Government to build houses but can we make them affordable? Yes we can with Joint Equity

The Government is to directly commission the building of 10,000 new homes on public land as part of a “radical” new plan to build at a faster rate using smaller companies.

Prime MinPicture David Cameronister David Cameron described the move as a “huge shift”, claiming it marks the biggest use of such a policy since Margaret Thatcher and Michael Heseltine started the regeneration of London’s Docklands in the Eighties.

Rather than waiting for major construction firms to work their way through the government’s long list of housebuilding projects, the scheme will see smaller businesses take on less extensive sites that have already have planning permission.

The policy will be backed by an extra £1.2 billion to prepare brownfield sites for the building of 30,000 starter homes – available to first time buyers under 40 for at least a 20 per cent discount – over the next five years.

David Cameron described the move as a “huge shift”, claiming it marks the biggest use of such a policy since Margaret Thatcher and Michael Heseltine started the regeneration of London’s Docklands in the Eighties

“This Government was elected to deliver security and opportunity – whatever stage of life you’re at. Nothing is more important to achieving that than ensuring hard-working people can buy affordable homes,” Mr Cameron said.

rent or buy 2This is right and Joint Equity wholeheartedly agree no one should be forced to live in rented accommodation who deos not want to. And that is anyone from 18 to 80, we think a home of your home with absolute security to stay there as long as you want is a basic human right.

Our CEO Brad Bamfield has lived in rented accommodation and hated the insecurity, the interference of the agent and the different agenda of the landlord. It was one of the big driver later in his life to develop Joint Equity and help everyone who wants their own home get one.

So we do agree with DC in principle but what Mr Cameron and politicians of all persuasion describe as affordable and what everyone else considers affordable is two quite different things so we think the Government and the private investment industry needs to go further.

Brad Bamfield, CEO of Joint Equity, has written a blog on What is the Cost of an Affordable Home the conclusion is the Help to Buy Scheme is not really affordable for great numbers of ordinary people. But Joint Equity can provide you a home of your choice for as little as the cost of a cup of Cappuccino coffee a day more than renting the same house. Well we would say that you say but click here to read how we arrived at that surprising result. Its not rocket science and we explain all.

Old DC backed this up with a further £1.2 billion to get homes built on brownfield sites, “it shows we will do everything we can to get Britain building and let more people have the security that comes with a home of their own.” he said.

The construction of the first wave of up to 13,000 directly commissioned homes – 40% of which will be starter homes – will begin this year in Dover, Chichester, Gosport, Northstowe in Cambridgeshire and Old Oak Common in north west London.

In addition to these, the extra £1.2 billion will fast track the creation of at least 30,000 new starter homes and up to 30,000 market rate homes on 500 new brownfield sites by 2020. The new projects form part of the Government’s commitment to building 200,000 starter homes before the end of the Parliament.

Half of all new homes are constructed by the top eight house builders and the direct commissioning approach will help smaller builders and new competitor firms, according to No 10.

But how will people be able to afford it? Just having more homes does not make them affordable if you cannot get a mortgage or need £30k as a deposit.

puzzle-526420_1920We feel the right way forward is the partnership between investors and occupiers through Joint Equity and our Investment Bonds, more on our Bonds here.

Why invest in Buy to Let with all its hassles and its costs when with a Co-Ownership Bond from Joint Equity you can earn 5.5% average plus 3% pa contribution from the terminal bonus.

So 8.5% return and helping people buy their own home at the same time.

Now that is a win/win Partnership

Just how much does an affordable house cost? And is it affordable – the answer is surprising.

Diminishing returnsThe average price paid for a property through an affordable housing scheme is now £189,786 according to Halifax – just 4% (£7,750) lower than the £197,535 average for house purchases.

That is not a big saving is it?

However, the discount is different for London:- regionally, the highest average price paid by purchasers using affordable housing schemes is in London (£323,148), while the lowest is in the North (£147,437).

Nevertheless, the average value of a London property sold in a scheme is 33% lower than the average London regional price (£482,579).

First-time buyers remain the biggest beneficiaries of Help to Buy housing schemes; accounting for 80% of purchases over the last year. This is significantly higher than the 46% of all mortgage financed home purchases made by first-time buyers over the same period.

The average price paid by first-time buyers using the Government schemes is now £150,361; this is 10% (£16,732) lower than the average price paid by FTBs (£167,093) for all housing.

Again not a big discount and the question becomes does a 10% discount make the house affordable.

However, not everyone is eligible for or wants the properties offered through Help to Buy so what happens to them? Well they have to do the best deal they can with the mortgages currently on offer.

Lets look at what constitutes the term affordable:_

  1. The amount of deposit. The first thing you have to find is the deposit and unless your family can help you have to save it. So for a £150,000 house the deposit can be between 20% (£30,000) for good mortgage deals and 10% for the lowest deposit (£15,000).
  2. The costs of the mortgage. The deposit and the cost of the mortgage trade off each other for a 10% deposit the rate currently (Jan 16) is 2.18% to 2.5%. But for a 20% deposit the rate drops to 1.44%  to 1.65%. In Cash terms this means a 90% LTV costs £585pm and 80% LTV £477pm, a difference of £108 pm.
  3. Your salary and the % you spend on the mortgage. Mortgage providers are required by the regulator to ensure you can afford your mortgage and that still equates to not borrowing more than about 4x your income. So for a £135,000 mortgage (the mortgage for a 10% deposit) you will need to earn £33,750pa.
  4. To the Government affordable seems to mean not more than 30% of your income. So for this£150k house and a mortgage of 585pm we would need an annual income of £23,500pa.

Lets look at this another way:-

  1. So an average income family on £27,000 pa can get a mortgage of £108,000 which means the difference, £42,000, has to come from savings to be the deposit.
  2. This would mean the LTV is 72% so the deposit is 28%.
  3. The monthly cost would be £429 which is 20% of the income well inside the Government’s 30%

So the monthly cost is affordable but the deposit is not. Is that really affordable.

Lets now look at Joint Equity Co-Ownership for the same £150,000 home.50-50 split

  1. The minimum deposit required from the Resident Partner £7,500.
  2. The mortgage of £67,500 costs £268pm
  3. The Non Resident partner payment, for the 50% you do not own, is £387pm
  4. The total cost pm for your Joint Equity home is £655pm
  5. This is 29% of the average income of £27,000.

So Joint Equity offers the £150,000 home that you chose for £7,500 deposit and £655pm.

The alternative to buying is renting and the average cost of renting a £150,000 house is now around £575.

That means a owning your own home through Joint Equity will cost you £2.60 more a day than renting and you have the security of your own home, no short term tenancy, the threat of termination, swinging rent rises, or over bearing landlords and agents.

And what is £2.60 a day?

Well its a cup of coffee, 3/4 of a pint of beer or 6 cigarettes – not a very high price is it really.

And don’t forget that £2.60 also means you own 50% of the house and will benefit from rises in value of the house.

So if the property rises in price by 6% per year you will earn £4,500 per year or £12.32 per day. Not a bad return for your £2.60 extra cost is it?

Brad Bamfield, CEO of Joint Equity, says “affordability is a combination of many things and the tragedy is that many of our Partners are turned down for a mortgage when the rent they are paying is similar to the mortgage costs. To me its affordable if the deposit is at an attainable level, the monthly costs are not too high a proportion of the income and the security is assured. Joint Equity delivers affordable homes.”