Who are Low Cost Home Ownership (LCHO) purchasers and what is the demand for LCHO? Analytical Services Directorate

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 Source:CORE (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. Source:CORE 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 Source:CORE 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 0.77%pa, 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 Income Distribution of Newly Forming Private and Social Renters • There were around 360,000 newly forming households in 2004. 29% are already home owners % 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.