At the height of an earlier government crisis in June 2022, there were three related policy announcements concerning the extension of right to buy to housing associations’ tenants; allowing those on universal credit to use housing benefits to meet mortgage payments; and a general review of the residential mortgage market.
This article looks at the challenges these policies pose to the government and the likelihood of them being implemented.
Extension of the right to buy
Government statistics reveal the current picture of the rented housing market:
- 5 million tenants rent their homes from housing associations.
- 1 million households are on waiting lists for social housing.
- 9 million homes have already been sold under the right to buy scheme.
- 40% of existing right to buy homes from local authorities have been sold into the private rented sector.
- Less than 5% of all existing right to buys have been replaced.
- In 2002, the typical income multiplier was 4.5 times the purchaser’s income. In 2022 it is typically nine times their income.
- On average, it costs the government £70,000 to assist people into home ownership.
So, while the government’s policy aims to increase home ownership, what are the challenges facing its implementation?
Firstly, the homes in question are not the government’s to sell as they are owned by housing associations. In many cases, they will have been charged to lenders as security for loans which are being used to build new homes and to raise the standards of existing stock. Any disposal to a social housing tenant at a discount will need to be compensated for. This will be expensive and the government has already confirmed this will need to be funded from existing budgets.
Secondly, when the commitment to guarantee one for one replacement is considered, it has been suggested the extension offers poor value for money. For example, if a tenant exercises a right to buy, allowing for the minimum length of occupation eligibility test - which has yet to be confirmed - the home will inevitably consist of older stock. It will be much more expensive to replace such stock with newly constructed homes built to the latest construction standards.
The Chartered Institute of Housing (CIH) has estimated the cost of replacing right to buy homes would be in the region of £2-3 billion, equivalent to the total annual cost of the Affordable Homes Programme. However, this cost would only compensate the housing associations for the substantial discounts which have been given and facilitate one for one replacement. It will not lead to any increase in the amount of affordable housing.
Thirdly, as a consequence, housing associations have warned the extension of the right to buy will have an adverse impact on their development capacity leading to the decrease in affordable housing and erosion of the social housing stock.
Fourthly, how will tenants afford to buy their homes? Under the existing right to buy with council-owned properties, tenants were eligible to buy their homes with a substantial discount of up to 70% of the market value. While the discount for homes owned by housing associations will be much less generous - again no details have been provided - many renters simply cannot afford mortgages.
Finally, many housing associations oppose this extension of the right to buy because it will be an added and unwelcome burden on their resources. They are already having to contend with inflationary pressures associated with the cost-of-living crisis; delivering on the decent homes’ standards; improving existing stock and defending the rising number of ‘housing disrepair claims’; implementing the changes brought about with the new shared ownership lease; and delivering on the ‘roadmap to net-zero homes’.
In the absence of any detailed proposals or consultation paper, we do not know how the government will be able to overcome the sector’s concerns.
Using universal credit to meet mortgage payments
There are two issues here: the deposit and income to discharge the mortgage. Under the existing universal credit rules, claimants cannot have more than £16,000 in savings. Clearly, to acquire a right to buy home, the tenant will require significant savings which would take them out of eligibility for universal credit.
Therefore, the government is looking at changing the criteria for universal credit whereby monies saved in a Help to Buy ISA - or any equivalent - will not be taken into account. Again, there are no details.
The next challenge concerns affordability and how to satisfy the lending criteria of the lenders which are much stricter after the 2008 financial crash. The government wants to relax the rules to achieve ‘benefits to bricks’ so that part of the universal credit which relates to housing could be used to meet the monthly mortgage payments.
However, lenders have already pushed back on this saying the government’s statistics show that less than 6% of renters could afford a typical first-time buyers’ mortgage.
Unfortunately, lenders were not consulted about this policy announcement before it was made. Since the announcement, there have been statements from the government in which it is considering 100% mortgages - effectively government-backed mortgages - and mortgages with longer terms which can be passed down to the renters’ children.
General review of the residential mortgage market
This review was triggered by the latest statistics which show the percentage of 25-34 year-olds who own their own homes has fallen from 55% to 34% between 1996 and 2016.
The government is looking at whether the mortgage market is partly to blame for this. This is a contentious issue with the immediate response of lenders saying that it is not the mortgage market which needs fixing but the supply of new homes. The government has abandoned its pledge to build 300,000 new homes per annum; there is an urgent need for the reform of planning law and practice; and the housing stock must be increased to meet growing demand.
The government’s consultation is expected in the autumn.
Very slim prospects for success
The extension of right to buy is not a new policy. It was first tabled by David Cameron in 2015 but quickly ruled out by George Osborne as unaffordable and lacking in value for money. Theresa May considered it again in 2018. In response, housing associations agreed to pilot a voluntary right to buy scheme in the Midlands. The uptake was very disappointing with only 1,892 homes being sold out of 3,000 planned sales.
The government has already said this must be funded from existing budgets. The Department for Levelling Up Housing and Communities has said it does not have the budget and will therefore look to other cash-strapped departments for contributions.
However, even if the economics are overcome, the biggest defect with this policy is that it will not deliver a single new home or reduce the ever-increasing waiting list for affordable homes to rent.