Shared-Equity Home- Ownership Recommendations for a Business Case

Transcription

1 Shared-Equity Home- Ownership Recommendations for a Business Case Prepared for Shared-Equity Working Group Date October 2013 Prepared by Emilio Ferrer eferrer@sphere.com.au

2 Document name: Shared-equity Home-Ownership Recommendations for a Business Case Version: 2 Prepared by: Reviewed by: Saritha Manickam, Phil Nott, and Emilio Ferrer Emilio Ferrer This report does not necessarily represent the views of the Shared Equity Homeownership Working Group or Regional Development Australia. T F W A L2, Abercrombie Street, Darlington NSW 2008

3 Contents 1 Executive Summary 2 2 Background Why Shared-Equity Home-ownership? Shared-equity Products 6 3 Shared-Equity Home Ownership Product General Principles Shared equity as a pathway to home ownership Shared-equity as another form of housing assistance Bank loans 10 4 Modelling: Affordability for Home Buyers 11 5 Modelling: Market Demand Methodology Eligibility Target Market Potential Demand 16 6 Modelling: Housing Developments Case Study Case Study Conclusion 20 7 Implementation Plan Operational Requirements Management Marketing Delivery Banks 23 8 Legal Requirements Co-ownership Agreement 24 9 Conclusion Appendix 1: Shared Equity Target Households for 16 Selected LGAs 27 Shared-equity Home-Ownership 1

4 1 Executive Summary Sphere has been commissioned by the Shared Equity Home-ownership Working Group (SEWG) (through funding by Regional Development Australia and others) to make recommendations for a business case for a Shared-Equity Home-ownership ( Shared-equity ) product in NSW. The SEWG has representation from Regional Development Australia, community housing providers, peak bodies in the housing and social services sector and the NSW Department of Planning and Infrastructure. This study defines the features of a Shared-equity product and provides analysis in terms of: Need for the product Operation Affordability for consumers Potential market demand Viability to deliver the Shared-equity product as part of housing developments undertaken by housing providers. Whilst each community housing provider will apply the scheme to suit their capacity, the framework for the scheme is: The non-residential partner will be a registered community housing provider. The mechanism for joint ownership will be a Tenants in Common title with a Co-ownership Agreement between the Home buyer and the Housing provider. Eligible Home buyers will have a maximum household income of $100,000 per annum and be currently renting. Legislative change to allow Home buyers under the proposed scheme to be eligible for the First Home Buyer Grant Scheme will be requested. Home buyers will be required to provide a 10% deposit on their share of the property. Home buyers will be required to obtain a bank loan on normal commercial terms. Home buyers will buy their proportion of the dwelling at market value. Home buyers will be able to own from 25% to 75% of the property and be allowed to increase their proportion of ownership over time if they wish to do so. Home buyers will pay Shared-equity rent to the Housing provider for the proportion of the dwelling they don t own. Housing providers will set Shared-equity rents at a subsidised level to ensure the total housing costs to the Home buyer (Mortgage repayments + Shared-equity rent + Home ownership costs) do not exceed 35% of household income. Costs associated with home ownership such as maintenance, insurance, council rates and body corporate fees - will be the responsibility of the Home buyer. However, these costs will Shared-equity Home-Ownership 2

5 be taken into consideration by the Housing provider when calculating the level of Sharedequity rent subsidy. If the Home buyer decides to sell the home, the capital gain or loss on the property will be shared between the Home buyer and the Housing provider in accordance to their share of ownership. Figure 1 summarises the operation of the proposed Shared-equity product. Figure 1: Proposed Shared-equity Scheme The proposed scheme offers the following advantages: It provides a pathway to home ownership for families and individuals on low to moderate incomes. It is simple to administer and implement. It is consistent with the services Community Housing Providers deliver in practice, it is another way of providing rent subsidies and tenancy management. It does not require special loan products from banks. The proposed scheme has been informed by modelling on: The impact of the Shared-equity product for prospective Home buyers in terms of affordability. The potential market demand for the product. The potential of the product to be delivered as part of housing developments undertaken by community housing providers. Shared-equity Home-Ownership 3

6 The study concludes that: In terms of affordability and sustainability for Home buyers, the proposed Shared-equity product would be most likely to be applied to: Households with incomes in the range $70,000-$100,000 p.a. Dwellings with prices under $400, % ownership of dwellings. Varying levels of Shared-equity rent subsidies according to individual circumstances and geographical areas. In terms of market demand for the proposed Shared-equity product, there is a large number of renters in NSW who would be eligible and are already paying rents which would cover the total housing costs of participating in the proposed Shared-equity scheme. Consequently, the demand risk of going ahead with the proposed product would be negligible. In terms of delivering Shared-equity homes as part of Housing provider developments, the inclusion of the product in the development mix would improve the viability of developments and allow greater affordable product 1 yield. However, this approach would mean lower ongoing portfolio surpluses than delivering affordable housing for rent only. 1 Affordable for rent + Shared equity dwellings Shared-equity Home-Ownership 4

7 2 Background 2.1 Why Shared-Equity Home-ownership? Government and community organisations in NSW provide a range of services to assist individuals and families confronted with the lack of affordability of the housing market. These services include: Specialist Homelessness Services to address the needs of people in immediate risk of homelessness. These services include refuges and temporary/transitional accommodation (where clients are placed in caravan parks, motels or dedicated housing until a more sustainable form of housing can be found). Public and social housing tenancies where tenants typically pay rents based on 25% of household income. Affordable housing tenancies where tenants pay rents up to 74.9% of market rent. Assistance for people renting in the private rental market in the form of interest free loans to pay for rental bonds. Potential assistance to buy homes through the First Home Owner Grant (New Homes) Scheme (currently $15,000) 2. Sydney is among the most unaffordable housing markets in the word. The 9 th Demographia International Housing Affordability Survey 3 placed it behind only Vancouver in Canada and Hong Kong when comparing the ratio of median house prices to median household gross annual pre-tax income in 337 locations. A ratio of 3 or less is seen as being affordable and any ratio above 5.1 is seen as highly unaffordable. Sydney s ratio was 8.3 in the third quarter of The high cost of both buying and renting homes in NSW (in particular in Sydney) means that many tenants in the rental market find it difficult, not only to afford mortgage repayments, but also to save enough money to have a deposit to buy a home. It also means that, in order to be able to buy a house, families sometimes have to move away from the areas where they work and where they have family support. As shown in Figure 2, a Shared-equity product would provide an opportunity to improve the continuum of available housing assistance. In particular it would provide a bridge from the private rental market to home ownership. This would improve the capacity of housing providers to provide assistance that best meets the individual circumstances of families and individuals. 2 This requires legislation to be changed as at present the Home Buyer would not be eligible to receive the grant as the Housing Provider partner is not a natural person. < 3 9 th Demographia International Housing Affordability Study, Demographia (Wendell Cox Consultancy), Illinois, USA and Performance Urban Planning, Christchurch, NZ, 2013 Shared-equity Home-Ownership 5

8 Figure 2: The Continuum of Housing Assistance 2.2 Shared-equity Products International Experience Shared-equity schemes were developed in the UK and US as an alternative to either renting or purchasing a house. They form part of the affordable housing offering and aim at bringing some of the benefits of home ownership to people who could not afford to purchase on the open market 4. The UK experience has built on the capacity of the housing associations. They have often benefited from an element of government subsidy through the Homes and Communities Agency and have been seen as a way of moving people who cannot afford to buy a house to full ownership over an extended period. Generally, the occupier buys at least 25% of the equity in a property and rents the balance from the housing association. There is also provision for these part owners to increase their ownership percentage as their finances improve. This is known as staircasing. However, there have been problems, especially following the GFC where many owners now find themselves with negative equity and where their incomes have not risen enough to allow them to increase their ownership level. The restrictions on renting their houses and selling their share have also reduced the support for the approach. The US model has a slightly different focus 5. It has been more concerned with retaining the housing stock indefinitely and in striking a fair balance between the interests of the community and the occupier. It has tended to involve smaller proportions of equity than in the UK and to place more restrictions on the part owner. Though these part owners have tenure, the restrictions on resale are designed to ensure that these houses remain affordable after many resales. 4 See 5 The Changing Landscape of Resale Restricted, Owner Occupied Housing, John Emmaus Davis, National Housing Institute, New Jersey, 2006 Shared-equity Home-Ownership 6

9 2.2.2 Australian Experience Governments outside NSW The Western Australian Government has the best developed affordable housing scheme in Australia 6. It has delivered 11,000 Shared-equity loans since 1984 and currently has a $550 million loan book. These loans are funded by private sector loans through WA Treasury Corporation. It is integrated into the Department of Housing s activities and provides a mortgage of up to 30% of the purchase price of properties built by the Department with the balance funded by the purchaser from a bank or other commercial source. It requires only a low deposit ($2,000 or 2% of the purchase price) and is aimed at individuals earning up to $70,000 and families up to $90,000 a year. The salary limit for individuals and families is set at $110,000 in the North West of the State. The South Australian model has a highly integrated approach based on its HomeStart Finance operation which was established in It provided loans worth $289 million in A normal loan mortgage is provided by the Government owned HomeStart lending operation. It can be used to purchase existing houses. This is very competitive with private lenders and requires a low 3% deposit. It can be supplemented by $30,615 for borrowers earning less than $40,000 after tax by an Advantage loan which charges interest equal to CPI (refunded if it is repaid within 5 years). An interest only Breakthrough Loan of up to 35% of the purchase price is also available from the Government. This is repayable with a betterment factor of 1.4 on sale of the property. A Wyatt loan provided by the Wyatt Benevolent Institution is also available for borrowers earning less than $40,000 after tax (or up to $50,000 with dependents) a year to pay for the deposit and transaction costs. It is interest and repayment free for five years and is then added to the HomeStart loan. Various first home buyer incentives are also available. Tasmania operates the HomeShare scheme where ownership is shared with the Director of Housing 8. Various eligibility criteria apply which take account of household composition and income. For example, a family with two adults and two children cannot earn more than $82,832. A deposit of $3,000 is required and purchasers are required to borrow as much as they can with the Director of Housing buying up to 25% with a maximum payment of $50,000. It can be used for new or existing homes. The Northern Territory also offers a home loan package 9. This was restructured in 2012 as HomeBuild Access loans and can be used for new dwellings where construction started after 1 January There are two products on offer. Both have limits on eligible purchase prices. 1. A Low Deposit loan where the borrower obtains 80% of the purchase price from the TIO which is owned by the Government and offers loans, insurance, and motor accident compensation on commercial terms but with low transaction costs. Up to 17.5% of the purchase price is also available as a HomeBuild Access loan where subsidised interest rates are available subject to income and asset tests. 2. A Subsidised Interest Rate Loan is also available subject to income and asset tests. A Fee Assistance loan is also offered to cover up to $10,000 of transaction costs, whitegoods, etc. The Western Australian and Queensland Governments also have Shared-equity schemes designed to assist social housing tenants purchase their homes Australian Experience Private Organizations The Rismark-Bendigo Bank Equity Finance Mortgage was launched in It is not currently available but offered loans of up 20% of a property s value on an interest only basis for up to 25 years but with the lender entitled to up to 40% of any capital gain when the loan is repaid. Interestingly, the lender shares any capital loss in proportion to its percentage ownership at the time of sale. 6 See 7 See 8 See 9 See 10 See Shared-equity Home-Ownership 7

10 A number of other private organizations have attempted to offer Shared-equity home ownership products. These have generally looked to investors to provide the capital not funded by the resident partner. These have not been successful. Failures have generally been attributed to the difficulty of generating attractive returns while still making the proposition affordable and to resistance from lending institutions when asked to fund unfamiliar loan products New South Wales The NSW Government does not currently offer a Shared-equity product. However, it did offer a loan product aimed at people who could not borrow from commercial lenders between 1986 and Under its Homefund scheme the government borrowed funds from commercial lenders and then lent those funds to home buyers at fixed rates of 12% to 15.8% for 25 to 30 years 11. Some interest was initially capitalised and repayments increased at 6% each year. This proved unsustainable and the scheme became a disaster for many of those involved. It must be pointed out that the scheme described in this study will have as a primary principle that consumers are not put in a position where, in order to achieve home ownership, they have to borrow more than they can afford to repay (i.e. there will be no interest capitalisation or even interest only periods). The scheme will require home buyers to meet normal commercial lending requirements in respect to their share of ownership. 11 A History of Homefund, Greg Kirk, Public Interest Advocacy Centre, PIAC Bulletin No 13, June 2001 Shared-equity Home-Ownership 8

11 3 Shared-Equity Home Ownership Product This section will outline the characteristics of the proposed Shared-equity product. This section will use the following terminology. Home buyer : the dwelling occupier purchasing a share of the dwelling. Housing provider : the organisation owning the balance of the dwelling. Shared-equity rent : a regular payment from the home buyer to the Housing provider representing rent on the proportion of the property owned by the Housing provider. Shared-equity rent subsidy : The difference between market rent and Share equity rent adjusted by home ownership costs incurred by the Home buyer for the portion of the dwelling they don t own. 3.1 General Principles In designing the product the following framework has been used: The scheme should offer a pathway to home ownership for people on low to moderate incomes taking into consideration the affordability of total hosing costs. In particular, home buyers should not borrow beyond their capacity to meet mortgage repayments. The non-residential partner in the scheme will be an organisation (typically a registered housing provider) which has as an objective providing housing assistance and is a registered charitable institution. The product should be simple and inexpensive to administer. The product should carry minimum financial risks to the Housing provider. The implementation of the product should not be dependent on banks providing special Shared-equity loans. Banks should lend to Home buyers on standard housing loan terms and conditions. Home buyers will buy their proportion of the dwelling at market value. Home buyers will be able to increase their share of ownership over time, if they wish to do so. The Housing provider will set Shared equity rents taking into consideration the capacity of the Home buyer to meet overall housing costs. If the Home buyer decides to sell the home, the capital gain or loss of the property will be shared between the home buyer and the Housing provider in accordance to their share of ownership. In that case the Housing provider will be able to recycle their capital investment on another Shared-equity property. Shared-equity Home-Ownership 9

12 3.2 Shared equity as a pathway to home ownership In order to ensure that the product provides assistance to people on low to moderate income it is recommended that the following eligibility criteria for prospective Home buyers be placed on the scheme: Home buyers will have a maximum household income of $100,000 per annum. Home buyers will be currently renting. If the NSW Government agrees to change legislation, Home buyers would be eligible for the First Home Plus One Scheme. 3.3 Shared-equity as another form of housing assistance Under Shared-equity schemes, home buyers are normally subject to three types of costs. Mortgage repayments. Rent payable to the non-residential partner for the proportion of the property they don t own (Shared-equity rent). Cost associated with home ownership including maintenance, insurance, council rates and body corporate fees. It is recommended that the scheme have the following features. No subsidy will be provided to mortgage repayments. Home buyers will be responsible for all dwelling costs associated with home ownership. Shared-equity rent will be subsidised. It will be set at a level which takes into consideration the household income as well as the costs associated with home ownership. For example Shared-equity rent could be set so that the Home buyer s total housing costs do not exceed 35% 12 of household income. Consequently, under the proposed scheme, Home buyers are assisted through: The First-Home Buyers Grant if legislation is changed. A rent subsidy for the proportion of the property they don t own to ensure overall housing costs are affordable. 3.4 Bank loans To ensure that banks provide debt for Home buyers, it is proposed that properties be jointly bought by Home buyers and Housing providers as tenants in common. This mechanism for joint ownership is commonly used and banks already provide loans on this basis. It is also proposed that Home buyers provide a 10% deposit on their share of ownership (i.e. if their share of ownership is 50%, Home buyers will provide 5% of the dwelling cost, if their share is 25%, they will be provide 2.5% of the dwelling cost, etc.). Potentially, the Housing provider might also carry some debt on their share or ownership this would depend on the mechanism by which the dwelling has been procured (e.g. though a development with residual debt). Consequently, being able to obtain a bank loan on normal commercial terms should be part of the eligibility criteria for Home buyers to enter the scheme. 12 The usual 30% threshold has been increased to 35% to take into account home ownership costs. Shared-equity Home-Ownership 10

13 4 Modelling: Affordability for Home Buyers In this section analysis is provided to illustrate the affordability of the proposed product for Home buyers. Modelling has been performed to assess the affordability of the product for different levels of household income. Under each scenario modelled it has been assumed that the Home buyer s housing costs (including home ownership costs 13 ) will be 35% of household income 14.. Each scenario varies the loan interest rates (6% and 9% are tested) and the rent subsidy provided on the share owned by the Housing provider (subsidies of 25.1%, 50% and 75% are tested 15 ). The tables below show the qualifying household annual income to meet these affordability constraints whilst varying dwelling price ($300,000, $400,000 and $500,000 are tested) and Home buyer share of ownership (25%, 50% and 75% are tested). The tables below also show the required savings required by the Home buyer to meet the deposit requirements (without the First Home Buyers Grant). In the case where household income would exceed $100,000 in order to meet the affordability constraints, the table shows Ineligible. Figure 3: 6% Interest Rate, rent set at 74.9% of market rent, 35% housing costs as a proportion of income Figure 4: 9% Interest Rate, rent set at 74.9% of market rent, 35% housing costs as a proportion of income 13 These costs might include council rates, strata fees, maintenance and insurance. 14 In practice, the actual rent policy will be determined by the each housing provider. 15 Corresponding to rents set at 74.9%, 50% and 25% of market rent, respectively. Shared-equity Home-Ownership 11

14 Figure 5: 6% Interest Rate, rent set at 50% of market rent, 35% housing costs as a proportion of income Figure 6: 9% Interest Rate, rent set at 50% of market rent, 35% housing costs as a proportion of income Figure 7: 6% Interest Rate, rent set at 25% of market rent, 35% housing costs as a proportion of income Figure 8: 9% Interest Rate, rent set at 25% of market rent, 35% housing costs as a proportion of income In summary: We estimate that the minimum household income to enter the scheme would be in the range $36,000-$40,000, depending on interest rates. These Home buyers would be able to purchase homes up to $300,000 and would need to have their share equity rents highly subsidised (by 75% of market rent). They would only be able to own up to 25% of the homes. These Home buyers would need to have savings of $7,500 to meet deposit requirements. Households in the $70,000-$100,000 income range would be able to purchase homes up to $400,000 with a share of ownership up to 50% in most instances (the only exception in the scenarios modelled is where the rent subsidy is only 25.1% and the loan interest rate is 9%). These Home buyers could own up 75% of the homes in dwellings with prices up to $300,000 and more expensive dwellings with a lower share of ownership. These Home buyers would need savings up to $25,000 to meet deposit requirements. Shared-equity Home-Ownership 12

15 In general, $500,000 homes could only be purchased under the scheme with a low share of ownership (25%). These Home buyers would need savings of $22,500 to meet deposit requirements. It can therefore be concluded that in terms of affordability for Home buyers, the product would realistically apply to: Households with incomes in the range $70,000-$100,000 p.a. Dwellings with prices under $400, % ownership of dwellings. Varying levels of Shared-equity rent subsidies according to individual circumstances and geographical areas. Shared-equity Home-Ownership 13

16 5 Modelling: Market Demand This section will analyse 2011 Australian Bureau of Statistic Census data to estimate the size of the potential market for the Shared equity product. 5.1 Methodology Data analysis has been performed looking at two key indicators: Eligible households: defined as rental households with incomes below $104, p.a. Target household: defined as rental households with incomes below $104,000 p.a. currently paying rents which would already cover the total housing cost associated with participation in the Shared-equity Scheme 17. Therefore, Target household represents families and individuals who would be able to participate in the Shared-equity scheme without increasing their current housing costs. The definition of Target household varies depending on the dwelling price, the Home buyer s share of ownership and the level of Shared-equity rent subsidy. 5.2 Eligibility The 2011 ABS Census shows that there were 491,774 rental households with incomes below $104,000 p.a. in NSW Figure 9 shows the proportion of eligible households for different family types. Figure 9: Family Composition of Eligible Households Figure 10 shows the top ten local government areas (LGAs) in NSW ranked by the total eligible number of households. 16 $104,000 p.a. income has been chosen as the closest ABS Census category to the $100,000 eligibility threshold. 17 Housing costs: Mortgage repayments+ Shared equity rent + Home ownership costs. Shared-equity Home-Ownership 14

17 Figure 10: LGAs with highest number of eligible households in NSW Rank LGA Single Couple with children Couple without children One parent family 1 Sydney 6, , ,994 2 Blacktown 1,211 4,099 1,514 2,186 10,143 3 Parramatta 1,646 2,706 1, ,207 4 Newcastle 1,745 1,353 1, ,843 5 Wollongong 1,496 1,718 1,233 1,184 6,572 6 Randwick 2,097 1,068 1, ,320 7 Penrith 1,234 2,049 1,034 1,340 6,276 8 Sutherland Shire 1,789 1,459 1, ,885 9 Canterbury 776 2,257 1, , Gosford 1,192 1,744 1,067 1,110 5,708 Total 5.3 Target Market This section analyses how the number of Target households in NSW changes as the following assumptions change: Dwelling price ($300,000, $400,000 or $500,000). Home buyer s share of ownership (25%, 50% or 75%). Level of Shared-equity rent subsidy (Low 25.1%, Medium 50%, High 75%). Figure 11 shows the number of Target Households in NSW. In the case where Home buyers take a 50% ownership share and Shared-equity rent is subsidised by 50% (medium): For a dwelling price of $300,000, there would be at around 170,000 Target households who could immediately benefit from the proposed Shared-Equity Scheme. For a dwelling price of $400,000, there would be at around 70,000 Target households. For a dwelling price of $500,000, there would be at around 25,000 Target households. Figure 11: Target Households in NSW This analysis can be reproduced at the local level. For example, Figure 12 shows the number of Target Households in the Kogarah LGA. In the case where Home buyers take a 50% ownership share and Sharedequity rent is subsidised by 50% (medium): Shared-equity Home-Ownership 15

18 For a dwelling price of $300,000, there would be at around 2,500 Target households who could immediately benefit from the proposed Shared-Equity Scheme. For a dwelling price of $400,000, there would be at around 900 Target households who could benefit from the Shared-equity scheme. For a dwelling price of $500,000, there would be at around 250 Target households who could benefit from the Shared-equity scheme. Figure 12: Target Households in Kogarah Appendix 1 contains graphs showing the number of Target households in 16 selected Local Government Areas across urban, rural and regional NSW. 5.4 Potential Demand The analysis in this section shows the demand for the Shared-equity product would be high, both in terms of eligibility and in terms of families and individuals who could be part of the scheme without increasing their current housing costs. By changing the share of ownership of Home buyers and the level of Shared-equity rent subsidy delivered by housing providers, the product could easily match the individual circumstances of Home buyers across different geographical locations. In practice, it is clear that the number of dwellings which could be offered under the Shared-equity scheme could only deliver homes for a small proportion of this demand. Even if 1,000 Shared-equity dwellings could be delivered each year, it can be concluded that the demand risk would be negligible. Shared-equity Home-Ownership 16

19 6 Modelling: Housing Developments This section will provide financial analysis of two case studies to illustrate how the Shared-equity product could be used as part of a development conducted by a housing provider. These case studies are based on projects currently in the pipeline of Sydney based community housing providers. Housing provider developments aim at growing affordable housing and usually deliver new dwellings targeting a mixed of housing tenures. These usually include: Social housing: targeting tenants who pay rents based on 25% of their income. In the case where the land in the development contains existing public housing, there will normally be an expectation that the existing public housing is at least replaced. Affordable rental housing: targeting tenants who pay rents up to 74.9% of market rent. Private housing for sale. The revenue from these sales is used to contribute toward the cost of producing the social and affordable housing above. In the case studies examined, analysis will be provided to determine the impact of delivering a mix of affordable (for rent) and Shared-equity dwellings. The modelling examines three scenarios in terms of dwellings delivered by the development. Scenario 1: a mix of public (if required), affordable (for rent) and private dwellings (if required to fund the project). Scenario 2: a mix of public (if required), affordable for rent, Shared-equity and private dwellings (if required to fund the project). Scenario 3: a mix of public (if required), Shared-equity and private dwellings (if required to fund the project). In scenarios containing Shared-equity dwellings, results are given for 25%, 50% and 75% shared ownership and a Shared-equity rental subsidy of 50% is assumed in all scenarios. Under each scenario the modelling maximises the production of affordable (for rent) and/or Shared-equity dwellings with the constraint that the development must deliver a surplus (i.e. it must be viable with no outstanding debt at the end of the development). The modelling the estimates: Number of dwellings delivered for each tenure type. The development surplus. The annual surplus generated by the rental 18 portfolio. 6.1 Case Study Project Scope A housing provider will undertake a development in land owned by the NSW Land and Housing Corporation with 10 existing public housing dwellings. The development will deliver 30 new units with a mix of 1-bedroom, 18 Including Shared-equity rent, if applicable. Shared-equity Home-Ownership 17

20 2-bedroom and 3-bedroom units. The development must replace the existing 10 public housing dwellings. The remaining 20 dwellings can be a mix of affordable housing for rent, Shared-equity dwellings and private dwellings for sale. The NSW Government is contributing $7.2 million towards development costs but the development must pay $3.6 million to the Government for the land. The remaining costs of the project will be funded through a development loan at 7.5% pa. The average construction cost per dwelling is $210,000. Additionally the project has $300,000 in planning costs and $142,000 in infrastructure and demolition costs. The average estimate price of private sales is $430, Project outcomes Scenario 1: Public housing dwellings are replaced, remaining dwellings are a mix of affordable housing (for rent) and private sales. Affordable Rental Dwellings Annual Surplus from Affordable Rental Dwellings Annual Surplus from Shared Equity Rental Dwellings Shared Equity Development Total Annual Dwellings Private Sales Surplus Surplus No Shared Equity $ 13,598 $ 147,186 - $ 147,186 Under this scenario: It is estimated that 7 dwellings would have to be sold in the private market to make the project feasible and 13 dwellings would be delivered as affordable housing for rent. The estimated annual surplus generated by the portfolio, once operational is around $147,000 per annum. The estimated development surplus is around $14,000. Scenario 2: Public housing dwellings are replaced, remaining dwellings are a mix of affordable housing (for rent), Shared-equity dwellings and private sales. Affordable Rental Dwellings Shared Equity Dwellings Private Sales Development Surplus Annual Surplus from Affordable Rental Dwellings Annual Surplus from Shared Equity Rental Dwellings Total Annual Surplus Shared Equity 25% Ownership $ 13,855 $ 77,692 $ 49,160 $ 126,852 Shared Equity 50% Ownership $ 61,525 $ 96,825 $ 34,132 $ 130,957 Shared Equity 75% Ownership $ 95,525 $ 116,344 $ 20,353 $ 136,697 Under this scenario: It is estimated that up to 5 dwellings would have to be sold in the private market to make the project feasible and between 13 and 20 dwellings would be delivered as affordable housing for rent + Shared equity dwellings. The annual surplus generated by the portfolio once operational is estimated in the range $127,00-$137,000 per annum. The estimated development surplus is in the range $14,000-$95,000. Shared-equity Home-Ownership 18

21 Scenario 3: Public housing dwellings are replaced, remaining dwellings are a mix of Shared-equity dwellings and private sales. Affordable Rental Dwellings Shared Equity Dwellings Private Sales Development Surplus Annual Surplus from Affordable Rental Dwellings Annual Surplus from Shared Equity Rental Dwellings Total Annual Surplus Shared Equity 25% Ownership $ 63,525 - $ 102,705 $ 102,705 Shared Equity 50% Ownership $ 1,265,525 - $ 81,411 $ 81,411 Shared Equity 75% Ownership $ 3,545,525 - $ 40,706 $ 40,706 Under this scenario: It is estimated up to 3 dwellings would have to be sold in the private market to make the project feasible and between 17 and 20 dwellings would be delivered as Shared equity dwellings. The annual surplus generated by the portfolio once operational is estimated in the range $41,000-$102,000 per annum. The estimated development surplus is in the range $64,000-$3.5 million. 6.2 Case Study Project Scope A housing provider has received a land donation with a potential housing yield 120 units. This case study only considers the first stage of the development with a yield of 40 units with a mix of 1-bedroom, 2-bedroom and 3- bedroom units. The new dwellings can be a mix of affordable housing for rent, Shared-equity dwellings and private dwellings for sale. Development cost for the project will be funded through a development loan at 7.5% pa. The average construction cost per dwelling is $180,000 per dwelling. Additionally the project has $190,000 in planning costs and $100,000 in infrastructure and demolition costs. The average estimate price of private sales is $440, Project Outcomes Scenario 1: Developed dwellings are a mix of affordable housing (for rent) and private sales. Affordable Rental Dwellings Annual Surplus from Affordable Rental Dwellings Annual Surplus from Shared Equity Rental Dwellings Shared Equity Development Total Annual Dwellings Private Sales Surplus Surplus No Shared Equity $ 39,714 $ 259,637 - $ 259,637 Under this scenario: It is estimated that 20 dwellings would have to be sold in the private market to make the project feasible and 20 dwellings would be delivered as affordable housing for rent. The annual surplus generated by the portfolio once operational is estimated at around $260,000 per annum. The estimated development surplus is around $40,000. Shared-equity Home-Ownership 19

22 Scenario 2: Developed dwellings are a mix of affordable housing (for rent), Shared-equity dwellings and private sales. Affordable Rental Dwellings Shared Equity Dwellings Private Sales Development Surplus Annual Surplus from Affordable Rental Dwellings Annual Surplus from Shared Equity Rental Dwellings Total Annual Surplus Shared Equity 25% Ownership $ 73,819 $ 142,507 $ 85,472 $ 227,979 Shared Equity 50% Ownership $ 148,492 $ 169,838 $ 68,619 $ 238,457 Shared Equity 75% Ownership $ 298,664 $ 205,370 $ 42,866 $ 248,236 Under this scenario: It is estimated up to 17 dwellings would have to be sold in the private market to make the project feasible and between 23 and 33 dwellings would be delivered as affordable housing for rent + Shared equity dwellings. The annual surplus generated by the portfolio once operational is estimated in the range $228,000-$248,000 per annum. The estimated development surplus is in the range $143,000-$205,000. Scenario 3: Developed dwellings are a mix of Shared-equity dwellings and private sales. Affordable Rental Dwellings Shared Equity Dwellings Private Sales Development Surplus Annual Surplus from Affordable Rental Dwellings Annual Surplus from Shared Equity Rental Dwellings Total Annual Surplus Shared Equity 25% Ownership $ 95,981 - $ 186,250 $ 186,250 Shared Equity 50% Ownership $ 307,844 - $ 188,764 $ 188,764 Shared Equity 75% Ownership $ 4,712,844 - $ 94,382 $ 94,382 Under this scenario: It is estimated up to 13 dwellings would have to be sold in the private market to make the project feasible and between 27 and 40 dwellings would be delivered as Shared equity dwellings. The annual surplus generated by the portfolio once operational is estimated in the range - $94,000 -$186,000 per annum. The estimated development surplus is in the range $95,000-$4.7 million. 6.3 Conclusion Modelling in both case studies shows that the inclusion of Shared equity dwellings in the development mix: Improves the viability of the developments. Allows a greater total affordable product yield (i.e. affordable (for sale) dwellings + Shared equity dwellings). Results in lower ongoing portfolio surpluses than delivering affordable housing for rent only. The above factors are exacerbated as the ownership share of Home buyers increase. Consequently, it can be concluded that: It is highly realistic that the Shared equity product could be used as part of the dwelling mix of Housing provider developments. Shared-equity Home-Ownership 20

23 The limits on how many Shared equity dwellings can be included in a development will be driven by the potential need for operational surpluses to services debt. In general, affordable housing for rent is more financially advantageous as it delivers higher operational surpluses. Shared-equity Home-Ownership 21

24 7 Implementation Plan This plan is based on the actions required by an individual housing provider that decided to implement the Shared-equity Scheme as part of the product it offers to provide housing assistance. 7.1 Operational Requirements The community housing provider would identify dwellings that were suitable for the Shared-equity Scheme as part of its development and procurement program. Criteria for suitability would include: New dwellings or dwellings in good repair. Located in areas with mixed housing types (no more than 30% of the dwellings in the immediate area should be rented as social or affordable housing). Located in areas with relatively affordable housing prices. Moderate housing demand. The Shared-equity product would be offered as another product of the housing provider. In practice this product would act as another form of subsidised rent. Its aim would be clearly stated as being to provide a path towards full home ownership. Its existing tenants would be given priority but the product would also be available to tenants renting from other housing providers or in the private market. It is very likely that a waiting list for prospective buyers would need to be established. The Shared-equity product would be offered using standard legal documents so as to reduce the start-up costs for the Home buyers. However, they would be required to arrange their own legal advice possibly selecting a solicitor from a panel of practitioners who had agreed to cap their fee and arranged by the NSW Federation of Community Housing Associations. 7.2 Management The Shared-equity product should require less management than other types of community housing, as the Home buyer would be accepting responsibility for many of the functions usually carried out by the community housing provider and there should be very low turnover. However, it would require some management input. This would include: Identifying the Home buyer. Preparing and executing the legal agreements. Regularly monitoring the Home buyers performance under the Deed of Shared-equity and intervening if required. Managing step-up where it is initiated by the Home buyer. Sale of the dwelling either a sale by the Home buyer to release its equity ideally for use in purchasing another dwelling with the subsequent need to start the process again or to use Shared-equity Home-Ownership 22

25 the dwelling in some other way or by way of the residential owner purchasing the housing provider s remaining equity. These tasks are very similar to tasks carried out by the community housing providers in their current business of acquiring, renting, and maintaining rental housing. They will represent an incremental increase in the work of their existing operations. 7.3 Marketing The key marketing task will be attracting potential Home buyers. These will come from two sources: the housing provider s existing tenants and the general renting public. It should widely canvas its intention to begin offering a Shared-equity housing scheme in its in-house publications. Themes here would include: The role of Shared-equity housing as a stop on a continuum of services that starts by offering assistance to the homeless through its focussed social housing offerings, through encouragement to find employment with a move to affordable housing, and now on to Shared-equity which is a pathway to full home ownership. The financial issues how the costs of a shared ownership compare with affordable and market rentals, how step up works as people s family income increases, and the capital gains available to the Shared-equity participant and the way that provides a way to trade up to full ownership with its retention of all the capital gain. Case studies showcasing the success stories of long term tenants. As shown in Chapter 5, demand for the Shared-equity product is likely to be much greater than the capacity of housing providers to deliver Shared-equity properties. Consequently, it is envisaged that only a small amount of resources would have to be dedicated to marketing the Shared-equity product. 7.4 Delivery The first key decision that each participating housing provider will need to make is the scale of its participation. It would seem sensible for it to start small and gradually increase the proportion of its properties available for Shared-equity disposal as it gains experience and its successes become more widely known. The small scale start is probably best managed through a mix of one off market purchases and the inclusion of Shared-equity dwellings in its own mixed developments. The extent to which the Shared-equity product can be included as part of developments would clearly depend on the individual characteristics of each project. 7.5 Banks The proposed tenants in common ownership method is already familiar to banks. This together with the requirement to provide a 10% deposit should allow Home buyers to obtain loans without impediment. However, it would be important for Housing providers to explain to local bank relationship managers the features of the Shared-equity Scheme to confirm that banks regards this kind of loan as normal tenants in common mortgages and to be able to direct Home buyers to institutions that will provide loans on that basis. Shared-equity Home-Ownership 23

26 8 Legal Requirements The Shared-equity structure proposed in this study is squarely aimed at providing a pathway to home ownership for low to moderate income families. Other structures have been proposed with different objectives for example, the Community Land Trust Model 19 can be structured to limit the capital gains made by the Home buyer and so allow much of the subsidy in the Shared-equity model to be recycled to future Home buyers. The model of Shared-equity ownership described in this study is based on the parties, the Home buyers and Housing provider being tenants in common. In Australia this concept of shared ownership is well understood and available in all legal jurisdictions. It allows the partners to have unequal shares and to deal with their shares independently and at different times. The more common use of this ownership structure is where the parties live in the dwelling and have essentially equal rights and responsibilities. The features of tenants in common arrangements include: 1. The interest in the land of each tenant in common is separate and distinct from the other. 2. There can be several owners as tenants in common all with different shares. 3. All tenants in common are entitled to physical possession of the whole property 4. Tenants in common can each deal with third parties as to their share as a separate owner, generally without the need for other co-owner s consent. 5. Tenants in common can acquire their interests at different times and from different people. 6. Each tenant in common is free to sell or otherwise deal with their interest in a property at any time 20. Under a Shared-equity scheme it would be essential for sales contract to be accompanied by a Co-ownership Agreement that outlined the responsibilities of the parties and any restrictions on dealing with their ownership shares. In particular the agreement should stipulate arrangements and place restriction on points 4, 5, 6 and 7 above. 8.1 Co-ownership Agreement Matters covered in the Agreement should include: Sole occupancy rights for the Home buyer. Maintenance obligations for the Home buyer it is recommended that the Home buyer be solely responsible for maintenance (with a right of regular inspection for the Housing provider and step in rights in specified circumstances). Obligations of the Home buyer responsibility for insurance, rates, body corporate fees, etc. but with step in rights for the Housing provider if these responsibilities are not met. Arrangements for payment for the use of the Non-Resident Partner s share of the property it is recommended that the Home buyer pays rent on that portion of the property on a similar basis to the affordable housing rentals charged by that housing provider. 19 The Australian Community Land Trust Manual, Louise Crabtree, et al, University of Western Sydney, February Shared-equity Home-Ownership 24

27 Options for the Home buyer to step up by paying for some or all of the Housing provider s share of the property at its market value at the time of the step up this could be done incrementally or in one step. The right of the Housing provider to nominate a party to acquire the Home buyer s portion of the property (while it is less than 100%) when the Home buyer elects to sell its interest at its market value the Co-ownership Agreement would lapse away once the Home buyer became the sole owner. Dispute resolution procedures initially through the Housing provider s usual dispute resolution system with appeal rights to the Consumer, Trader, and Tenancy Tribunal. The associated terms required to regulate relations between the parties. It is recommended that a solicitor be engaged to draft a standard document so as to minimise transaction costs. That document would be suitable for used throughout NSW by any community housing provider that wanted to offer Shared-equity arrangements. Shared-equity Home-Ownership 25

28 9 Conclusion In summary, this study concludes that: The proposed Shared equity product could be implemented in a simple and inexpensive way. The legal requirement for the implementation of the Scheme would be minimal. This would be achieved by using Tenants in Common titles and a Co-ownership agreement between the Home buyers and the Housing provider. Banks would be likely to lend to Shared-equity home buyers without impediment using existing residential loan arrangements. Housing providers would incur minimum financial risks by participating in the Scheme. In fact, from the Housing provider s perspective, the product is just another form of tenancy assistance and rental subsidy provision. By setting Shared equity rent subsidies at the right levels, the product could be implemented without causing housing stress for Home buyers. There would be high demand for the product across NSW. The product could easily be delivered as part of housing developments undertaken by housing providers. Substituting Affordable housing for rent with Shared equity dwellings would make developments more viable necessitating less private sales. However, this would mean lower levels of surpluses once the developments became operational. The proposed Scheme would highly benefit form legislative change allowing Home buyers who buy a property with a Housing Provider to be eligible for the First Home Buyer Grant Scheme. Shared-equity Home-Ownership 26

29 10 Appendix 1: Shared Equity Target Households for 16 Selected LGAs Figure 13: Blacktown Figure 14: Fairfield Shared-equity Home-Ownership 27

30 Figure 15: Auburn Figure 16: in Parramatta Shared-equity Home-Ownership 28

31 Figure 17: Hornsby Figure 18: Hurstville Shared-equity Home-Ownership 29

32 Figure 19: Liverpool Figure 20: Wyong Shared-equity Home-Ownership 30

33 Figure 21: Newcastle Figure 22: Maitland Shared-equity Home-Ownership 31

34 Figure 23: Wollongong Figure 24: Shoalhaven Shared-equity Home-Ownership 32

35 Figure 25: Dubbo Figure 26: Wagga Wagga Shared-equity Home-Ownership 33

36 Figure 27: Coffs Harbour Figure 28: Tweed Shared-equity Home-Ownership 34