Latest housing research: is shared ownership truly more affordable than private renting?

Houses vs flats

It is true to say that much of the adverse feedback related to flats rather than houses, and centres on issues such as remediation of building safety defects, the corresponding increases in service charges and buildings insurance for blocks of flats, as well as “wider concerns about leasehold tenure”, as this study rightly highlights.

These issues are not specific to the shared ownership product, nor do they affect the roughly 60% of shared ownership stock comprising houses. Notably, in London, where affordability issues are most acute, 82% of shared ownership homes are flats.

It is true that mortgage costs and service charges have risen for all homeowners in recent years, particularly those with leasehold flats in high-rise buildings, alongside a general rise in the cost of living. The rent payable by shared ownership leaseholders on the landlord’s retained equity has also increased with high rates of inflation over recent years.

Yet rents in the private rented sector have risen just as sharply, as the supply of available rented homes continues to shrink. Many individual landlords are leaving the sector, citing changes in tax rules, energy efficiency regulation and forthcoming reform of renters’ rights. This report provides an insightful, objective and evidence-led comparison of the long-term cost differential between these tenures, using extensive industry loan-level datasets.

Although many private renters may not satisfy the affordability or eligibility criteria for shared ownership, those who do will, according to this study, be highly likely to be significantly better off financially after one, five and 10 years. By year 10, the report concludes that shared ownership would cost less than renting in 93% of local authority areas, and 98% of “high-rent” local authority areas where rental payments make up over 30% of average household income.

Benefits of homeownership

Moreover, after 10 years, shared owners are estimated to be on average £29,000 better off than private renters in terms of equity growth, with this figure rising to £42,000 in London.

This estimate was produced by the model despite the authors using very conservative assumptions of no house price growth in the first five years (to offset any new build premium paid by the shared owners), house price growth being pegged to the Consumer Price Index for years six to 10, and after offsetting the notional return that a private renter would have received if they had invested a sum equivalent to the deposit paid by a shared owner.

In both income and capital terms, the differences are stark. Shared ownership tenants pay less per year than private renters (in the vast majority of cases, and after service charges and repair costs have been taken into account), and since a proportion of those payments goes towards amortising their mortgages, the growth in their equity even without any house price inflation is significantly higher.

The report concludes that shared ownership providers do frequently mention the benefits of homeownership in terms of “avoiding constantly inflating rents” and “the added bonus of capital appreciation”, but that “having provided an initial assessment, what most if not all providers don’t do is to plot out in relation to key metrics how shared ownership performs in relation to private renting over time and by local authority area”.

While this conclusion isn’t groundbreaking and shouldn’t come as a surprise, it is nevertheless a timely reminder of the long-term cost benefits of the shared ownership product for leaseholders. Registered providers that are not already doing so might well consider drawing on the datasets available to provide locally adjusted evidence-based cost comparisons so that prospective shared ownership purchasers can make better-informed decisions and overcome perceived concerns as to escalating costs or value for money.

Shared ownership remains the government’s key product for delivering new properties for sale, so remains important for meeting its housebuilding target. In discussing the product, it is also important to remember the large number of existing shared owners who quite rightly need and want the product to remain viable and supported in the market. This analysis provides some helpful context to the discussion.

Suzanne Benson, national head of real estate at Trowers and Hamlins, and Thinkhouse Editorial Panel member