The global financial crisis has had a devastating impact on the housing market, the availability of mortgages and the supply of affordable housing. How we meet the demand for affordable homes and prevent a further socially and economically damaging spiral of house price inflation in future years, fuelled by an acute shortage of housing supply, is a key issue of social justice. If we are to meet this challenge we need to be innovative and creative in finding new ways of building affordable homes and new sources of finance to fund them.
‘Mutual Home Ownership’ is a new form of housing tenure devised by the Co-operative Movement that has a unique capacity to meet the affordable housing delivery and funding challenges we face in the post-financial-crisis world. As set out in the recent publication New Foundations: Unlocking the Potential for Affordable Homes, it is designed to fill the growing gap between affordable rented housing and the open housing market, specifically (but not exclusively) for households on average earnings who can service part of the cost of providing their home but who cannot afford the full costs by buying on the open market.
Mutual Home Ownership is a different way of owning a stake in a home, but the way it works is fundamentally quite simple. The land on which the homes are built is owned by a Community Land Trust (CLT), which takes the land out of the market and holds it in perpetuity as a community-owned asset. The CLT grants a Mutual Home Ownership Society (MHOS) the right to build on the land and use it for Mutual Home Ownership. This immediately makes the homes more affordable.
The cost of building the homes is met by a mix of 10%t deposits from resident members of the MHOS and a 90% corporate mortgage loan. Rather than owning a percentage share of a particular house or flat funded by a personal mortgage, resident members of the mutual own equity shares in the value of the portfolio of property owned by the mutual. The mutual’s property portfolio is divided up into equity shares, each with a value of £1,000 on the date the project is completed and the long-term corporate investment needed to fund it is drawn down.
To ensure affordability across the range of incomes within a community, the number of equity shares purchased and funded through rental payments is geared to 35% of a household’s net income. The more a resident earns, the more equity shares they own and fund, and the more they pay in a monthly rental to the mutual. As their income rises they are expected to fund more equity shares.
When residents wish to leave the mutual, they are entitled to take the net capital value (if any) of their equity shares with them. This net capital value is calculated in accordance with a valuation formula in the member’s occupancy agreement (lease).
There are many advantages in treating equity investment in housing in this way, the details of which are set out in New Foundations.
However, the big advantage of Mutual Home Ownership is that because corporate finance is required for a long term investment, not for short term mortgages to individuals, it can be structured to be an attractive investment for pension funds and other long-term investors. By drawing in this new source of finance, more affordable homes can be built in partnership with local communities.
It is time for the Labour Government to embrace this new form of co-operative housing to help provide more affordable homes for those who need them.
New Foundations: Unlocking the Potential for Affordable Homes, published by the Co-operative Party on 27 January 2009, can be downloaded free as a PFD file from the Co-operative Party’s website at www.party.coop.