New mortgage regulation requirements have had a positive impact on Co-Ownership clients’ affordability, as has the tax credit system for lower income earners.
Lower Co-Ownership rents to be introduced next year will further enhance affordability.
With the housing market booming, there are signs of buyers compromising on property type and size just to get a foot onto the property ladder.
PEOPLE
Being single shouldn’t stop people from becoming home owners, yet one adult households in Northern Ireland are much less likely to own their home than couples or family households. 26% of lone parents are home owners, compared with 53% of lone adults and around 85% of couples. This is an affordability issue more than anything, and something that Co-Ownership can tackle head on. Most of the properties we purchased this year were for just these one adult households.
While 95% of Co-Ownership clients are first time buyers and all of our clients share common characteristics with entrants to the housing market, it is worth noting that a stable minority each year are actually returning to home ownership and experiencing the same problems, but with special circumstances.
Generally, first time buyers are aged in their 20s and 30s. Here, Co-Ownership is no different, although the scheme has been flexible enough to meet the needs of all age ranges and situations and this year helped buyers aged from 18 up to 81 years into home ownership.
Property price and income information for the 2005 calendar year clearly shows Co-Ownership has helped clients get a foothold on the property ladder who wouldn’t have made it there otherwise. The income gap between Co-Ownership buyers and first time buyers overall has never been wider.
Two factors have played their part in helping affordability for our clients; the tax credit system topping up household income, and changes in how lenders assess mortgage applications.
In 2004, the Financial Services Authority started to regulate mortgage lending. One of the rules requires lenders to assess mortgage applicants’ ability to repay. This has encouraged lenders to move past the traditional income multiple approach to develop affordability models and more flexible financial assessments.
An affordability model calculates the amount that a mortgage applicant can afford to repay, based on an assessment of the main components of their income and expenditure. While their introduction was led by regulatory changes, many lenders appreciate that an affordability model enables them to offer higher value mortgages where applicants’ incomes have not kept pace with property prices.
Now that the tax credit system has become established, lenders have incorporated these elements of income into their assessment. Substantial numbers of Co-Ownership clients are able to avail of tax credits in some form.
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These two factors, tax credits and affordability based mortgage assessments, have combined to lessen the effects of property prices rising faster than incomes.
Nearly 50% of lenders had an affordability model in place in 2005, and this is expected to grow towards 70% over the next couple of years. However, borrowing must be sustainable and we expect that the benefits for lower income buyers of moving towards affordability-based calculations have already been maximised.
We can see that further action needs to be taken now as the property market continues to boom. We have therefore reviewed the Co-Ownership scheme to identify opportunities for new initiatives that would actually help people to get a big enough mortgage to get into houses. Effective 1st April 2006, we announced a cut in Co-Ownership rents for both current and future clients. For lenders working on affordability models, the benefit is clear. The clients’ borrowing capacity will increase even though their income has not.
The reduced Co-Ownership rents will help new clients into a property and also enable current clients who already own a home through Co-Ownership to purchase a larger share.
PROPERTIES
The supply of affordable property for sale has been reducing steadily, year on year. In the past year the pace escalated dramatically, with the proportion of property selling below the £100,000 mark falling by half. Latest figures from the NI Quarterly House Price Index at year end suggest that only around 20% of properties are currently selling at or below £100,000.
The price limits set by government for Co-Ownership eligible property, effective from April 2005, were simply unable to accommodate such a seismic shift in the property market (in most council areas the limit applicable was £102,500).
A significant level of investor activity fuelled property prices and edged out first time buyers (some estimates suggest 40% or more of property purchases have been by investors during the period). While we received many enquiries from prospective home buyers, securing a property for them was a different matter with the triple whammy of rising prices, Co-Ownership limits dragging behind the market, and consequently too few potential Co-Ownership properties coming on the market. We had to work extremely hard across the organisation to maintain a credible market presence.
In terms of how many properties were actually purchased for clients, this year’s figures (504) look much like last year’s (502). Yet behind these figures a look at property purchases by age, type and size provide early indicators of affordability pressure continuing to bite.
For the second year running the proportion of new build property purchased through Co-Ownership has remained steady at 13%, half of the proportion of new build sales in the wider market.
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There was a shift in the property types purchased this year compared with last. Apartment purchases rose to 16%, and the proportion of both terraced and semi-detached property purchases fell to 47% and 36% respectively.
Terraced and semi-detached properties dominate sales in the wider property market also. However, Co-Ownership property activity reflects our focus at the first rung of the property ladder and is therefore markedly greater for terraced property in particular. While greater numbers of apartments for sale are a feature of today’s market, overall the trend was towards purchasing smaller properties (2 bedrooms rather than 3).
