Public Services Management: Council mortgage scheme fails to hit home: Government plans to boost house ownership have been met with scepticism, says Paul Gosling

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THE GOVERNMENT'S new scheme to boost home ownership among council tenants is bound to fail, say a wide range of housing experts. Rents-to- mortgages (RTM) was heralded before the election as being as significant as the right to buy. However, evidence from pilot schemes suggests that very few tenants will be persuaded by it, especially in the existing economic and house price climate. There is also concern that those who do take up the scheme will be those who can least afford to do so, boosting mortgage arrears and repossessions.

The Housing and Urban Development Bill, currently going through its committee stage in the Commons, contains a diverse set of proposals, including the establishment of the Urban Regeneration Agency, ending local authority mortgages, and provoking backbench Tory ire with plans to give many leaseholders the right to buy their freehold from private landlords, such as the Duke of Westminster.

The Department of the Environment says that RTM will provide opportunities for 1.5 million of the remaining 5.2 million council tenants to buy their homes. This compares with the 1.5 million who have exercised their right to buy.

One of the big problems with RTM is that the financial calculations to determine purchase price and payments are extremely complex. The scheme has been analysed for the Council of Mortgage Lenders by Steve Wilcox, senior research associate at the University of Wales. He complains: 'The discounts are the same as right to buy, but proportionate to what you are buying. You need A-level maths just to work it out. It's a variable calculation, but on both sides of the equation.'

Tim Dwelly, editor of the housing group Shelter's Roof magazine, says: 'It's a great big red herring. It's only really aimed at about 4 per cent of tenants - you couldn't really think it would encourage universal home ownership, which is what the Tories were claiming at one stage. It's irrelevant, it's not needed, no one asked for it, and it doesn't fill a gap. And you pay virtually the same cost in administration on solicitors and things as if it were a full purchase.'

All secure tenants not in receipt of housing benefit in the preceding year (or entitled to claim over the last year, in the case of Scotland) and who have the right to buy will be eligible for RTM. According to Steve Wilcox's report for the CML, produced in February 1991, the typical buyers will be in employment and in their forties or fifties, more interested in retaining their standard of living than in owning their home outright. In that report he argued that there would be a take-up by a maximum of 250,000 tenants in England, Wales and Scotland over ten years.

Mr Wilcox believes that the changed economic situation means that the figures will now be much reduced. While right to buy becomes more attractive, RTM becomes much less so. 'Overall, the market has changed significantly. House prices have dropped, rents have increased, and interest rates have dropped. That means that people would be buying into a higher tranche of purchase. The market niche has disappeared.' His view is supported by the experience of pilot areas Basildon and Milton Keynes, where only 107 out of 10,000 eligible tenants took up RTM, but did trigger a further 126 right-to- buy sales.

The Institute of Housing is also unhappy with the scheme. Jason MacGilp, policy officer, says: 'It's either a very low take-up, and a lot of administration costs over nothing, or a high take-up by low-income families leading to mortgage arrears. It's another instance of concentrating on the question of tenure rather than supply.'

Even the Conservative-led Association of District Councils - which supports RTM in principle - has doubted the arrangements, saying: 'It is . . . questionable whether it is sensible to encourage low-income households to take on the responsibilities of home ownership at a time of falling house prices and low inflation.' The ADC would prefer the Government to boost support for the Do-It-Yourself Shared Ownership scheme, funded by the Housing Corporation and operated through some housing associations.

One of the concerns of the Labour- controlled Association of Metropolitan Authorities is that RTM buyers might take out second mortgages, leading to repossessions and, consequently, to councils losing their equity stake in the property. The mortgage lender would be registered as a first charge on the property, leaving the councils vulnerable, particularly if the housing market continues falling.

There are also concerns as to how the scheme will work with flats. Steve Wilcox explains: 'Local authorities will have to pay one-third of the service charges because of its share of the equity. What that actually means because of ring-fencing is that other tenants will have to pay it, which seems to me grotesquely unfair.'

Voluntary Transfer Housing Associations (VTHAs) were also to have been included under RTM, but the Government has now agreed to exclude those associations that have already taken over council housing stock. This was as a result of strong lobbying by the associations and the banks who were concerned that it would reduce right-to- buy income that business plans had been predicated upon. However, new VTHAs will be required to allow RTM, which the National Federation of Housing Associations says will make future capital receipts lower and less certain, making future transfers of housing stock more difficult to finance.

According to the Institute of Housing what is needed instead of rents-to- mortgages is converting mortgages into rent, and more flexible options for social housing. Seldom have such a wide range of organisations been quite so convinced that a government measure was bound to fail. The Housing and Urban Development Bill also ends the Right To Shared Ownership scheme, which in practical terms was very similar to RTM, but which attracted very little interest from tenants and has died from lack of interest. No one, other than the DoE, seems to believe that RTM will fare any better.

HOW IT WORKS

A tenant of 20 years' standing, paying pounds 30 a week for a house valued at pounds 42,000, would be permitted to take out a 25-year mortgage for pounds 16,000.

House valued at pounds 42,000.

Tenancy discount of 20 years (50 per cent) pounds 21,000.

Weekly rent of pounds 30 can service mortgage of pounds 16,000.

Tenant owns 75 per cent; council retains 25 per cent 'equity stake'.

If the house were sold 10 years later the council would be entitled to 25 per cent of the proceeds, less another 20 per cent discount. If the house were sold for pounds 60,000, the council would get pounds 12,000, and the tenant pounds 48,000. (Source: Shelter)

(Photograph omitted)

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