For those readers of a certain age, it will be a sobering thought that the right-to-buy scheme (RTB) has been with us for more than a quarter of a century. Introduced in 1980, it is an enduring legacy of the first of Margaret Thatcher’s three Conservative administrations. It has not been without its critics or criticisms but, as we shall see, it has proved to be a highly successful and popular piece of social legislation.
Despite speculation about its demise under the Labour government that came to office in 1997, the present administration has given its unequivocal backing to the principle of the scheme. The Office of the Deputy Prime Minister (ODPM) – the department responsible for its administration – holds to the view that RTB ‘contributes to the government’s aim of a decent home for all, offering everyone the opportunity of a decent home and so promote social cohesion, well-being and self-dependence.’
Achieving aspirations
The scheme is open to virtually any qualifying tenant who can afford to buy. Exceptions include properties occupied by tenants as part of their employment, e.g. police officers, and housing specifically provided for elderly people and, in some cases, those with disabilities. Since its launch, it has helped 2.2 million qualifying tenants in Great Britain to achieve their aspiration of home ownership. Of these, 1.6 million reside in England. According to the ODPM, this has helped create more stable, mixed income communities by encouraging better-off tenants to remain in their original neighbourhoods.
A further benefit identified by the ODPM is the £45 billion generated through sales of local authority dwellings. Much of this enormous sum has been used to repay public debt and also to finance new capital expenditure projects.
To qualify for the scheme a person must be a ‘secure’ tenant either of a local authority, a Housing Action Trust, a non-charitable housing association or any other registered social landlord. However, ‘assured’ tenants of a registered social landlord, such as a housing association, do not usually qualify. They only do so if they were previously a secure tenant of a local authority and became an assured tenant after responsibility for their dwelling was transferred to a registered social landlord. So long as they were resident in the property at the time of transfer, such persons will usually qualify under the terms of Preserved Right-to-Buy rules.
No person can exercise their right-to-buy until they have spent a minimum of two years as a qualifying tenant. This period extends to five years for tenants taking up their tenancies after 18 January 2005. The property to be bought, whether a house or flat, must be a separate home and the only property owned by the would-be purchaser. There are also strict rules that disqualify bankrupts or persons subject to pending bankruptcy petitions and IVAs. However, it is possible to exercise the right-to-buy in conjunction with family members and joint tenants so long as they have been resident in the property for at least 12 months.
Attraction
The principal attraction of the RTB scheme is the discount it offers to well-established, qualifying tenants. This increases in proportion to the number of years they have been paying rent. It is also the element that has attracted most criticism for encouraging profiteering and abuse of the scheme. It is therefore unsurprising it’s been the element most subject to review and amendment.
Current discount levels date from changes introduced in March 2003. These follow the principle set by earlier changes made in February 1999, whereby discount amounts were adjusted to take into account regional differences. The result is a maximum discount of £38,000, available to qualifying tenants buying in most parts of the South East of England. This figure reduces in regional bands until it reaches £16,000 for Wales. However, and in recognition that some areas are subject to the greatest housing pressures in terms of high prices and homelessness, a maximum discount of £16,000 was applied in 41 local authority areas. These include most of the London boroughs and the more prosperous parts of the Home Counties.
There have been other legislative changes to modernise the scheme. These include a ‘Buy Back’ scheme introduced under the 1999 changes, whereby local authorities can take advantage of a government-supported financial incentive to buy back dwellings from RTB purchasers facing financial difficulty. Councils have discretion when deciding who to help, and may allow the owner to stay in the property as a tenant. However, the most significant changes since the introduction of RTB are in the Housing Act that came into force on 18 January 2005.
Discouraging exploitation
The overriding purpose of the 2005 changes was to discourage the exploitation of the scheme for profit. Early resales against a backdrop of sharply rising house prices have, at various times, caused observers to question the social justice credentials of the scheme. Many feel it has been too easy for some to exploit the generous discount provisions at a time when social housing supply is under increasing pressure. The 2005 Act seeks to address these concerns in a number of ways.
First, and as previously mentioned, the qualifying period was extended from two to five years. Second, the period during which owners are liable to repay all or a proportion of their discount in the event they sell their property was extended from three to five years. The amount repayable was also made dependant on the property’s resale value. Third, owners planning to sell within 10 years of exercising their right-to-buy are now required to offer their homes back to a social landlord. And fourth, tenants who enter into a ‘deferred resale’ deal, often to a property company, are now liable to repay the discount. There were others, but these represent the key ones thought necessary to close the exploitation loopholes.
The changes have been generally well-received. And, despite lingering reservations among some, goodwill towards the scheme remains high. But what of its continuing prospects as a niche market for lenders and mortgage brokers?
Positive future prospects
All available market intelligence suggests these are good. For instance, there remains a significant stock of social housing – approximately five million homes – to continue to fuel the scheme. On the back of this, the ODPM reports that house sales under the scheme are exceeding 60,000 a year. Datamonitor adds its authoritative voice by reporting that £2.6 billion in new RTB mortgages was advanced in England in 2003/2004 – representing a healthy rise of nearly 25 percent on a yearly average over the period beginning in 1999/2000. Much of this can be attributed to fears in 2002-2004 that the scheme would be scrapped. With that fear all but gone, Datamonitor predicts that gross lending in England will rise more slowly to reach £2.7 billion by 2008/2009.
Other factors contributing to a stable market for RTB include generally favourable macro-economic conditions aligned to continuing consumer aspirations to achieve home ownership. Remortgaging too is becoming more popular in the sector with Datamonitor reporting that it contributed approximately 20 percent of gross advances in 2004. Interestingly, it also estimates that 45 percent of advances in 2003/04 were made by specialist or non-conforming lenders – generally considered to have a far higher profile in the sector than their mainstream counterparts, many of whom have a low-key RTB offering.
This latter point should be of particular interest to intermediaries not currently operating in the sector. After all, brokers are an important link in the distribution chain given the specific needs and circumstances of RTB customers. For instance, Datamonitor reports that over 52 per cent of households exercising their right-to-buy in 2003/2004 had an income of under £15,000. Many also derived income from self-employment or unconventional forms of employment. Coupled with the current high levels of personal indebtedness and the implied higher risk associated with RTB households, the conditions are positive for specialist brokers and lenders looking for additional opportunities in the current highly competitive market we are experiencing.
It may not be as big, dynamic or even profitable as the booming buy-to-let, self-certification or secured loans sectors, but RTB has clearly established its own place. It may face future competition from the government’s embryonic HomeBuy schemes. Undoubtedly, it also lacks the innovative edge and image associated with other parts of the market. There is also pressure in Scotland for the Scottish Executive to overhaul or even scrap the scheme there. But many enterprising intermediaries and lenders will continue to value RTB as an important part of their overall proposition.
Bob Sturges is director of communications at Money Partners
