Shared ownership – an impactful solution to the UK’s affordable housing shortage

The UK has a well-documented shortage of affordable housing. A structural shortfall in housing supply, combined with long-term demand growth, has meant that for several decades, property prices have grown faster than average incomes.

Today, the average UK home costs nine times average earnings¹. When compared to the maximum mortgage availability needed to buy a home, of around only 5x earnings²,  the result is that in more than 93%³ of local authorities across the country, the average earner cannot afford to buy the average home.

To compound the situation, housing associations that have delivered a significant volume of affordable housing over recent decades have seen their development capacity reduce materially, due to the requirement to reinvest in their existing housing stock, allocating c.£35bn to improve fire safety and energy efficiency by 2030.^4 5

This backdrop creates an urgent need for patient investment capital at scale to help deliver affordable homes to the UK. Shared ownership offers a great way to provide these much-needed homes, delivering a tangible social impact while generating a secure, inflation-linked income for investors. What is more, geographically focused investment in shared ownership can help local authorities meet demand for affordable housing in their locality.

Shared ownership is a government-backed part-buy/part-rent solution that offers people on lower and middle incomes, such as young families and key workers, an affordable route onto the property ladder by reducing deposit and income requirements.

A purchaser acquires an initial (typically 25%) equity share in a house. They then pay government subsidised (i.e. below-market) rent on the remaining share of their home, to a registered provider of social housing, reducing their monthly income requirements. The shared owner has the option to incrementally purchase additional shares in their home at the prevailing open market value, known as “staircasing”.

The part buy/part rent model improves the initial affordability of home ownership in two ways:

• Reduced deposit, through buying a smaller share in the property.
• Reduced household income requirements, through subsidised rents at 30% discount to market.

The reduced deposit and income requirements under shared ownership provide an affordable route onto the housing ladder for 7.5 million people⁷ who would otherwise be unable to own their home.

Shared ownership also provides owners with significant longer-term savings. Subsidised rents at a discount to market of c.30% mean a shared owner can expect to save more than £300k over a lifetime compared to remaining in the private rented sector.⁸

In addition to the lifetime saving, shared owners can expect to build a financial asset of more than £400k as they own an equity stake in their property.⁸

From an investment point of view, shared ownership lets investors play a part in fulfilling a key societal need by making home ownership more affordable and accessible to people on lower and middle incomes such as young families and key workers who are fundamental to the future of their community.

Shared ownership has the potential to deliver long-term secure, inflation-linked income from ultra long-term leases with individual residents, each of whom are part owners of their homes and thus long-term partners rather than just tenants. Investors in shared ownership benefit from the security of investing at a c.30% discount to open market value, offering protection that improves over time.

With this enhanced security, shared ownership is able to deliver a return that compares favourably with comparable residential housing strategies but with a more attractive risk profile.

In addition to financial returns, investment in shared ownership creates quantifiable social and environmental impact by delivering additional, energy efficient homes that are affordable to people on lower and middle incomes.

As part of our shared ownership investment proposition, Gresham House offers investors the opportunity to establish and deploy locally alongside a commitment to the main UK-wide Fund⁹. Gresham House has experience of establishing local investment vehicles for LGPS investors dating back to 2019.

We believe shared ownership represents a standout solution to the structural issues affecting the UK’s regional housing markets and should be viewed as a core element in the portfolios of institutional investors looking to combine quantifiable social impact with strong and secure, inflation-linked investment returns.

¹ ONS, July 2022

² Based on a 10% deposit and a mortgage that is 4.5x household income

³ Gresham House calculation. Assumptions: average UK house price £293k; mortgage LTV 90%; mortgage rate 5.3%; mortgage term 25 years; housing costs as % of net income 40%; service charge £1,500 p.a.; maximum mortgage amount of 4x income

⁴ Inside Housing, L&G and British Property Federation, March 2022 (based on a 2020 survey by Inside Housing).

⁵ Savills and National Housing Federation, Decarbonising the Housing Association Sector – Costs and Funding Options (October 2021).

⁶ Gresham House: Assumptions: OMV £300k; first tranche sale 25%; service charge £1,500 p.a.; shared ownership rent 2.75%; mortgage LTV 90%; mortgage rate 5.0%; mortgage term 30 years; maximum housing costs as % of income 40%; shared ownership rent and private rent growing at CPI + 1%; CPI 2.5%; market rental yield 5.0%; HPI 3.5%

⁷ Gresham House - homeownership eligibility calculated based on ONS income percentiles, 2020-2021. Assumes 1.5x earners per household

⁸ Gresham House calculations
⁹ The Good Economy calculation of saving of an EPC B home vs an EPC D home, the average for the UK. Saving scaled up for energy price cap at Oct-23