Is sharing home ownership the way out for Penang?

loading The Combe in London.

Something needs to be done about the housing market. That much is clear. But what? Rethinking the concepts and studying solutions implemented in other countries are definitely needed. Stuart Macdonald takes a look at an alternative successfully tried in the UK.

Public housing in East Asia has traditionally been distinct from European social housing. A Unitary system in Western Europe stems from a conception of social welfare that aims to provide housing at affordable prices for the population as a whole, while a Dualist system found in East Asia assumes that housing needs will largely be met by the market and social housing interventions are thus extended only to those on the margins of society, for whom the market is unable to deliver decent or affordable housing.

It is time to rethink these concepts.

In Malaysia today, major urban areas are facing increasing pressures on their housing markets, displayed in increasing land prices and growing costs of housing. As a result, middle income households are increasingly being squeezed out of their local market and housing affordability is fast becoming an issue for more than just those on the margins.

The concern is that this middle income group will eventually be forced to put down roots elsewhere, contributing to a loss of talent and potentially lost future investment as the skilled labour pool declines.

In the UK, shared ownership or shared equity models have been developed over the last 30 years as a way of supporting middle income households with “affordable” home ownership (without the need to invest huge subsidies in middle income housing), typically helping key workers (teachers, nurses, etc.) and other first-time buyers get on the property ladder. Over 170,000 shared ownership sales have been completed since 1979 in the UK1.

So what is shared ownership/shared equity?

With shared ownership, you buy a share of the property. Most models operate from a minimum share of 25% and up to 75 % of the full value. Typically, a social housing provider (e.g. a local authority or housing association as in the UK) would own the remaining share of the property and the household pays a small rent on that share (typically capped at up to three per cent of the share’s value). Shared equity works on the same basis; however you typically share ownership with a financial institution or a developer.

In Penang, the average condominium on the island now exceeds RM500,000 in price; a 2/3-storey semi-detached house exceeds RM1mil; and a low cost house sells for RM360,000 in the north-east of the island2. Table 1 below shows a comparison between a standard finance model and a shared ownership model for an RM440,000 property (with examples for 75%, 50% and 25% ownership). Such a property would typically be out of reach for middle income earners3. However, employing a shared ownership model would bring it back within affordability levels, reducing monthly costs, while also reducing the deposit requirement (as you only need to raise the deposit on the share you are purchasing).

So what happens next?

Do nothing – the household continues to pay its mortgage to the bank and continues to pay an interest charge on the outstanding value. Once the mortgage is paid in full, the only charge that remains is the interest charge on the outstanding value.

Increase your share (staircasing) – as the household over time increases its income and can afford to dedicate more to mortgage payments, the household can purchase additional stakes in their home, typically in blocks of five per cent or 10%. Of course, the mortgage payment goes up, but the interest charge reduces. The household continues to increase its share to 100% over time, or stops where it is comfortable. At least a quarter of shared owners go on to become full (100%) home owners in the UK.

Sell your share – the household, after a minimum period of time stipulated in the sales agreement (e.g. five years), decides to move house and wants to sell. The normal process of market valuation is undertaken and the final value of the property is agreed with the other shareholder. This shareholder can then decide with first refusal if it wishes to buy out the household, or open the property sale up to the open market. Any capital appreciation is divided between the household and the other shareholder on the basis of the stake owned. The outstanding mortgage is then settled in the normal manner.

Penang

How might such a model work in Malaysia/Penang?

For such a model to be successful, a willing, able and trusted shareholder is required for households to enter into shared ownership. In a Malaysian or Penang context this may be the state government, the local authority, the developer, or even an NGO. Each would have pros and cons that need to be carefully weighed. Typically the state government or local authorities would lack sufficient capital to enter into such an offering in a significant manner. However working with developers, government land sold for housing development could be paid back in housing units that the authority could then allocate, building a social housing stock that can be recycled for social good (around 70% of resold shared ownership homes remain within the social sector in the UK).

The state could also stipulate that developers need to make a fixed number or proportion of units available for shared ownership, to be allocated by the state/local government. This way, the developer retains a long-term interest in the property development, which would lead to an interest in future resale values and may drive improvements in building quality and maintenance arrangements, which would be a particularly valuable outcome.

Alternatively, building the capacity of the NGO sector to the point at which it can manage housing in a model similar to a UK housing association would depoliticise housing provision, though professionalising the NGO sector would take significant time and resources.

In reality, a combination of these stakeholders may provide the best way forward, with the government and local authorities devising eligibility criteria and managing allocation, the developer providing shared equity financing and the “third” sector eventually taking over the management of housing. This may be the “Third Way” out of the housing conundrum.

This article was originally published in The Edge Financial Daily.


1
Shared Ownership: Facts and Figures, www.shared-owner.co.uk/_media/static/SO-the_facts.pdf

2 Based on National Property Information centre (Napic) transaction reports Q1 2012.

3 In Penang, middle income households earning between RM2,700 and RM6,200 (2009) account for roughly 40% of the population. This group can roughly afford property between RM150,000 and RM350,000 within sensible borrowing limits and income multiples where they can raise the required deposit.

Stuart Macdonald is head of Cities, Urbanisation and Environment, Penang Institute.



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