is not surprising that shared ownership was particularly affected in these regions. In the East of England region, sales were stronger in the higher-value ‘growth areas’, e.g. Cambridge and the London Commuter Belt than in the lower-value areas in the north of the region and areas such as Bedfordshire. Flats in all regions were generally more difficult to sell than houses. However, in parts of London, the London Commuter Belt and the growth areas of the East of England, flats were still selling well relative to other areas. This suggests that underlying demand for shared ownership remains buoyant in the highest-value areas. In London, there was a lot of variation in the success of new-build shared ownership schemes between boroughs. HAs reported that they very much depended on the area. Kensington and Chelsea, West Camden and Hackney, for example, were selling well, whilst in Croydon the properties were not selling. The differences were linked to the nature of the developments and very local scale area characteristics. There were differences in sales rates for similar units even down to post-code level. This was generally true across all regions. The location of units was influencing sales success at a very local scale. Whereas previously this had been a buoyant market, similar properties in developments in close proximity to one another now had very different sales rates. Local people are aware of area characteristics, such as the ‘best’ streets to live on, the catchment areas for good schools and the best transport links. The capacity for potential purchasers to choose was more restricted when the market was buoyant, but purchasers can now be more discerning in choosing a shared ownership property, as there are so many for sale and reduced demand for the units, and this is leading to very variable sales rates at the local scale. All HAs reported that their shared ownership units were being valued at less every time the units were assessed by mortgage providers for potential purchasers. The extent of down valuations on these units by mortgage providers varied by location and property type, with flats worst affected. HAs reported that similar properties on the same development were down valued by quite different amounts by those conducting valuations for different financial institutions. The reductions in house prices and down valuations have three main impacts: on HA finance, on the confidence and capacity of the potential purchaser to pay, and on the capacity to obtain finance. The general picture was one of falling sales. However, whilst demand was reduced in the lower-value areas of the country, there was still demand for

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shared ownership in areas where values were relatively higher. There was still interest in the products, but there were considerable difficulties for potential purchasers both in terms of affordability because of the new, higher deposit requirements, and in terms of the ability to secure a mortgage to purchase a property on a shared ownership basis.

New market-based intermediate products The downturn in the housing market led to new products being offered. This included a new shared equity product. In response to the collapse of sales of market housing in the UK, the major housebuilders in conjunction with the government began to offer their own version of an intermediate product, HomeBuy Direct. This shared equity scheme is designed to help first-time buyers into affordable home ownership and to help participating housebuilders by enabling more first-time buyers to purchase their newly built properties (DCLG, 2009). The scheme is offered on specific new-build properties brought forward by developers. Buyers are offered an equity loan of up to 30 per cent of the purchase price, co-funded by Government and the developer. As with the other HomeBuy products, the 15 regional HomeBuy Agents are the first point of contact for those first-time buyers who are interested in applying for the scheme. General eligibility for HomeBuy Direct is the same as for the other HomeBuy products (i.e. households earning £60,000 or less who could not afford to buy a suitable property on the open market without assistance in the area where they live or work). The purchaser receives an equity loan of up to 30 per cent of the purchase price of the chosen property. The equity loan is co-funded on equal terms by Government and by the developer supplying the property. The purchaser must contribute the remaining equity (a minimum of 70 per cent), through their mortgage (which could be obtained from any lender regulated by the Financial Services Authority) and any deposit. There will be no fee charge for the equity loan for the first five years but a fee will be charged from year six onwards. Purchasers can redeem the equity loan in instalments, purchasing up to 100 per cent equity after their initial purchase by buying additional equity at the market rate. Buyers will be able to sell their HomeBuy Direct home on the open market. When they do so, they will repay the equity loan by way of a share of the sale proceeds. This repayment will be shared equally between Government and the developer. If the value of the property has increased by the point of sale, the buyer, the developer and Government will all share in this increase. If the value of the property has gone down, Government and the developer will only share the sale proceeds that are left over once the mortgage has

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been repaid. The Homes and Communities Agency allocated in excess of £300 million for the scheme and over 10,000 homes were made available to purchasers. Some HAs and housebuilders have also begun to offer products that allow a potential purchaser to ‘Rent to Buy’ or ‘Try before you Buy’, renting a new-build property at sub-market rates with a view to moving into owner-occupation once they have saved enough cash for a deposit. The aim of ‘Try before you Buy’ is to assist first-time buyers who, because of the current housing market, are unable to obtain a mortgage. The scheme allows buyers to rent a new home at a discounted rent for up to three years before they take the opportunity to buy a share of between 25 and 75 per cent of the property. Whilst renting the property, options are available for the occupier to save towards a deposit. Once they are able to obtain a mortgage, they can purchase a share in their home.

Competition with new private developer shared equity products In response to the collapse of their market sales, some private developers began to offer their own version of LCHO schemes in most areas of England. The research found that they were more likely to offer these deals on apartments than houses. One developer reported that their shared equity scheme had been very successful in the higher-value areas of the south, but that the same product had not worked well in the lower value north of the country. Availability of the shared equity option was often limited as the schemes are very costly for developers to offer and depend both on their development pipeline and market sales. The schemes were regarded by developers as a way in which stock may be sold in a difficult market in which property values were falling and as a way to generate much-needed cash flow, not as part of a long-term strategy. Young first-time buyers, singles and couples were the target group for developers, largely because the shared equity schemes were being offered on small units and apartments. The developers felt that purchasers of their shared equity schemes would have been able to buy 100 per cent of the property with a mortgage before the downturn but were now hampered by the limited availability of mortgage finance and the need for a larger deposit. However, the developer-led schemes were sometimes in competition for the same potential purchasers as HAs. Private developers had a range of schemes and incentives on offer. They were being used as a marketing tool to increase interest in their products. In response, HAs were offering more incentives to purchasers, such as free carpets and curtains, but these were

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relatively small in comparison to the incentives offered by private developers. Despite the increased competition, HAs felt that they were able to compete with the developer shared equity schemes as they believed they offer a better product; were more trusted and provide long-term support to purchasers. HAs are aiming to offer products that can help people over a longer period. Their only concerns were that developers can offer a wider range of incentives and have more flexibility.

HA responses to uncertainty and falling sales The research found that many HAs were worried that they would struggle to sell, or were already struggling to sell, new-build shared ownership units. This was creating concern both about the impact of falling revenues from sales and of falling receipts from existing owners staircasing up and buying a greater share of their property. HAs were worried that falling revenues would impact on their future development programmes and particularly on their ability to use the revenues from shared ownership sales to go towards funding the provision of social housing. The downturn in the housing market and related problems in the financial markets were reflected in close monitoring of business plans by HAs and regular amendments to their development programmes and financial models. HAs were examining future development pipelines to assess the viability of planned schemes and scoring the degree of risk more carefully for particular developments. HAs were having to sell smaller initial tranches in response to the downturn. Some HAs were also looking at their revenue streams and considering changing the tenure of completed, but empty, properties from what were intended to be shared ownership units to intermediate rental (below market rental rate) units instead. In particular, they were changing the tenure of the units where demand for shared ownership was weakest. Generally HAs were concentrating on reducing the number of properties waiting to be sold. Some HAs were engaging with lenders and valuers directly to ensure they understand the products and their benefits, as many HAs felt that lenders at local level did not understand shared ownership products. At the start of the research, the cost of borrowing had increased, so HAs faced higher costs. There were concerns that some HAs were quite highly geared and more vulnerable to the increased cost of borrowing. This would be particularly relevant when they come to refinance and find themselves unable to access rates as favourable as their previous rates. Although interest rates were subsequently lowered, lending to HAs has been restricted so that only those with existing lines of credit can develop new-build homes.

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Changes to purchasers of HA shared ownership There have been recent calls in the UK to encourage shared ownership to be targeted at households currently in social housing and therefore most likely to be on lower incomes within the eligible group for the products, because this will free up social housing and ensure that public subsidy achieves the best value for money. In 2006, the National Audit Office (NAO) recommended that the DCLG and the Housing Corporation should further develop the choice of LCHO products available for lower-income groups (NAO, 2006). Chapter 10 showed that households entering shared ownership generally had very small deposits, which contrasted to private-sector first-time buyers who had much larger average deposits. Shared ownership purchasers also had lower average incomes than private-sector first-time buyers. This meant that shared ownership was more accessible to those with lower incomes and particularly to those who lacked capital. This was based on data from 2005, but the credit crunch has created a very different mortgage market. Lenders now require significant deposits from all borrowers. HAs participating in the research conducted during the credit crunch on 2008 reported that people on lower incomes in the eligible group could no longer afford shared ownership because of the greater restrictions on mortgage borrowing and need for relatively large deposits. Instead, HAs reported that shared ownership properties were being purchased by households with rather higher average incomes than the norm, suggesting that the recent changes are undermining the potential of LCHO products to meet the NAO agenda, which was to provide an affordable step into owner-occupation for those in housing need or lower-income groups, particularly for social tenants.

Mortgage finance problems The research showed that the lack of mortgage finance was the main hindrance to the intermediate housing sector as the difficulty in securing mortgage finance was the greatest inhibitor to sales, as it was for full purchases. Even in early 2010, any potential purchaser that appears to pose even the slightest risk to lenders is no longer easily able to secure mortgage finance. The research also found that mortgage lenders were less keen to lend on traditional shared ownership products in comparison to shared equity products, because they consider there to be more financial risk for the lender attached to shared ownership if the property is repossessed. This is largely due to the priority with which debts are paid off on repossession. For shared equity, the lender has first charge, meaning that they have priority

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on repossession funds, followed by the HA and the property purchaser. But for shared ownership, the repossession proceeds are split according to the share. This means that in a market where values are falling, with concerns about negative equity, lenders face a greater chance of losing money if a shared ownership property is repossessed.

The HA LCHO property pipeline The downturn has also had an impact on the pipeline of shared ownership units provided through HAs. Over the last few years as house prices rose in the UK, the emphasis on shared ownership increased, as it could be readily negotiated with developers through the planning system within S106 agreements and involved relatively little government subsidy. It is through this mechanism that shared ownership can be delivered at a reasonable cost, but delivery is very closely tied to the supply of market housing. The research looked at the impact of the housing market downturn on the supply of shared ownership delivered in this way. Some HAs reported that developments were still being completed but that they would be reviewing future planned schemes. Other HAs had schemes that had not been completed because of developers going out of business. For HAs in a stronger financial position, there were increasing opportunities to purchase completed units from private developers who could not sell them outright. Whilst the initial fears of many HAs were related to cash flow worries, research is showing that more recently they have been purchasing units from developers who are now unable to sell properties on the open market. Whole schemes originally intended to be market housing with a proportion of affordable housing are being bought by HAs and will now be 100 per cent affordable, often with a mix of social rent, shared ownership and rent to buy. However, many of the units offered to HAs are not in the right location or of the right standards, type and size and so many units offered by developers are being rejected. The impact of the continued downturn on future pipelines for shared ownership is unclear and this is a matter of concern, particularly as new social housing is closely dependent on shared ownership units to help subsidise its delivery. There were concerns about the ability of HAs to deliver new social housing without the expected cross-subsidy from sales of shared ownership units. The way in which the delivery of new affordable housing is linked to the development of market housing may be problematic now that market housing development has declined so significantly. Despite the units being offered to HAs by the major housebuilders, the supply of shared ownership properties through mixed tenure S106 schemes is likely to decrease over the longer term because developers are facing

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financial difficulties related to the overall market conditions and may not go ahead with new planned developments. Whilst public subsidy has been provided to ensure a relatively high output of affordable housing through 2009 and early 2010, the constraints on public finances are likely to mean that this subsidy will not be available in the future.

Conclusions The dynamics of the shared ownership sector of the housing market are extremely variable across regions, localities and even streets. Shared ownership is still working relatively well in higher-valued areas in regions where longer-term prospects are thought to be good. It is less successful in lower-value areas, particularly where there are likely to be more problems due to the recession such as higher unemployment. Despite these variations, shared ownership has remained an important part of the market in the downturn as it has been regarded by Government and the major housebuilders as a way to keep the market moving and generate much-needed cash flow. The credit crunch and recession have had an impact on shared ownership and shared equity along with the wider housing market. All purchasers now need higher deposits, hence the fall in first-time buyers. Intermediate products are aimed at relatively marginal buyers, they are atypical products and there is less money for mortgage finance overall in the system. The institutions lending mortgage finance have become increasingly conservative, e.g. taking lower valuations and restricting access to the products. For those who are actually trying to buy, the problems with respect to mortgage availability, valuation and down payment remain the most pressing. This means that shared ownership is not significantly more affordable than before the downturn, as even though house prices have fallen, tightened lending criteria have led to the requirement for a much larger deposit. Those on relatively low incomes with large deposits, e.g. as a result of relationship breakdown where a previous home was sold or with help from parents, are the households who can afford to buy. One response by HAs has been to sell smaller equity shares of shared ownership properties, in many cases as low as 25 per cent. In such a difficult market this has been the only way in some cases to sell units, sales which HAs need to generate cash flow. With recession leading to stagnating incomes, many households are unlikely to see wage rises that will enable them to staircase up in the near future. One issue this raises is whether the problems of marginal home ownership such as the affordability of repairs and maintenance and rental payments make ownership under these conditions advisable and a sensible use of public subsidy.

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There are more fundamental issues that relate to the acceptability of the product to customers in the medium term, the extent of the pipeline of completions once the immediate backlog of unsold properties is cleared, and who is prepared to buy in this environment and whether they should be advised to do so. The research also raises questions about the future of the intermediate sector of the housing market. The policy emphasis had been on encouraging those in social housing to move to shared ownership, both to make best use of public subsidy and to free up social housing. This is a group of households that would probably have to stretch their finances furthest to afford shared ownership and therefore is inherently a riskier group in terms of mortgage borrowing. In the context of rising unemployment and repossessions, it is unlikely that households in this category would be welcomed by mortgage lenders. Rather, the research shows that it is households on higher incomes in the eligible group who are now purchasing intermediate housing products. Chapter 11 showed that in the East of England those who purchased HomeBuy products were overwhelmingly single people living in a larger dwelling than they would have been able to afford on the open market or been able to access had they been eligible for social rented housing. These products were already unaffordable to lower-income households. There were already concerns amongst HomeBuy agents and others that public subsidy was being used to assist those not on the lowest incomes or in priority need for housing into home ownership. With higher deposit requirements and products now being bought by those on higher incomes, this will only have been exacerbated by the credit crunch and downturn. This suggests that for the foreseeable future, shared ownership is unlikely to become the hope for step-on from social housing. It is unlikely to be purchased by households on lower incomes, by social tenants or by those in the greatest housing need. This brings the policy goal of shared ownership into question. It raises the issue of whether public subsidy ought to be used to assist households who are neither on particularly low incomes nor in housing need and who are perhaps buying a new-build property that is larger than they would have been able to buy on the open market. Shared ownership housing is a fine balance between the financial risk taken by the purchaser and obtaining maximum value for money from public subsidy. It would be a contradiction in the current economic climate, with new emphasis on greater risk aversion, to expect that shared ownership or shared equity can, or should, be for the households on the lowest incomes in the group eligible for the product. There is a tension between the goal of providing owner-occupation for households on lower incomes and managing risk that is not easily reconciled. It is possible that the policy drive to assist ever more marginal households into home ownership is ill founded.

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These issues reflect the way in which LCHO has been used to achieve different policy goals at different times, and for different stakeholders. Originally designed to increase home ownership, there has been pressure, e.g. from the NAO, to use the products to assist low-income households to move out of social housing. But the use of shared ownership to crosssubsidise the delivery of social housing where it is delivered through the planning system has made the products more expensive, as HAs need to charge rents high enough to balance their revenue streams and make schemes financially viable. This puts shared ownership out of reach of those on lowest incomes. The need for HAs to offer very small equity shares in order to sell shared ownership units is questionable. These purchasers are unlikely to be able to staircase up. In the downturn, the major housebuilders’ goals have been to secure cash flow while the government’s goal has been to try and protect the housebuilding sector through directing public subsidy towards their schemes. Looking forward, it is clear that changes in intermediate housing policy have been more a matter of political expediency than an attempt to provide a product to meet more fundamental goals of increasing both supply and access to good-quality affordable housing. It may be that the products need revisiting yet again, but to produce a simpler range of products. The way in which intermediate housing is funded and delivered at a reasonable cost may need new and innovative mechanisms. The intermediate market may be a small sector of the overall UK housing market and the policy goals it serves may shift over time, but it has an important role to play in the dynamic between the delivery of market and affordable housing.

14 Conclusions Sarah Monk and Christine Whitehead

Introduction We began this book by asking what is intermediate housing? Why has it become so important in recent years? Who is it for? Is it sustainable? Does it contribute to affordable housing? We hope we have provided some evidence on these questions for England and to some extent for other industrialised economies. We now turn to questions of whether the policy has been successful. What are its shortcomings? What lessons can we learn from the experience of the past ten years or more? And what are the prospects for the future?

Is intermediate housing successful in its own terms? One way of evaluating a policy is to look at the extent to which it meets its own objectives. In the 1970s and 1980s, the objectives were quite simple: to help a group of people into home ownership, to release social housing for those in greater housing need and to add to the stock of affordable homes. A number of local areas such as Birmingham realised that they needed to do something for social tenants and others with modest incomes who aspired to own their own home. Their solution was to provide land for homes for shared purchase – Half and Half schemes. This worked; they had produced a model that provided both land and subsidy, two crucial inputs for new housing of any kind, including intermediate tenures (Monk and Whitehead, 1999). Central government took over the policy in 1980 and it has now been in place for 30 years. Making Housing More Affordable: The Role of Intermediate Tenures, edited by Sarah Monk and Christine Whitehead © 2010 Blackwell Publishing Ltd.

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Two further models followed: first, affordable housing through the planning system was introduced in 1990 and enabled private land to be provided at lower costs specifically for affordable housing – where affordability for planning purposes is defined mainly in terms of particular instruments (see Appendix 2; Barker, 2006); and second, shared equity in 1999, which was a publicly provided mortgage paid for through capital gains on a proportion of the property. Unlike the two earlier initiatives, this did not directly support additional housing – but equally if there were capital gains ex post there might be no cost to government. So until near the turn of the century, the objectives in England were fairly straightforward. Since then, the objectives of intermediate housing have been constantly modified and made more complicated. The government has used it to meet a range of different policy goals such as addressing the key worker problem; achieving mixed communities; ‘stretching’ available subsidy and planning gain to provide more dwellings; supporting the brownfield, density and energy efficiency agendas; and introducing additional private finance; as well as the basic objective of helping households caught in the ‘gap’ between market and social housing to access a decent home (Crook and Whitehead, 2007).

Achieving core objectives The core objectives to assess are therefore how many dwellings have been provided?, how many households have benefited? and have intermediate tenures been affordable? None of these questions is straightforward.

How many dwellings have been provided and households assisted? Dwellings provided and households who benefited are very different issues and it is not easy to identify either of them with any degree of certainty. Bramley and Dunmore (1996) suggest that around 36,000 households had taken up shared ownership products during the 1980s. For the 1990s and 2000s, the Housing Corporation and then the Homes and Communities Agency (HCA) and Tenants Services Authority collected data on additional intermediate affordable housing. Initially this covered only Housing Corporation-funded shared ownership but, from 2000, S106 nil grant lowcost home ownership and from 2003–04 intermediate rents were included. Figure 14.1 shows the total number of additional intermediate dwellings – i.e. those that added to the stock of affordable homes – from 1991–92 to 2008–09, the most recent figures available. If the numbers are all added up, including the 36,000 from the 1980s, then intermediate housing products have added more than a quarter of a million dwellings – and benefited at least that number of households.

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30,000 25,000 20,000 15,000 10,000 5,000

8 19 99 –0 0 20 01 –0 2 20 03 –0 4 20 05 –0 6 20 07 –0 8

6

19 97 –9

4

19 95 –9

19 93 –9

19 91 –9

2

0

Figure 14.1 Additional intermediate housing 1991–2008. Source: DCLG live table 1000.

25,000

2003–04

20,000

2004–05

15,000

2005–06

10,000

2006–07

5,000

2007–08 2008–09

H O A

ll

LC

O th er

ni l

gr an t

lH B S1 06

So ci a

H Bu ild

N ew

O pe n

M ar ke t

H B

B

0

Figure 14.2 Intermediate housing by type of scheme, 2003–04 to 2008–09. HB: HomeBuy; LCHO, low-cost home ownership. Source: DCLG live table 1010 (based on HSSA and HCA IMS).

Other households have benefited from shared equity products since 1999, but because this involves open market homes, comprehensive figures on how many have done so are not readily available. Jackson’s (2001) evaluation of HomeBuy found 4000 shared equity sales in 1999. Figure 14.2 shows take-up of the different products for the period 2003–04 to 2008–09. In terms of households assisted, the National Audit Office (NAO) report A Foot on the Ladder: Low Cost Home Ownership Assistance (2006) noted that since 1999 up to the end of 2006 shared ownership and shared equity products had helped about 40,000 households. The number of households benefiting each year increased from approximately 4000 in 1999–2000 to more than 11,000 in 2004–05 while more recent data show over 24,000 beneficiaries in 2008–09.

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35,000 30,000 25,000 20,000

Social rent

15,000

Intermediate

10,000 5,000

19 99 – 20 00 00 – 20 01 01 – 20 02 02 – 20 03 03 – 20 04 04 – 20 05 05 – 20 06 06 – 20 07 07 – 20 08 08 –0 9

0

Figure 14.3 Social rented and intermediate housing 1999–2008. Source: DCLG live table 1000.

In the case of additional dwellings, are all these units net additions? Figure 14.3 shows that during the 2000s, new intermediate housing increased from a low base to a level approaching that of social housing. Yet this increase has been at the expense of social rented housing where output declined for much of the period since 1999. In this context, Chapter 11 shows that housing providers and local authorities in the East of England only embraced the policy with reluctance, because funds were available and they could use intermediate housing to cross-subsidise the social rented homes that were seen as urgently required to meet higher-priority housing need.

Have intermediate tenures been affordable? There is a sense in which any product that has been taken up successfully by eligible households must be affordable – at least to those households. Shared ownership clearly offers some of the benefits of home ownership to households, many of whom would otherwise not have been able to buy. Without intermediate housing they would have been more stretched in terms of outgoings relative to income, or, being more risk averse and not wishing to invest in a standard mortgage, would have remained in private renting. Most of those surveyed in Chapter 10 wanted to have their own home in a secure tenure, and shared ownership met these objectives. The strongest reason for taking up shared ownership was to get a foot on the property ladder and shared ownership enabled this. Even so, Chapter 10 found that some households had been quite stretched when paying for shared ownership, particularly in the early years of the mortgage. This is common with first-time buyers more generally, of course. In this context, there is an issue over how much more than social rents purchasers could and should afford. Holmans note in Chapter 4 that

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putting people only just above an income that can afford social renting into intermediate housing misses the point – intermediate housing is supposed to be more lightly subsidised than social renting, so it makes little sense from the government’s point of view to use it for people who need almost as much subsidy as social tenants. However, ‘affordability to whom’ is a major value for money issue, especially in the last few years. It could be seen as quite extraordinary that the upper income limit for eligibility is £60,000 when the national average income is only £27,000 a year (2009). But this has been necessary because in practice intermediate housing is still not cheap. It is tied to market prices and to the availability of mortgages, and as Chapter 11 shows, housing providers were concerned that lower-income working households simply could not afford shared ownership when house prices were so high. In the downturn, prospective shared owners have been affected by the lack of credit in the same way as full first-time buyers, only more so because lenders remain suspicious of lending to customers whom they see as less credit worthy than full purchasers. In the end it is questionable whether the policy has housed people who could not otherwise have afforded to purchase or rent a decent home. As Chapter 12 shows for Wales and Chapter 11 for the East of England, there has been little, if any, attempt to prioritise applicants according to need, and for shared ownership, the aim has often been to ensure the new dwelling is actually sold. For shared equity, it seems to have been more a case of ‘first come, first served’ until the funding for each scheme was exhausted. Chapter 10 shows that many purchasers could have bought with a traditional mortgage on the open market, but a smaller property, in a less desirable location, or possibly in poor condition. Many also came from living with family and friends, so could presumably have delayed forming a separate household had they been unable to access intermediate housing. There are clear questions to be asked about effective targeting and whether taxpayers’ money should be used to subsidise people who could have found adequate housing without it.

Targeting social tenants The research reported in Chapter 10 showed that a quarter of households entering shared ownership were either moving out of social rented housing or would otherwise have been likely to end up there. The rest were in some degree of housing need, such as living with family or sharing private rented accommodation. This level of need is not sufficiently severe to qualify them for social housing. However, Chapter 8 provides evidence that most purchasers were not even on waiting lists. But as both chapters make clear, while providing shared ownership for such households meets lesser

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needs than helping households into social renting, it does so at lower cost in terms of subsidy per dwelling, and thus may generate longer-term savings to government.

Has the wider range of objectives been achieved? Meeting aspirations Success might be measured in terms of purchaser satisfaction and the extent to which the products meet aspirations. In this sense the policy has been successful as people have generally liked it and obtained what they were looking for. Thus Chapter 10 found that people were able to buy a large home, in a nicer location, than they could otherwise have afforded and this was seen as very satisfactory. They were also happy to consider themselves as owners, even though they only owned a share of the property. To them, it clearly felt like owning compared with renting and they saw themselves as having a foot on the property ladder. Equally, Chapter 11 shows that many shared ownership purchasers were single people and couples who were able to access better quality housing than they could have afforded in the private rented sector. Another measure of success is whether low-cost home ownership has helped meet government aspirations of extending home ownership. Since the turn of the century, there has not been the intended increase in owneroccupation that the government had planned. Indeed, the proportion of the total stock that is owner–occupied actually fell in 2007–08 as the housing market recession began to bite. Yet it is clear that the present government, like its predecessor, wishes to meet aspirations and survey data consistently show that aspirations to home ownership remain high. Thus for example the Council of Mortgage Lenders (CML) found that ‘the desire for owner-occupation has returned to near-record levels, following a protracted dip that started after the early 1990s recession. Some 84 per cent of adults hope to become homeowners in 10 years’ time’ (2007). The Home Ownership Taskforce (2003a, b) estimated that demand from new households totalled about 20–22,000 a year, but there was also a potential demand of a further 40,000 a year from existing households in social or private rented housing. Recent figures provided in an answer to Parliamentary Questions show that in the year March 2008 to the end of February 2009, there had been 32,275 applications of which 27,659 or 85 per cent had been approved as eligible for one of the HomeBuy products. More recently the shared equity schemes, My Choice and Own Home, were rapidly oversubscribed and all of the funds available for 2009–10 were fully committed by the middle of 2009 (DCLG web pages). The HCA chose instead to direct public investment towards stimulating the housing market

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by introducing a new product. HomeBuy Direct is effectively an equity loan scheme for affordable homes on specific ‘stalled’ developments. Despite this and other evidence of high-potential demand for intermediate products, there have been problems selling new shared ownership housing for key workers in some areas (NAO, 2006). Reasons for this included that the properties were of the wrong type or in the wrong location; they had been poorly marketed because of an initial confusion between the roles of the Key Worker Zone Agents and other housing associations; and some key workers were unwilling to buy where their neighbours would be exclusively other key workers. Newly built products may be in the ‘wrong’ location from the point of view of households who might be eligible. As Chapter 11 shows, in the East of England, there were clear problems of selling the properties, and questions asked about housing associations’ marketing strategies and even competences. In some cases, a ‘cascade’ had to be agreed, whereby if there were no key workers applying, then the HomeBuy Agent would target social renters with sufficient income. If they were not forthcoming, the Agent would try anyone on the housing waiting list, and if that still failed, as a last resort the tenure could change to social rented housing and be allocated to a household in priority need. The complexity of the products and the way in which they are delivered has been an issue. While government has attempted to simplify access, for example, by establishing HomeBuy Agents in each region so that households do not have to ring round every housing association that is offering a product, the fact remains that completing the necessary forms and providing the details of income, wealth, debts and so forth are extremely complicated for many households. Often the outcome is that they cannot afford the products on offer. Another outcome is that they find that they are not eligible after all. And the clawback element that until recently applied to key workers – if they left their position they had to repay everything – put many of them off. Another issue has been the ready availability of relatively close alternatives in some areas. For instance, households wishing to own their own home and unable to afford it locally may be able to move to a cheaper area. Another possibility is to accept a smaller or poorer-quality home and again many households do this, with a view to ‘doing it up’ or extending it via loft conversions or back extensions at a later date.

Changing the location of affordable homes Intermediate housing as well as social rented housing has been built in more prosperous and desirable locations than before S106 was introduced. Chapter 6 shows that S106 has changed the geography of affordable housing. This means that more housing has been built on the south and also that the housing provided is likely to be found in more desirable areas.

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The policy has also helped the government in its objective of creating ‘mixed, sustainable communities’ in the sense of social sustainability. An important driver of this policy has been to ensure that large-scale social housing estates are no longer built, as these have produced unintended outcomes associated with the concentration of poverty. The use of S106 to ensure on-site provision of affordable housing has led to increasing proportions of intermediate tenures which are preferred both by developers and by the purchasers of market housing. This has also helped local authorities in S106 negotiations when trying to meet their overall affordable housing targets, as developers are less likely to try to reduce the proportions of intermediate dwellings. Overall, studies have found that on-site provision of affordable housing has worked reasonably well and has made an important contribution to mixed communities as well as meeting local housing need (CCHPR and University of Sheffield, 2005).

Helping particular groups Households in the south of England have benefited more from intermediate housing than those in the north, as Chapter 8 shows. Singles and couples without children have been more likely to take up the available intermediate housing than single parents or families, and within this, ethnic minorities have benefited more than we might have expected. Given the high house prices and problems of affordability in the south this makes sense. However, allocation is often so constrained that there is a question of equity – other almost exactly similar households to those who were successful did not receive the subsidy and did not access intermediate housing. With respect to the particular objective of assisting key workers, intermediate housing has helped teachers, nurses, the police and other categories of public-sector workers. However, many others have been excluded, particularly those on private contracts. But the core issue has been affordability. The targeted groups have often had insufficient income to be able to purchase intermediate housing, especially where there has only been a single income in the household. Moreover, the available stock has not always been of the right type or in the right place.

Stretching government subsidy The obvious benefit to intermediate housing from the point of view of government is that it requires lower subsidy than social rented housing and it enables the subsidy provided to be recycled much more quickly than is the case with social rented housing. Indeed, from the government’s point of view, shared equity products in a buoyant market may actually pay for themselves in the longer term. In addition, as Chapter 7 shows, significant amounts of shared ownership through the planning system require no

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direct government subsidy. In terms of bringing in household equity, the position has been less satisfactory. Purchasers have tended to have very low or nil deposits. The shift towards development in London and the south has meant that average subsidy rates have not declined. Moreover, in terms of the capacity to recycle government funding, housing associations’ emphasis on expanding shared ownership has increased their capacity to build and added to output levels – but, as Chapter 13 makes clear, this has also increased risks for the associations especially in the downturn. Overall, we may conclude that intermediate housing has helped a section of the community who otherwise would not have been able to purchase at all. However, there are clearly some downsides to this. Perhaps the most important one is that the policy has been at the expense of providing additional social rented housing, for which arguably there is a much more pressing need.

Looking forward: learning from experience in England Interest in intermediate tenures tends to be cyclical: it comes to the forefront of policy particularly when house prices are growing faster than incomes because households’ natural expectations are stifled by entry costs and because these are periods of higher risk when there is an increased incentive to examine ways of reducing those risks to the individual. Interest tends to fall away as prices become more affordable and people are better able to manage their risks through traditional means. But there are more fundamental policy reasons for interest in intermediate tenures. In policy terms, there is a continuing need to limit subsidy and to lever in as much private finance as possible commensurate with sustainability. Intermediate market initiatives are based on shallow subsidy or even simply reorganising financial structures to make housing more affordable over the lifetime of the household. They also aim to generate a more stable and better operating market into the longer term. In principle at least, as we discuss in Chapter 2, the case for intermediate tenures applies at all times in the economic cycle. Households may be looking for different attributes other than those available in the traditional tenures particularly with respect to security of tenure, wealth accumulation, timing of expenditures, relationships with landlords and other stakeholders, and risk. Again, in principle, if there is potential demand, such options should in principle be provided by the market. However, there are many market and indeed policy failures that restrict what is available as well as what people demand – so evidence that markets cannot be developed in current circumstances does not necessarily mean that the benefits do not exist.

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What has been true over the past three decades is that instead of looking at first principles, there has been a continuity of interest and policy in one particular type of intermediate product – shared ownership. The attributes have remained fundamentally unchanged throughout this period. Only eligibility and the proportions shared have changed with the political and economic cycle. It involves new-build affordable homes, true shared ownership between the occupier and a social landlord, and the right to staircase to 100 per cent ownership. As we have noted earlier, the product met the simple objectives of increasing the provision of affordable housing with shallower subsidy, providing for those some way up the income scale and freeing up social housing or reducing waiting lists. Shared equity was introduced in the late 1990s in a period of relative calm to provide a broader range of options for potential purchasers and particularly to allow people to move on from social housing and to change location. However, this initiative reflected the increasing difficulties that lower-income established households were facing in moving into more appropriate housing rather than an acceptance of fundamentals. Even so, these two products brought together at least some of the objectives of policy and principle – enabling people to achieve their aspirations with reduced risk and greater involvement in their properties and neighbourhoods. However, when we look at the downturn, it is clear that the policy has not been robust with respect to economic change – with costs to households, housing associations, developers and government alike. Looking back, intermediate tenures, as implemented, have not been able to meet the fundamental objective of providing a range of options or, in particular, to reduce risks. Instead, over the last few years, they have formed part of the ‘irrational exuberance’ of the housing market in general and have suffered the same sudden decline. This situation has then had to be managed mainly by reduced provision and increased subsidy – the opposite of what one might wish for in an effective intermediate tenure strategy. Many of the reasons for this failure have come from the best of motives – of trying to increase provision rapidly, of targeting assistance to those near the affordability margin, improving sustainability and reducing costs through higher densities. Others have arisen from the narrow policy interpretation of intermediate housing as almost entirely low-cost home ownership. Still others have been the result of perhaps trying to be too clever – introducing an additional layer of private finance into Open Market HomeBuy for instance. And finally, some of the problems have occurred as a result of the unprecedented financial crisis which has (i) hit small and less well-understood sectors hardest, making mortgage finance almost impossible to obtain and (ii) shifted government priorities towards maintaining output and the development industry rather

Conclusions

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than looking to the more fundamental benefits of intermediate markets in terms of risk sharing and risk reduction. To some extent these problems have been building up over the boom years. First, in particular, the growing importance of S106 with its increasing emphasis on shared ownership rather than social rented provision (Chapter 6 discusses the details), together with the shift in new build towards brownfield sites and higher densities, has resulted in concentrations of small flats on specific sites. This has increased risks for financial institutions and purchasers alike – as well as restricting the range of potential purchasers. Second, the benefits to housing associations of shared ownership were very significant. They usually received half of the value on sale and the rest when staircasing occurred. This funding could be immediately recycled into new build of both social rent and shared ownership. While house prices were rising, this increased opportunities – so it was all too easy and associations could still outbid developers because of the subsidy involved. This business model has turned out to be dysfunctional for some associations. Yet the principles involved, of recycling subsidy to achieve more housing, is one that should be sustainable in any market. Third, the incentives for policy makers were also often perverse or simply muddled. They saw the need to restrict subsidy to groups where there were additional – often labour rather than housing market – benefits. They were consistently being encouraged to limit deadweight losses which went against the principles of risk sharing. Concern about value for money often constrained eligibility too tightly in relation to for the potential demand. More fundamentally, there was an assumption that the products on offer would be desirable because of the subsidy (either to the rental element or to access) without any significant attempt either to estimate the actual extent of the subsidy provided or, perhaps as importantly, the nature of the options available to potential purchasers. Finally, there was simply the impact of changing economic and financial environment. No policy maker developing intermediate products took enough notice of the changing offer from financial institutions and the impact of unrealistic expectations, both with respect to incomes and to house prices. The fact that the outcome of the credit crunch followed by recession has not been disastrous (at least at the time of writing) can probably be put down to a range of factors, including: 1. the rapid decline in interest rates for many if not all existing mortgagors; 2. the much smaller than expected increases in unemployment – together with the fact that reduced hours and wages could be managed better because of (1);

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3. both the government’s and the regulator’s positive responses in addressing the financial difficulties faced by some housing associations; 4. the preparedness to put additional subsidy into new build so that unsold market dwellings could be transferred into social and intermediate rental as part of the stimulus package. The major immediate policy failure has been to withdraw shared equity funding except for new build exactly at the point when the risk sharing aspects of immediate tenures could have been most valuable and where continued demand could be – and was – readily be identified. This response reflects the extent to which government over the last few years has addressed the cyclical rather than the fundamental aspects of intermediate products. One particular issue in this context has been the continuing emphasis on owner-occupation. Some increase in intermediate renting, with rents set at a maximum of 80 per cent of market, has been part of the ‘post-crunch’ package, but even then it has usually been tied to later purchase. The main reason for this is that intermediate rent does not fit most housing associations’ business models and requires very considerably increased subsidy in the short term. In this situation, social renting has been seen as the preferable option. Yet the current situation is both unsustainable and undesirable into the longer term. It is too expensive and does not provide the fundamental attributes required. The government’s objective is a shallow subsidy, not propping up the sector with additional support in future downturns. The more fundamental objective is to achieve a wider range of options which better fit household requirements and which may, where appropriate, be maintained over long periods, maybe even for the household’s lifetime. Instead, the immediate policy response has been a return to more traditional approaches of social rented housing and greater regulation – leaving even more people with very limited options.

Why continue to provide intermediate housing? At this stage it is worth reiterating that there are important and continuing reasons for broadening the tenure offer and for using land values to support the provision of affordable housing. First, current tenure arrangements are extremely constraining – the vast majority of households cannot enter social renting unless they are in priority need and they cannot/do not want to leave because other options are too expensive. Owner-occupation depends upon debt finance, where the risks lie mainly with the mortgagor and where the specific risks of the housing asset are all too obvious. Private renting has become a far better option than in the past – but is still only available on very short-term contracts

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and gives tenants little opportunity to invest in housing assets more generally while continuing to rent. Moreover, much of the growth in the private rented sector has been built on expectations of capital gains. Rental rates of return remain too low to attract significant institutional private equity. More practically there are said to be up to a million households who would, on underlying trends, have purchased since the crisis began – and many of these households will be looking at least for something longer term if not immediately for owner-occupation (CML). On first glance, therefore, the opportunities for developing intermediate markets could probably not be bettered. However, because of the immediate past and the nature of the products available, exploiting these opportunities is both politically and structurally difficult. Second, while there has been a massive decline in land values, to the point where developers are arguing that the majority of the land they own currently has negative value, the longer-term planning permission will continue to enhance value. There is therefore a continuing potential to use S106, or its equivalent, to produce both land and at least some finance for affordable housing as markets readjust. The case for using this localist approach to supporting intermediate tenures, including housing for ‘sons and daughters’ and local key workers, remains strong. Third is the question of mixed communities. Intermediate housing has the potential for providing for lower-income and probably younger employed households as well as for older households looking to realise equity and/or obtain accommodation more suited to their requirements. This helps generate a mix of incomes and household types both at site and neighbourhood level. In particular, mixed developments help to avoid large-scale social rented housing estates which concentrate the poorest households in one location and tend to get a poor reputation so that no one wants to live there. Mixed tenure estates, where some people are part buying and some may staircase up to full ownership, help to prevent this from happening. Fourth, intermediate housing can in some circumstances actually add to the total stock and levels of output, simply because it allows greater leverage of private debt and equity than is possible with social renting. Finally, it should be stressed that the benefits of intermediate housing fundamentally relate to the different requirements of different groups with different household circumstances and incomes. There is in particular no obvious case for intermediate tenures to be limited to new build. Indeed, the opposite should be true – as a major objective is to broaden opportunity so all types of dwellings should be potentially available in intermediate tenures. Where the new-build story becomes important is in the context of subsidy as opposed to intermediate tenures as such. The objectives of subsidy

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include increasing the total number of dwellings, particularly affordable dwellings; developing more mixed communities; and targeting particular groups as cheaply and effectively as possible. Not surprisingly, government policy has concentrated far more on the objectives of subsidy and affordability than on the benefits of intermediate tenures per se. Only in the context of shared equity one can see a broader understanding of these benefits – with a shared equity mortgage where both parties could actually share the gains and risks. The case for emphasising this broader approach, through improving the range of property rights, financial instruments and risk sharing, seems particularly appropriate at the present time. To start with the easy options first, the government has taken a useful initiative in simplifying finance for shared ownership by clarifying that the mortgagee has first call over the housing association on the value of the property (HCA, 2010). The most obvious second move is to reverse the cutbacks on shared equity funding which would help free up the second-hand market and provide a low-risk product and some upfront funding. On the rental side, there is an increasingly strong case for enabling longer-term contracts and therefore the possibility of linking rents to the extent of security provided. This could start by implementing existing proposals (Rugg and Rhodes, 2008; Shelter, 2009) and could provide at least some greater flexibility in that sector. Other aspects of expanding the rental offer need, on the one hand, to enable better access to investing in housing through property bonds or other instruments and, on the other hand, to enable part or even ultimately full purchase where appropriate. This might include schemes that are becoming more general in Europe by which new tenants make a down payment and may then be able to build up purchase rights over time. Other options include time limited social housing provision and tying rents more closely to services and other attributes of the dwelling in a way which covers the extra costs of providing additional benefits and could enable a higher-quality intermediate rented market to be developed over time.

Learning from international experience The vast majority of this text has been about experience in the UK and particularly in England. But, as is clear from Chapter 3, a wide range of approaches to providing housing for the intermediate market have been tried and tested in other industrialised countries. Transferring lessons across different institutional, fiscal and legal arrangements is always difficult

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to achieve. Of particular importance in this context is whether there is a tradition of social housing provision in the country in question – with welldeveloped, usually not-for-profit, institutional structures as well as largescale public land ownership; or whether the main forms of provision for lower-income households are in the private rented sector. In the first case, the emphasis is usually on adding to the stock of affordable homes. In the second, it often involves demand-side subsidies. Demand-side subsidies are seen to be relatively cheap but do not provide additional dwellings, while supply-side subsidies are expensive, can be politically unpopular and result in large deadweight losses. Approaches that are very different to those tried in England include the use of tax breaks to support private-sector solutions for affordable housing development, especially for key workers; and the extent to which affordable housing initiatives tend to be local or community led rather than national policies. However, there are strong similarities in the way that planning systems or other similar mechanisms are used to require provision of affordable housing as part of market developments. Also some particular initiatives look very similar to those tried in England (Paris, 2007). Overall, the main message would seem to be that England is definitely in the forefront with respect to specific intermediate tenure initiatives, but mainstream programmes of affordable housing in many countries are far more flexible than those observed in the UK.

Lessons for the future Our text suggests that there are fundamental reasons why intermediate tenures should be encouraged, as well as some strong reasons why governments may wish to subsidise some of these initiatives. Some of these reasons apply particularly to supporting low-cost home ownership, while others suggest that there is considerable mileage to improving rental options. The core reasons for supporting intermediate tenures is that it increases the range of choices available to lower-income households and can be a reasonably cost-effective way of helping to ensure a decent affordable home for all. In particular, intermediate tenures can help manage risks and enable expenditures to be better aligned with incomes over the household’s lifetime. Experience in England, in the UK more broadly and in other countries suggests that most government initiatives have aimed to address particular issues at particular times rather than to take a more comprehensive approach. This is probably unlikely to change in the current difficult environment.

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In the England context, the immediate policy requirement is something that works better than the past and current approaches (Whitehead, 2007), in that it • can help better-off social tenants into more appropriate housing and release highly subsidised homes for lower-income households; • can target those who cannot achieve what they require by other means such as moving a little further out; • can be clearly understood by both prospective purchasers and prospective lenders; • provides a better range of dwellings in appropriate locations; • is not limited to options that assume that the only goal is full ownership (in this context a second-hand market in shared ownership products would be particularly valuable and there are signs that such a market is emerging in London and some other cities); • shares the risks of price volatility and adverse policy between the household and the government. This is a big ask – but one which might make our housing system operate very much more effectively into the longer term. The case for maintaining and expanding intermediate housing, when so many households are excluded from access to long-term stable housing solutions, is strong. The case for ensuring that the options available provide the fundamental benefits of greater choice and lower risk is even stronger. Moreover, the same arguments apply as much in other industrialised countries that face major problems in ensuring adequate affordable housing for all.

Appendix 1 The products The table below identifies some of the more important intermediate housing products that have existed at some time in England. The terms in brackets (SO and SE) identify the basic attributes of the schemes as being either shared ownership or shared equity based. Ownership

Finance

Land/regulation

Pre-1980 Local initiatives: Part ownership Half and Half (from 1975, Birmingham)

Traditional mortgage plus rent

Discounted market price

Covenants

Lower-cost ownership

Traditional mortgage

Discounted market price

Housing association co-ownership schemes from 1974

Part ownership

Traditional mortgage (plus contribution)

Discounted market price

Cost rents

Rent only Housing association, local authority or charity

Rents charged to cover costs

Homesteading

Purchaser

Discounts/ mortgages available from local authority on unimproved property

Existing property, often compulsorily purchased, in poor condition

Build/improve for sale

Purchaser

Traditional mortgage (from mainstream lender or local authority)

Local authorities built new homes on public land and sold at discount

Leasehold schemes for the elderly (LSE)

Part ownership

Own equity

Existing sheltered housing for over-55s

(continued) Making Housing More Affordable: The Role of Intermediate Tenures, edited by Sarah Monk and Christine Whitehead © 2010 Blackwell Publishing Ltd.

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Ownership

Finance

Land/regulation

1980s 1980 Housing Act including: 1980 shared ownership (SO)

Part ownership

Traditional mortgage plus controlled rent

New-build units provided by HA/ purchased at market price

1980 do-ityourself shared ownership (DIYSO)

Part ownership

Traditional mortgage plus controlled rent

Existing open market property

1980 Right to Buy

Transfer from public to private

Traditional mortgage

Existing units, discount on market valuation

1989 shared ownership for the elderly (replaced LSE)

Part ownership

Traditional mortgage plus rent (unless own 75% maximum share)

Sheltered housing units for over-55s

1990 Town and Country Planning Act

Sales to private owners/ housing associations

Developer contribution

New-build units on developer land

1996 Right to Acquire

Transfer from public to private

Traditional mortgage

Existing units, discount on market valuation

1999 HomeBuy (SE)

Purchaser

Traditional mortgage plus shared equity provided by housing association

Existing open market units/purchased at market prices

2000 Starter Home Initiative (SE)

Part ownership

Traditional mortgage plus shared equity provided by housing association

Existing open market units/purchased at market price

2004 Key Worker Living (SE and renting)

Part ownership or housing association (intermediate rent)

HomeBuy – traditional mortgage plus equity loan of up to £50,000 (£100,000 for some London teachers)

HomeBuy – existing open market units/ purchased at market price

1990s

2000s 2000 Housing Green Paper including:

The products

New Build – traditional mortgage plus rent, or intermediate rent

New Build and intermediate rent – new housing association property

279

2005 HomeBuy New Build HomeBuy (replaced original HomeBuy) (SO)

Part ownership

Traditional mortgage on 25% or more plus rent on the remainder

New-build units provided by housing association/purchased at market price

Open Market HomeBuy (OMHB) (SE) (replaced HomeBuy)

Purchaser

Traditional mortgage plus shared equity provided by housing association

Existing open market units/purchased at market price

Social HomeBuy

Part ownership

Traditional mortgage

Existing units owned by local authority

Rent to HomeBuy (new)

Rent with option to part purchase later

Below market rent

New-build units provided by housing association/purchased at market price

2007 Open Market HomeBuy relaunched (SE)

Purchaser

Traditional mortgage plus shared equity provided by private finance

Existing open market units/purchased at market price

2008 OwnHome HomeBuy (replaced OMHB) (SE)

Purchaser

Traditional mortgage through Cooperative Bank plus up to 40% equity loan from Places for People, interest free for first five years

Existing open market units/purchased at market price

2008 MyChoice HomeBuy (replaced OMHB) (SE)

Purchaser

Traditional mortgage plus charge on up to 50% equity loan from one of eight housing associations

Existing open market units/purchased at market price

2009 HomeBuy Direct (new) (Hybrid SO/SE in that new-build but SE mortgage)

Purchaser

Traditional mortgage plus 30% equity loan interest free for first five years from Homes and Community Agency and private developer (15% each)

New-build units on specified ‘stalled’ market developments/ purchased at market price

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Currently (February 2010) the following options are available: New Build HomeBuy (SO)

New homes built by housing associations, 25% up to 75% shares purchased with conventional mortgage, subsidised rent on unowned share. Second-hand properties also available from existing shared owners.

HomeBuy Direct (Hybrid)

Minimum 70% of market value bought with conventional mortgage. Equity loan of up to 30% provided with no payments for first five years. After five years, a fee of 1.75% of value which increases in line with inflation.

Social HomeBuy

Existing social tenants can buy minimum initial 25% share of own home. Landlord retains rest of equity and charges an affordable rent. Can purchase 100%.

Rent to HomeBuy

Assured tenancies with housing association who charges an affordable rent of 80% of market rents (or less). Rent payable for pre-defined, limited period, after which expect share to be bought on the terms of New Build HomeBuy. Rental period provides opportunity to save for deposit.

Intermediate New-build homes for rent at 80% or less of market rents. Shorthold market rent tenancy with housing association, usually for initial six months. This is reviewed regularly. HOLD (SO)

A specially tailored option to assist people with long-term disabilities to buy a share in a property. Limited availability from a small number of housing associations.

Source: http://www.homesandcommunities.co.uk/buyingrentingahome Site last accessed 2 February 2010. Of these, the first three are currently the mainstream products. MyChoice and Own Home were withdrawn early in 2009 and funding switched to HomeBuy Direct as part of the government’s housing market stimulus package. Similarly, Open Market HomeBuy and the First Time Buyers’ Initiative still exist as products but all the funding for 2009/10 has now been committed.

Appendix 2 Definitions of intermediate housing for use in negotiating planning obligations Further detailed advice on how to negotiate planning obligations in the context of affordable housing is provided from time to time. This appendix sets out the definition of intermediate housing in terms of the types of housing that can be secured as affordable when planning authorities negotiate contributions from developers under Section 106 of the 1990 Town and Country Planning Act. The latest such advice at the time of writing is reproduced in the box below, taken from the advice note on Affordable Housing Delivery that accompanies Planning Policy Statement 3: Housing (DCLG, 2006b).

Intermediate affordable housing Types of housing between market and social rented housing include: − Intermediate rented homes are provided at rent levels above those of social rented but below private rented. The Government offers these to some key workers who do not wish to buy. − Discounted sale homes have a simple discount for the purchaser on its market price, so the purchaser buys the whole home at a reduced rate. − Shared equity is where more than one party has an interest in the value of the home eg an equity loan arrangement or a shared ownership lease. There may be a charge on the loan, and restrictions on price, access and resale. − Shared ownership is a form of shared equity under which the purchaser buys an initial share in a home from a housing provider, who retains the remainder and may charge a rent. The purchaser may buy additional shares (‘staircasing’), and this payment should be ‘recycled’ for more affordable housing. In most cases, a purchaser may buy the final share (‘staircase out’) and own the whole home, though this may be restricted in some rural areas. (continued)

Making Housing More Affordable: The Role of Intermediate Tenures, edited by Sarah Monk and Christine Whitehead © 2010 Blackwell Publishing Ltd.

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Homes of any of these types should only be considered intermediate affordable housing if they meet the criteria in the definition. If they do not, even if offered at less than market price, they should be considered ‘low cost market housing’, outside the definition of affordable housing. For example, a shared ownership home is likely to be affordable if access is restricted to households from a target group at a price they can afford. The purchaser may staircase out, but there should be secure arrangements for subsidy to be recycled to provide more affordable homes or buy back the home if needed. Low cost market housing is not part of the Government’s definition of affordable housing although it can play an important role in meeting housing demand. Local authorities should consider the potential to provide low cost market housing as part of their approach to achieving a mix of housing. Source: DCLG (2006b, paragraphs 38–41)

The Advice Note also says: ‘This means providing a wide choice of housing to meet the needs of the whole community in terms of tenures and price ranges. This should include affordable housing, both social rented and intermediate. Affordable housing policy is based around three themes: providing high quality homes in mixed sustainable communities for those in need; widening the opportunities for home ownership; and offering greater quality, flexibility and choice to those who rent’ (DCLG, 2006b, paragraph 3).

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Index A acceptable cost guidelines (ACG), 233 ACG, see acceptable cost guidelines (ACG) Addenbrooke’s hospital, 127–32, see also Cambridge, as a case for key worker housing eligibility of staff, 131–2 recruitment and retention policies, 128–9 staff housing needs, 129–30 affordability, 205–6 Intermediate Housing Working Group and, 205–6 Wilcox’s measure of, 64–6 affordability, of LCHO, 150–52 income differences across tenure and, 150 PIR as measure of, 150, 151–2 affordability criterion, for intermediate housing, 126 affordable housing, 1 completions, 211–12 definition for planning purposes, 9 and intermediate housing tenure, 2 policies (Cambridge case), 125–7, see also Cambridge, as a case for key worker housing PPS3 definition, 122 scale of planning and, 105–6 shortage of key workers, see London, as a case for key workers housing tax relief on construction of, 43–4 affordable housing providers (AHPs), 203, 205, 207 AHPs, see affordable housing providers (AHPs) asset wealth, 185–6, 192–3 B bedrooms, number of, 206–7, 223 BHPS, see British Household Panel Study (BHPS) Bramley approach, 66–8 Bristol City Council, 223 British definition of intermediate-housing market, 37–8

British Household Panel Study (BHPS), 87 Bronx’s Co-op City, 56 bungalows, 147 C Cambridge, as a case for key worker housing, 122–32 affordable housing policies, 125–7 commuters/in-migration, 123–4 economic success, 124 employment/housing imbalances, 124 environmental protection, 123 health sector, 127–32 high growth sectors, 123 income distribution, 124 past policies, 123 population, 123 Cambridge Centre for Housing and Planning Research, 248–9 Cambridge City Council, 123 Cambridge Local Plan, 125, see also Cambridge, as a case for key worker housing Cambridgeshire county, 122–3, see also Cambridge, as a case for key worker housing growth, 123 settlement pattern in, 123 Cambridge University Hospitals NHS Foundation Trust, 127 Cantref, housing association, 243–5 Cardiff Council Homebuy scheme, 242–3 Carmarthenshire Homebuy purchases in, 243–5 central government definition of intermediate housing by, 8–9 Ceredigion Homebuy purchases in, 243–5 Charter Housing Association, 239 Chelmsford District Council, 219 CIL, see Community Infrastructure Levy (CIL) Community Council, in Wales, 233

Making Housing More Affordable: The Role of Intermediate Tenures, edited by Sarah Monk and Christine Whitehead © 2010 Blackwell Publishing Ltd.

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Index

Community Infrastructure Levy (CIL), 115 community land trusts (CLTs), 40, 50–51 completions of affordable housing, 210–12 COntinuous REcording (CORE), 87, 138, 142, 156 Copenhagen, case of, 45 CORE, see COntinuous REcording (CORE) cost(s) housing, in England, 7–8 of owner-occupation, 25 costs-to-income ratios, 152, 153–5 County Councils, 203 credit crunch, 249, see also financial crisis CTLs, see community land trusts (CLTs) D DCLG, see Department for Communities and Local Government (DCLG) ‘deep rural,’ 245 demand-side measures, 46–8 assessment of, 48 shared equity/ownership, 47–8 subsidised mortgages, 46–7 supply-side versus, 40–41 ‘density bonus,’ 50 Department for Communities and Local Government (DCLG), 70, 249, 256 direct subsidy, see also subsidies intermediate housing and, 20 discounted sale homes, 281 downturn, see financial crisis E EAH, see employer-assisted housing (EAH) East of England Intermediate Housing Working Group, see Intermediate Housing Working Group regional assemblies, 202 role of, 202 stylised facts about, 201 economic success, of Cambridge, 124 ECTHPP, see Extra Credit Teacher Home Purchase Program (ECTHPP) EFM, see ‘equity finance mortgage’ (EFM) eligibility, for key worker housing, 126 in health sector, 131–2 employer, 52–3 employer-assisted housing (EAH), 53 employment in financial crisis, 249 nature of and Homebuy scheme, 240 employment growth, in Cambridge, 122–5, see also Cambridge, as a case for key worker housing

employment locations (residence to work), 174, 175 England comparative housing costs in, 7–8 Homebuy scheme in, 229, 230 modelling LCHO in, 86 data sources and model design, 87–8 model results, 88–91 sales of shared ownership in, 252 English Growth Areas, Cambridge in, 124 ‘equity finance mortgage’ (EFM), 48 ‘equivalence value,’ 69 ‘equivalised’ income, 69 Essex, 201 Europe definition of intermediate-housing market in, 38 Extra Credit Teacher Home Purchase Program (ECTHPP), 47 F Fairlake Properties Ltd., 239 financial crisis, and LCHO, 155–62, see also HomeBuy scheme; shared ownership (SO) scheme financial crisis, in UK employment in, 249 and housing market, 247–8 LCHO and, 247–8 nature of, 249–50 shared equity schemes in, 254–5 shared ownership in, 251–2 first-time buyers, 53 flats/maisonettes, 146, 147 France definition of intermediate-housing market in, 38 funding mechanisms, 54–5 ownership and, relationship between, 23 G geographical targeting, 53 GLA study, 68–9 GO-East, see Government Regional Office (GO-East) government intermediate tenures rationale for, 28–32 potential net benefits to, 30 government policies definition of, 204 Government Regional Office (GO-East), 203 role of, 203 Green Belt, 123

Index

H HA, see Housing Associations (HA) HCA, see Homes and Communities Agency (HCA) health sector, key worker housing in, 127–32, see also Addenbrooke’s hospital Hertfordshire, 201 Holmans approach, 69–70 HomeBuy, 6, 77, 86, 205 attributes, 10–11 HomeBuy Direct, 11, 210, 248, 250, 253–4, 279 homebuyers change in, 238–42 average age of, 241 earnings of, 240 gender shift, 245 household type, 239–40 occupations of, 240 urban, metropolitan and rural, 242–5 HomeBuy products, demand for applicants, 212–17 age of, 214 income of, 214 HomeBuy scheme, 278 in England, 229, 230 geographical distribution of beneficiaries under, 144 household attributes, 143, 144, 145–6 housing costs, 151–2 and housing cycle, 230 incomes of purchasers, 150, 151 numbers (2000–05) in, 143 PIR for, 151–2 post-credit crisis scenario, 155–62 purchasers characteristics of, 238–42 urban, metropolitan and rural, differences in, 242–5 purpose of, 233–5 regional analysis, 144, 145–6 in Wales, 230–31 administration of, 231–3 home ownership attributes of, 24 costs inherent in, 25 Homes and Communities Agency (HCA), 105, 115, 217 Homes for a World City, 3, 168 Homes for the Future, 77 ‘Homes within Reach’ programme, 43 house/bunglow, property attributes, 147 household attributes, of LCHO schemes, 143, 144, 145–6 household income intermediate housing and, 20

301

household(s) eligible, allocation among, 53–4 new proportions of, 75–6 and their income, 70–71 rationale for intermediate tenures for, 22–8 house prices and earnings, in housing market, 235–8 incomes and, future changes in, 76–7 housing complex and multi-dimensional nature of, 23 contractual failure and, 23 1980 Housing Act, 5 Housing and Environment Panel, 202 Housing Associations (HA), 203, 208, 248 developer shared equity schemes and, 254–5 in Homebuy programme, 231–2 LCHO property pipeline, 257–8 responses to uncertainty and falling sales, 255 shared ownership purchasers, changes to, 256 regional markets for, 251–3 Housing Corporation, 217, 256 housing costs, 152–5, see also HomeBuy scheme; shared ownership (SO) scheme costs-to-income ratios, 152, 153–5 in England, 7–8 first-time buyers, 152, 153 income and, 153–5 housing expenditure models tenure-choice and, 83 Housing Green Paper, 8 housing market financial crisis in UK and, 247–8 for HA shared ownership, 251–3 Homebuy scheme and, 230 house prices and earnings in, 235–8 housing pressures, see also Cambridge, as a case for key worker housing case study (Cambridge), 122–5 Housing Trust of Santa Clara (HTSC), 54 HTSC, see Housing Trust of Santa Clara (HTSC) I IMH, see intermediate housing market (IMH) income(s), 51–2, see also price-to-income ratio (PIR); salaries, of key workers equivalised, 69 of Homebuyers, 240

302

Index

income(s) (continued) of households, 150, 151 and house prices, future changes in, 76–7 and house prices, in housing market, 235–8 housing costs and, 153–5, see also costs-to-income ratios range for intermediate housing, 71–2, 73 housing tenure of households within, 72, 74 in-migration/commuters, Cambridge case of, 123–4 intermediate housing government provision of land for, 44 income range for, 71–2, 73 housing tenure of households within, 72, 74 and planning system, 101 contributions to affordable housing, 105–6 increasing role of, 111, 113–14 numbers of affordable homes, 106–9 policy and legal framework, 102–5 reforms of, 116–17 products, 229–46 HomeBuy Direct, 248, 250, 253 Homebuy scheme, see Homebuy scheme recycling, 77–8 sub-regional estimates of need for, 76 intermediate housing market (IMH), 65 intermediate-housing policies typology of, 39–40 intermediate housing tenure access problems, 4 affordable housing and, 2 attributes for individual, 25–6 basic forms of, 10 definition of, 2–3, 8–11 by central government, 8–9 direct subsidy and, 20 household income and, 20 international, 37–8 for planning purposes, 10 explanation of, 2 government policies, 5 historical background, 4–6 hypothetical set of, 26–7, 27 international experience, 11–12 assignment and eligibility, 51–4 definitions, 37–8 demand-side measures, 46–8 funding mechanisms, 54–5 regulatory and contractual measures, 48–51 supply-side measures, 41–6 supply-side versus demand-side measures, 40–41 types of policy, 39–40 key dimensions, 20–21

objectives, 3, 22 policy instruments, 3 range of options, 34–6 rationale for government and society, 28–32 for household, 22–8 schemes, 32–4 in UK and other countries, 3–4 Intermediate Housing Working Group composition of, 203 CORE dataset, 214 driver for research, 202–5 government policies and, 204 HomeBuy products, demand for applicants, 212–17 related problems affordability, 205–6 number of bedrooms, 206–7 products marketing, 206 rental charges, 207–10 research, four main pieces of, 203 shared equity products introduction, 204 supply affordable housing completions, 211–12 completions, 210–11 intermediate market rent, 280 Intermediate Market Working Group driver for research within, 202–5 intermediate rented homes, 281 intermediate renting, 217–18 2000 Irish Planning and Development Act, 49 J job, 52 job search (London study), 172–3 K Kan’s model, 85 key worker housing case study (Cambridge city), 122–32, see also Cambridge, as a case for key worker housing concept, 121, 122 eligibility for, 126 for health sector, 127–32 in London, see London, as a case for key workers housing register for, 126 vs. traditional affordable housing, 125–6 Key Worker Living (KWL) Programme, 124, 217, 218, 278 key workers affordable housing shortage (London case) for, 168–71

Index

defined, 165–6 housing, see key worker housing reasons behind problems faced by, 166–7 salaries and housing costs, 166 shortage (London study), 172 L land prices planning constraints and, 104 Land Registry House Price Index, 250 LAs, see local authorities (LAs) LCHO, see low-cost home ownership (LCHO) housing leasehold schemes for the elderly (LSE), 277 LIHTC, see Low-Income Housing Tax Credit (LIHTC) limited-equity cooperatives, 50–51 Limited Profit Housing Companies Law, 42 local authorities (LAs), 202 local planning authority (LPA), 102, 103 location (distance moved), property attributes, 147, 148 location (residence to work), London study, 174, 175 London, as a case for key workers housing affordable housing shortage assessment, 168–71 age profile of key workers, 169 employment locations (residence to work), 174, 175 house-price falls (since late 2007), 170, 171 housing patterns, 173–4 housing problems effects (study), 171–2 job search outside city (study), 172–3 labour-market factors, 172–3 recruitment and retention of staff, 169 research findings, 171–80 shortages of key workers, 172 supply and demand, 168–9 teachers, 175–6 vacancy rate, 169, 171 London Home Ownership Group, 190 London–Stansted–Cambridge–Peterborough corridor, 202 long-term partial ownership, 36 low-cost home ownership (LCHO), in UK development for, 247 in downturn, 247–8, 250–51 for lower-income groups, 256 private developers and, 254 property pipeline, HA and, 257–8 low-cost home ownership (LCHO) housing, 81, 193, 210, see also

303

HomeBuy scheme; shared ownership (SO) scheme affordability, 150–52 costs, 152–5 data limitations, 91–2 information and market failure, 93–4 modelling, in England, 86 data sources and model design, 87–8 model results, 88–91, 89 policies, analytic strategies for, 94–6 price, 149–50 supply constraints, 92–3 tenure-choice modelling principle of, 82–6 Low Cost Home Ownership Taskforce, 199 low cost market housing, 281–2 Low-Income Housing Tax Credit (LIHTC), 43, 50 LPA, see local planning authority (LPA) LSE, see leasehold schemes for the elderly (LSE) M marketing, products and Intermediate Housing Working Group, 206 Metropolitan Homebuyers, 242–3 Metropolitan Statistical Area (MSA), 52 middle-income housing, 37 Milton Keynes South Midlands, 202 Mitchell-Lama Program, in USA, 42–43 mortgage finance problems, 256–7 market, 5, 232 MSA, see Metropolitan Statistical Area (MSA) ‘Munich model,’ 44 MyChoice HomeBuy, 279 N NAO, see National Audit Office (NAO) National Audit Office (NAO), 256 National Housing and Planning Advice Unit (NHPAU), 68 NBHB, see New Build HomeBuy (NBHB) New Build HomeBuy (NBHB), 11, 32, 132, 205, 206, 248, 279 applicants income, 218 post-credit crisis scenario, 156 rental charge on, 207–10 two-bedroom, household composition in, 216 next-generation housing, 37 NHPAU, see National Housing and Planning Advice Unit (NHPAU) non-S106 sites, 109

304

Index

O Office for National Statistics (ONS), 76 OLS method, see ordinary least squares (OLS) method OMHB, see Open Market HomeBuy (OMHB) ONS, see Office for National Statistics (ONS) Open Market HomeBuy (OMHB), 33, 156, 206, 211–12, 279 Opinion Research Services (ORS), 68 ordinary least squares (OLS) method, 85 ORS, see Opinion Research Services (ORS) overcrowded housing, 189 owner-occupation, 35, 189–90 costs of, 25 ownership and funding, relationship between, 23 home attributes of, 24 costs inherent in, 25 partial, 34, 36 shared, see shared ownership OwnHome HomeBuy, 279 P PGS, see Planning Gain Supplement (PGS) PIR, see price-to-income ratio (PIR) Planning Gain Supplement (PGS), 117 Planning Policy Guidance Note 3: Housing (PPG3) (2000a), 121 Planning Policy Statement 3: Housing (PPS3), 9, 121–2 Planning system, see also S106 intermediate housing and, 101 contributions to affordable housing, 105–6 increasing role of, 111, 113–14 numbers of affordable homes, 106–9 policy and legal framework, 102–5 reforms of, 116–17 PLI (Prêt locative intermédiaire)-financed housing, 41 PLS (Prêt locatif social)-financed housing, 41 PLUS (Prêt locatif à usage social) loans, 41 post-credit crisis scenario, 155–62, see also HomeBuy scheme; shared ownership (SO) scheme ‘poverty line,’ determination, 237–8 PPS3, see Planning Policy Statement 3: Housing (PPS3) Pre-Budget Report for 2007, 117 price, of property, 148–50 low-cost homes, 149–50 price-to-income ratio (PIR), 150, 151–2 private rented sector, 4–5

products marketing and Intermediate Housing Working Group, 206 property attributes, 146–50 flats/maisonettes, 146, 147 house/bunglow, 147 location (distance moved), 147, 148 price, 148–50 summary statistics, 146 value, 148–9 public-sector employers, in Cambridge, 124 public-sector workers, salaries of, 166 R RAPT, see Rismark Active Property Trust (RAPT) recession, 249–50, see also financial crisis recruitment/retention, of key workers Addenbrooke’s hospital policies, 128–9 London study, 169 recycling intermediate housing, 77–8 regional assemblies, 202 role of, 202, 203 Regional Housing Strategy (RHS), 212 Regional Spatial Strategy (RSS), 203 regulatory and contractual measures, 48 assessment of, 51 intermediate housing construction as condition of development permission, 49–50 limited-equity cooperatives and CLTs, 50–51 rent charges defined, 207 on NBHB, 207–10 as percentage of value of AHP’s share, 208 rents/renting social sector, 4 Rent to HomeBuy, 279, 280 Review of Low Cost Home Ownership Policies in Wales, 229 RHS, see Regional Housing Strategy (RHS) right to acquire, 278 right to buy, 29, 33, 191 Rismark Active Property Trust (RAPT), 48 Roger Tym & Partners, 131 RSS, see Regional Spatial Strategy (RSS) rural Homebuyers, 243–5 S S106 agreements, 257–8 salaries, of key workers in high-cost areas, 167 and housing costs, mismatch, 166 labour-market solutions for problems with, 167

Index

in public sector, 166 teachers, 175–6 sales, of shared ownership, 251–2 down valuations and, 252 highest-value areas and, 252 local scale area and, 252 location of units and, 252 SEH see Survey of English Housing (SEH) shared equity schemes, 33, 47–8, 281 in financial crisis, 254–5 shared owners, 144 shared ownership (SO), 5, 32–3, 47–8, 86, 247, 281 financial crisis and, 155–62, 251–2 geographical distribution of beneficiary under, 144 HA, regional markets for, 251–3 HomeBuy Direct, 250 household attributes, 143, 144, 145–6 households’ objective, 187–8 incomes of purchasers, 150, 151 key attributes, 183–4 moving from social housing to, 190–91 NBHB, 248 numbers available (2000-05) in, 143 pipeline of, HA and, 257–8 PIR for, 151–2 policy objectives, 185–7 post-credit crisis scenario, 155–62 property attributes, see property attributes purchasers of HA, changes to, 256 regional analysis, 144, 145–6 research methods, 184–5 subsidy for, 185, 189–90 shares, smaller, 217 SHG, see Social Housing Grant (SHG) programme shortages of affordable housing (London study), see London, as a case for key workers housing of key workers (London study), 172 short-term partial ownership, 34 significant deposit, in Homebuy policy, 232–3 social benefits intermediate tenures rationale for, 28–32 social HomeBuy, 33–4, 204, 279, 280 Social Housing Grant (SHG) programme, 105, 230–31 social rented housing, 35, 189 defined, 122 for planning purposes, 9–10

305

role of, 25 shortage of, 189 social sector rents, 4 Southern Fringe, Cambridge, 130–31 S106 policy, 6, 10, 104, 105 effectiveness of, 114–16 S106 sites approvals of new affordable homes on, 108, 109 completions of new affordable dwellings on, 110 tenures of affordable completions on, 112 Starter Home Initiative, 8 Strategic Housing Market Assessment, 206, 223 ‘sub-prime’ crisis, 250 subsidies direct, intermediate housing and, 20 to private developers, 41–3 for shared ownership (SO) scheme, 185 supply affordable housing completions, 211–12 completions, 210–11 supply-side measures, 41–6 assessment of, 44–6 demand-side versus, 40–41 government provision of land for intermediate housing, 44 subsidies to private developers, 41–3 tax relief on construction of affordable housing, 43–4 Survey of English Housing (SEH), 70, 71, 87 Sustainable Communities White Paper, 202 T tax relief on construction of affordable housing, 43–4 teachers, housing condition (London case), see also London, as a case for key workers housing housing preferences, 178–80 non-owner-occupiers, 176 owner-occupiers, 176 problems and needs, 175 salaries, 175–6 Tenant Services Authority, research for, 248–9 tenure-choice modelling aspect of time, 84 and housing expenditure models, 83 principle of, 82–6 econometric methods, 85–6 socio-economic variables, 84

306

Index

Thames Gateway Essex, 202 Town and Country Planning Act (1990), 6, 102, 278 ‘Try before you Buy,’ 254 two-bedroom social housing household composition in, 215 U unemployment, in financial crisis, 249 United Kingdom (UK) financial crisis in, see financial crisis, in UK ‘upper social housing,’ 38 urban Homebuyers, 243–5 USA Mitchell-Lama Program in, 42–43

V value, of property, 148–9 W wages, of key workers, see salaries, of key workers Wales Community Council in, 233 Homebuy scheme in, 230–31 administration of, 231–3 Wilcox’s measure of affordability, 64–6 workforce housing, 37 Z Zone Agents, 203, 221