08 Dec 2020
Several aspects of the housing market have shown weaknesses over recent years with what may be considered sharp industry practices causing misery for many, especially first-time buyers struggling with inflating ground rents on new-build leasehold houses and cladding remediation costs in new-build flats. Notably, before the financial crisis, we saw predatory lending and even mainstream lenders encouraging new buyers to stretch their borrowing using new instruments and ‘Together’ style mortgages with little understanding of the customers’ ability to service the loan. But publicly sponsored affordable homeownership schemes like shared ownership have also attracted a level of opprobrium that rumbles on to this day. Some of these issues relate to the construction industry, mortgage markets, legal structures like leasehold as well as regular frustrations of general house-buying practices, and ‘irrational exuberance’ associated with seeing homes as an asset. All of which can get entangled and can compound issues within publicly sponsored schemes to support access to homeownership for those for whom housing affordability is critical.
So, how do first-time buyers, and lower-income ones at that, navigate this landscape to buy their first home? Who supplies neutral market information to inform their decisions?
A few years back, Sajid Javid the former communities secretary wanted to improve the home buying process, as it takes time to learn to avoid the pitfalls associated with home buying, which can leave first-time buyers especially vulnerable and frequently stressed. The Department for Business, Energy and Industrial Strategy (BEIS) reported that people lacked confidence in the process, with more first-time buyers being pressured to make offers, offering more than they had wished and relying more on a lender’s valuation rather than a fuller physical survey of the home in comparison to more experienced buyers. There is also evidence that new buyers underestimate the costs of buying and a large minority have experienced financial difficulties as a result. Moreover, research shows that lower-income households can be less financially savvy than their affluent counterparts, pay more for credit and, when it comes to mortgage arrears, home equity or property conditions, have worse outcomes.
So, homeowning is not for everyone and, for new or low-income buyers, considerations must be wider than the processes involved at the point of purchase. Successful home purchase encompasses market insight, financial capability, as well as the sustainability of the purchase after completion.
A few years back, the Winston Churchill Memorial Trust provided me with a travel fellowship to undertake a study in New York State into the US system of homeownership education. These courses are open to all but mandatory for low-income households in return for help with deposits, transaction costs, discounted mortgages or entry to shared equity schemes. The federal government supports accredited local providers to offer courses in classes or increasingly via online platforms and mobile apps like those offered by Frameworks.
The US Department of Housing and Urban Development approved curriculum covers a wide range of aspects that cover the whole home buying process, from deciding whether to own, to financial support schemes, guiding you through the conveyancing process and how to sustain your home post-purchase. Third sector agencies that run the courses follow up with personal contact and support.
But why take advice from the US? After all, their housing market crash was more profound to that experienced in most of the UK, and isn’t their market more unequal than ours?
Nevertheless, various studies show that through homeownership education, new buyers gain greater confidence in the market, achieve improved credit scores, lower mortgage arrears and fewer possessions. Even after tighter mortgage regulation, one study reported 16% lower arrears rates, and the lending sector that extensively uses these courses had far lower rates of subprime lending than the wider market. Short-term results of a large scale demonstration project to identify the effectiveness of the education programme show that compared to a control group, new buyers have greater preparedness, greater ability to find needed information, increased financial capability and confidence to buy, a higher rate of buying, and greater satisfaction with the buying process. Other important measures like affordability, mortgage default and debt will be appraised over the long term.
Of course, UK websites offer home buying advice but much of it is superficial, partial or forms part of a sales pitch. My research also shows that new buyers find material, but it is fragmented and spread across the internet, provided by service suppliers and about their particular part of the process rather than the whole thing. Moreover, in some communities, parental advice may not be available or may be limited with regard to knowledge of the various affordable homeownership schemes, leasehold arrangements, 35-40 year mortgages, structuring family loans, or changing forms of estate agency practices (Modern Method of Auction anyone?).
Supporting people to make the best decision to suit them
We have evidence that demonstrates that right to buy or shared ownership buyers are more price-sensitive and often on low to moderate incomes, and we have Help to Buy continuing at the lower end and a new First Home project entering the fray. Neutral sites do exist but are not structured in a pedagogical approach and lack detail. Homeownership may not be the way forward for everyone, and arguably should not be the focus of government affordable housing programmes. Nonetheless, if thresholds to homeownership are to be lowered, then should we not ensure that people are supported into making the best decisions for their circumstances? Is it beyond our organisational capabilities to produce a neutral educational app that Help to Buy agents, local authority and providers of affordable homeownership schemes can ask applicants to complete? The US experience points to ways to actively engage potentially vulnerable new buyers with a greater depth of knowledge at a time when it is required.
Consumer protection is more than knowledge transfer but property fairs in UK cities demonstrate an appetite for market information. By combining the expertise of the UK housing, mortgage and financial inclusion sectors we could assist by systematically sharing awareness with prospective purchasers with mutual benefits for providers, lenders and households.