Corporate Identity

1
Who are Low Cost Home Ownership (LCHO) purchasers
and what is the demand for LCHO? Analytical
Services Directorate
2
Structure of Slide Pack

• The purpose of this slide pack is to present a
  selection of the data gathered and analysis
  carried out as part of the work for the Shared
  Equity Task Force
• The presentation is split into two sections
• Section I Characteristics of Low Cost Home
  Owners and
• (slides 3 to 15)
• Section II Potential Demand for Low Cost Home
  Ownership.
• (slides 16 to 24)

3
I Characteristics of current LCHO purchasers

• Including
• Household type
• Age Distribution
• Regional Distribution
• Previous Tenure
• Income
• Average Size of deposit
• Value of purchase
• Arrears and repossessions

4
Household type of LCHO purchasers
Household type of LCHO purchasers by type of
scheme, 2004/5

• Over 65 of LCHO purchasers are working age
  without children.
• Overall about 20 of LCHO purchaser are working
  age people with children.
• The remainder are elderly
• Families are most likely to access the HomeBuy
  scheme where 35 of purchasers have children.

Key RTB Right to Buy, RTA Right to Acquire
PRTB Preserved Right to Buy SHI Starter Home
Initiative SourceCORE (Continuous Recording)
sales 2004/5 Note that the data refers to LCHO
schemes prior to the inclusion of shared
ownership in the Homebuy scheme.
5
The age of LCHO purchasers
LCHO purchasers age of householder 2004/5

• 60 of Starter Home Initiative (SHI) purchasers
  and nearly 50 of Homebuy and Shared Ownership
  purchasers are aged between 25 and 34.
• Right to Buy (RTB) purchasers are more likely to
  be in their late 30s to 50s.

Source CORE Sales 2004/5
6
The location of LCHO purchases
Distribution by region of all LCHO purchases
2004/5

• Nearly 60 of all LCHO purchases in England in
  2004/05 took place in three regions (London, the
  South East and the North West).
• Most LCHO purchases in the North West, North East
  and West Midlands are RTB or equivalent.
• Most LCHO purchases in London and the South East
  are Shared Ownership or Key Worker schemes.

SourceCORE Sales data 2004/5
7
Where are LCHO purchasers coming from?
Previous tenure of LCHO purchasers 2004/5
Percentage of LCHO purchasers who are first time
buyers 2004/5

• Around 15 of purchasers accessing Homebuy or
  Shared Ownership are using the assistance to
  trade up rather than buy their first home.

• Most LCHO purchasers are either private tenants
  or living with family or friends before buying a
  home.
• - Those accessing shared ownership are more
  likely to have been living with family or friends
  (40)
• - The SHI is more concentrated amongst private
  tennats
• - HomeBuy is concentrated on renters, with a
  much higher proportion from the social sector
  than the other schemes

SourceCORE Sales data 2004/5
8
The value of LCHO purchases

• Unsurprisingly, the purchase price for RTB
  tenants is lower than for other LCHO schemes.
• The value of Shared Ownership, SHI and Homebuy
  purchases reflect prices in London and the South
  East where the schemes are concentrated.
• Shared ownership purchasers buy the most
  expensive properties amongst LCHO participants.
• Purchase prices are fairly consistent across age
  bands, but typically the median is lower in the
  first and last two age bands

All ages Shared Ownership 152,500 RTB, RTA,
PRTB 58,000 HomeBuy 142,500 SHI
145,000. FTBs London 180,000 FTBs South
East 150,000 FTBs England 125,000. Source
CORE Sales data 2004/5 and Survey of Mortgage
Lenders 2004/5
9
How much deposit do LCHO purchasers have?

• Nearly 40 of all LCHO purchasers have no deposit
  and a further 27 have a deposit of less than
  5,000.
• Right to Buy purchasers (which are not shown in
  the chart) are most likely to have no deposit
  (91), followed by Homebuy and SHI purchasers
  (51), compared to only 33 of shared ownership
  purchasers.
• The median deposit in 2005 of all first time
  buyers who did not have family financial
  assistance is 7,000 among the under 30s, rising
  to 27,000 among the over 30s (Source J Tatch
  (2006) Will the real first time buyer, please
  stand up CML Housing Finance, 03/2006).
• The median deposit for shared ownership
  purchasers in 2004/5 was 2,700 and for other
  schemes was 0 because of the high proportion
  with no deposit.

Source CORE Sales data 2004/5 (excl. RTB, RTA,
PRTB, RTM and other sales)
10
Incomes of LCHO households by age group
Median gross income of household and partner,
LCHO scheme purchasers and other tenures 2004/5

• Between the ages of 30 and 39, Homebuy purchasers
  have incomes closest (at 85 of) to all owners
  buying with a mortgage.
• Right to Buy and equivalent scheme purchasers
  have the lowest incomes of all LCHO purchasers
  and the gap between this group and all home
  owners widens with age.

11
LCHO subsidies and borrowing terms
Characteristics of LCHO participants average
values for 2004/05

• Source NAO report (2006 unpublished)
• By way of comparison, the average purchase of a
  normal first-time buyer was 125,000 (2005),
  their average deposit was 33,000 (2005) and the
  average initial mortgage rate was 4.99 (2004).
• Average purchase will be much higher in
  high-demand areas where the majority of the those
  helped through LCHO will be purchasing (as such,
  the FTB comparison ought to be weighted to
  reflect the regional distribution of LCHO sales
  in these regions to make the comparison fairer).
• Source Smith J et al (2005) Understanding First
  Time Buyers, Council of Mortgage Lenders

12
Arrears and repossessions of LCHO purchasers
Over 80 of LCHO purchasers are first time buyers
(Slide 7), most do not have a deposit (Slide 9)
and median incomes are lower than borrowers as a
whole (Slide 10). Arrears In 2001, a survey
of LCHO purchasers found that 10 had been in any
arrears with their mortgage payments in the last
year1. Repossessions There is a lack of data on
LCHO repossessions. In 2001/2 repossessions of
shared ownership stock was estimated to be
0.77pa, compared to 0.21 among all mortgaged
properties1.
Sources 1. Bramley G et al (2002) Evaluation of
the Low Cost Home Ownership Programme ODPM
13
Who can buy from the Private Rented Sector (PRS)?
The incomes of households moving from private
rented accommodation to owner occupation compared
to those who moved but stayed in the private
rented sector.

• Not surprisingly, people moving out of private
  renting into owner occupation have much higher
  incomes than those who remain in the PRS.
• Over 60 of new owner occupiers who were
  previously private renters had incomes over
  30,000 compared to 31 of those moving within
  the PRS.
• These figures refer to typical, or average,
  households at a national level. The figures will
  vary between regions.
• The figures refer to non-LCHO purchases.

Owner occupiers and private renters who had moved
into their current accommodation in the last two
years and were previously private renters.
Source Survey of English Housing (SEH), 2004/5
14
Who will buy in the future?

• Ability to buy
• Slower growth in young adult incomes in the 1990s
  relative to average incomes has driven a
  reduction in home ownership among under 30s.
• Delays in entry to the labour market whilst in
  higher education and student debt are slowing
  down graduate progression to home ownership.
  With a rising income trajectory, a high flying
  graduate couple will have both the income and
  sufficient deposit be able to buy by age 31,
  lower income graduates by mid 30s.
• Non graduate couples have been estimated to be
  able to save for a deposit by age 28 but due to
  slow earnings growth are either much delayed or
  never able to have sufficient income for a large
  enough mortgage.
• Single person households, especially
  non-graduates are most constrained by both
  earnings and lack of deposit.
• Up to half of first time buyers are now receiving
  help with their deposit from parents. Providing
  a deposit can reduce time spent saving by between
  6 and 10 years.
• Sources
• Andrew M (2006) Housing tenure choices by the
  young CML Housing Finance 07/2006
• Tatch J (2006) Will the real first time buyer
  please stand up? CML Housing Finance 03/2006

15
Who will buy in the future?

• Choice (not) to buy
• Unlike other age groups, enthusiasm for home
  ownership among under 25s has not recovered since
  the early 1990s recession. Whilst in 1989, 64
  thought it was sensible for couples to buy as
  early as possible, this was down to 44 in 20041
• Young people are showing historically low levels
  of interest in saving towards a deposit,
  expecting either to rely on parents or a 100
  mortgage.
• Attitudes to renting among people in their
  twenties are increasingly positive, valued for
  its mobility, flexibility and location in popular
  areas2.
• Young people still see marriage and having
  children as the most important triggers for
  buying a home. The mean age at first marriage
  (31 for men, nearly 29 for women) and a woman
  having her first child (27.5) continue to rise
  and the proportion of people remaining single
  longer is increasing all driving the age of house
  purchase up3.
• Sources
• 1 British Social Attitudes The 22nd Report,
  National Centre for Social Research, 2005
• 2 Smith J et al (2005) Understanding First Time
  Buyers, CML
• Marriage, divorce and adoption statistics, Series
  FM2 no.31, Office for National Statistics, 2006
  Birth Statistics 2004, Series FM1, No 33, Office
  for National Statistics, 2006.

16
II Potential demand for LCHO

• Including
• The stock of potential demand
• The flow of potential demand

NB the analysis presented in this section is
based on the sample of social and private tenants
for whom we have income data in the Survey of
English Housing. The analysis is based on a
comparison of regional (or super-regional)
lower-quartile house prices and incomes. It does
not make any assumptions about debt levels or
deposits.
17
The Stock of Potential Demand
Income Distribution of Private and Social Renters

• There are around 6 million households in the
  rented sector (2.2m in the PRS and 3.8m in the
  SRS)
• Not all of these households will want to access
  homeownership, and some will be able to access it
  unassisted

of renters (PRS SRS) able to afford
homeownership unassisted by super-region

• The ability to afford homeownership will depend
  on the relatively size of household income and
  local house prices
• Using lower-quartile super-regional house
  prices, assuming no deposit or other assistance,
  and a mortgage multiplier of 3.5 around 12 of
  renters overall could afford to buy unassisted
  (6 in the SRS and 22 in the PRS)
• This is equivalent to approximately 450,000
  private renters and 216,000 social renters.

Source Communities and Local Government internal
analysis, based on SEH data (2004).
18
Affordability Private renters (un)able to afford
homeownership in 2004 by age
Percentage of households in the PRS able to
afford homeownership in 2004 by age category
(England)

• The distribution of households able to afford
  (without LCHO) by age shows that
• 81 of those aged 16-29 in the PRS are unable to
  afford many are likely to be saving and will
  expect higher incomes in the future
• For 30-44 year olds, 71 are unable to afford.
  It is likely that more are able to afford due
  higher incomes

Of those unable to afford in the PRS in 2004,
household percentages by age category

• Of those unable to afford in the PRS in 2004, in
  the North only 25 are in the 30-44 year old
  category compared with 35 in the South (excl.
  London).

Source Survey of English Housing (SEH),
Communities and Local Government
19
Stock of Demand and Equity Loans

• With an equity loan of 25, an additional 7 of
  private renters (150,000) and 3 of social
  tenants (118,000) could afford homeownership
• With an equity loan of 75, an additional 24 -
  on top of the 29 that could afford with a 25
  loan of private renters(478,000) could afford
  an additional 17 - on top of the 9 that could
  afford with a 25 loan of social tenants
  (590,000).
• Even with a 75 loan, around 73 of social
  tenants and 47 of private tenants would be
  unable to afford to homeownership.

• We can look at how the affordability position
  changes with the introduction of equity loans of
  differing sizes
• Those that can afford with an equity loan but
  who could not afford otherwise might be regarded
  as constituting the potential demand for LCHO
  assistance.
• We model for two size of equity loan 25 and
  75 on the same basis as in the previous slide
  with a charge on the unowned equity of 2.75 from
  the outset

Number and of private/social tenants who could
afford homeownership with 25 and 75 loans
20
Targeting PRS tenants into Home Ownership

• The previous slides show that 22 (or 450,000)
  of PRS households can afford home ownership
  unassisted
• In addition other PRS tenants could access
  homeownership with, for example, a 25 equity
  loan this would lead to an extra150,000 who
  could afford to access homeownership.

• The additional 150,000 PRS tenants potentially
  helped into home ownership would fall into the
  income bands as illustrated in the chart. This
  comprises tenants in the 26,000 31,200 (48)
  and 31,200 - 36,400 (52) income bands
• The 450,000 already able to afford home
  ownership, are in the highest income bands. With
  the additional 150,000, all in the 31,200
  36,400 band can now afford and 44 in the 26,000
  31,200 band can now afford
• In total, there would be 600,000 (29) of
  tenants in the PRS able to afford home ownership

NB this modelling is necessarily a
simplification of reality and therefore abstracts
away from household characteristics, such as
having children, that may mean that some within
the above income bands would not be able to
afford homeownership whilst some on lower incomes
could.
21
Flow of Potential Demand

• There were around 360,000 newly forming
  households in 2004. 29 are already home owners

Income Distribution of Newly Forming Private and
Social Renters
of newly-formed renters able to afford
homeownership unassisted

• The ability to afford homeownership will depend
  on the relatively size of household income and
  local house prices
• Using lower-quartile super-regional house
  prices, assuming no deposit or other assistance,
  and a mortgage multiplier of 3.5 around 9 of
  newly-formed households who are renters could
  afford to buy unassisted (3 in the SRS and 11
  in the PRS)
• This is equivalent to approximately 20,000 new
  private renters and 2,000 new social renters.

Source Communities and Local Government internal
analysis, based on SEH data (2004). NB the top
two charts are based on actual data, the results
in the bottom chart are modelling based
22
Flow of Potential Demand and Equity Loans

• With an equity loan of 75, an additional 19 -
  on top of the 19 that could afford with a 25
  loan of new private renters (34,000) could
  afford an additional 14 - on top of the 4 that
  could afford with a 25 loan of new social
  tenants (11,000).
• Even with a 75 loan, around 82 of new social
  tenants and 62 of new private tenants would be
  unable to afford to homeownership.

• Again we can look at how this position changes
  with the introduction of equity loans of 25 and
  75.
• With an equity loan of 25, an additional 8 of
  new private renters (14,000) and 1 of new social
  tenants (1,000) could afford homeownership

Number and of newly-forming renting households
(private/social) who could afford homeownership
with 25 and 75 loans in 2004
23
Estimates of demand for LCHO

• External Estimates
• Low Cost Home Ownership Taskforce
• Based on work by Glen Bramley the Taskforce
  estimated that in 2001 there were around 120,000
  households whose incomes would not enable them to
  purchase in the open market
• The Taskforce estimated that the need for LCHO
  assistance from newly forming households was
  20-22,000 per year.
• With an LCHO product offering an equity loan of
  25, Bramley estimated that each 1 point extra
  affordability gain (in terms of the equity loan
  offered) would increase potential demand/need for
  LCHO assistance among under-35 households in
  England by 0.52 points Source Bramley, (2004),
  The Potential Market for Equity Loans in the UK
  see www.cml.org.uk
• Steve Wilcox
• Steve Wilcox identified a narrow intermediate
  housing market in England (defined as the
  proportion of younger working households that
  can afford to pay a social rent without recourse
  to housing benefit, but cannot purchase at lowest
  decile house prices for two and three bedroom
  dwellings) of 25.9 in 2005.
• He also identified a broader intermediate
  housing market in England (defined as the
  proportion of younger working households that
  cannot purchase at lower quartile house prices
  for two and three bedroom dwellings) of 45.4 in
  2005. Source Wilcox, (2006), The Geography of
  Affordable and Unaffordable Housing

A younger working households is defined as
having a household representative aged 20-39
24
Summary

• Almost as many LCHO purchasers are living with
  family or friends as renting in the private or
  social sector. They are part of the demand for
  housing coming from newly forming households.
• The average incomes of current LCHO purchasers
  are lower than home owners as a whole, Homebuy
  purchasers have closest to typical first time
  buyer incomes whilst social tenants have the
  lowest and flattest incomes over the life course.
• The key barrier to home ownership is consistently
  found to be the lack of a deposit nearly half
  of LCHO purchasers have no deposit at all.
• Of those in the PRS, 22 (450,000) could afford
  ownership and a further 7 (150,000) could afford
  with assistance from the Open Market Homebuy with
  a potential further demand of 33,000 newly
  forming households pa.
• Young people are showing historically low levels
  of interest in saving for a deposit and expect to
  buy later in life when their incomes are
  sufficient and they no longer require the
  flexibility of renting.