The Paul Gosling column
Inflated house prices lie at the heart of the global banking crisis. Despite newspaper headlines talking glibly of bank debts caused by foolhardy ‘sub-prime lending’, the truth is more complex and disturbing according to a lively debate amongst community development activists in the United States.
We might assume from the papers that it is the poor blacks and whites in urban ghettos and trailer parks who have defaulted on a widespread scale, turning mortgage and other loans into bad debts – pulling major banks down that were involved in re-selling massive packages of these debts as securitised financial instruments. But in truth, it seems, it was middle class families who over-extended themselves, because that was their only option if they wanted to buy the type of homes they aspired to.
Take these comments made in a recent online discussion between leaders of organisations trying to help low paid workers, who now find it almost impossible to borrow money to buy their own homes in America – with whole poorer areas ‘redlined’ as unworthy of credit. “In many cities across the country the supply of affordable housing disappeared as higher income households came back into urban areas and gentrified them,” said one contributor. Another added: “It is borrowers who live in high end neighborhoods that are walking away from their mortgage and homes. It is mostly high end homeowners who now are crying out that they have bad loans and bad appraisals. I think its very unfair to place neighborhoods who have been fighting for fair lending, to be accountable for this poor market. So if they [the mortgage lenders] are going to ‘redline’ neighborhoods they better look at the neighborhoods with ‘picket fences and three car garages’, not just urban areas.”
It is worth watching this American conversation very closely, because the UK has had an almost identical issue of housing affordability in recent years. This is particularly true in a region that has the double whammy of very low incomes, but very high house price inflation. Average income in Northern Ireland is near the bottom of that in the UK – average pay is 12% below that of the whole of the UK. It has also had the biggest rise in home values. According to the Nationwide’s house price survey, average home prices in the region jumped by 160% over the last five years to £197,000. That puts average prices in Northern Ireland equal with those of England (much higher than those in Scotland and Wales) and “put unusual strains on first time buyer affordability,” noted Nationwide.
As more homebuyers recognised their inability to purchase their own homes, co-ownership became an important option. Co-ownership enables people to purchase some equity in their new homes, with a financial institution or housing association owning the balance. As the occupier’s financial position strengthens, so they can buy an increasing share of the home’s equity.
This approach has provided 20,000 first time buyers in Northern Ireland with their own homes since 1978 – including 4,000 at the moment – through Co-ownership Housing. So successful has this been that another 700 households are currently in the process of co-ownership purchases and there were 900 co-ownership purchases in the 2007/8 financial year. But given the sharply increased house prices, it is not surprising that demand is rising substantially. There is now real anger that ministers have refused to increase funding sufficiently to allow supply to meet demand. The result has been that Co-ownership Housing has had to refuse to accept further applications for the time being.
Alan Crowe, chief executive of Co-ownership Housing said: “Despite the £205m available for social housing as a whole over the next three years, together with a series of changes announced to enhance the successful Co-ownership scheme, our funding has now been confirmed at £15m for the 2008/09 financial year starting in April and it is simply not enough to meet any further applications for Co-ownership. We expect it will be enough to deliver the 525 homes limit in the [Northern Ireland Executive’s] new Programme for Government, but the potential is there for so much more. In recent months we have broken records with the high numbers of people helped to buy their homes with Co-ownership, and demand continues to be very strong.” He said, though, that it was “business as usual” for people already living in Co-ownership homes, or whose applications had already been agreed.
Crowe added: “However, as Northern Ireland’s regional body for shared ownership and the only viable option for people to reach that first rung of the property ladder, the funding allocation means we are seriously limited in the work we can do to help at a time when our services were never more needed.
Now is not the time to cut back on the number of Co-ownership homes – the only real option for many hundreds of people looking to get onto the Northern Ireland property ladder. With just a little more public funding we believe Co-ownership can actually increase the number of affordable homes, while bringing down the cost per home so far as government grant is concerned to around 25%. We will continue to put the case for Co-ownership funding in the strongest terms.”
Social housing is the responsibility of Northern Ireland’s Department for Social Development, which rejects criticism of its refusal to provide funds to meet the demand for co-ownership housing. Margaret Ritchie, the Social and Democratic Labour Party’s minister for social development said: “Co-ownership remains a very important aspect in my New Housing Agenda. A minimum of 500 new applicants will be supported this year. This is in line with the pledge given in the Programme for Government. Record levels of funding have gone into co-ownership since I took office in May last year, and I have succeeded in getting substantial additional funding in the past financial year. Later this year we will introduce a new form of shared equity sharing for existing social tenants and we are currently exploring other new and innovative proposals from the Industry itself that could bring forward further opportunities for those on lower incomes to make that first important step onto the housing ladder. “
The refusal of ministers to provide further backing has annoyed the directors of Co-ownership Housing, which is properly called the Northern Ireland Co-ownership Housing Association (NICOHA). Its directors include Erskine Holmes – who is also a director of Co-operative Press, publishers of Co-operative News. They are now looking to private sources of funding to fill the shortfall caused by the rejection of its case for more government support. Holmes explained: “Within a few days it will know if private finance is available to bridge the gap left by the Department. It certainly will not be looking to the Co-op Bank, which has consistently refused to even give mortgage finance to Northern Ireland first time buyers who want to use co-ownership.”
Holmes compares unfavourably the bank’s approach in Northern Ireland to that adopted in England, where it is financially supporting ‘Ownhome’. This is a joint initiative with leading housing association Places for People, through which buyers take a mortgage from the bank for between 60% and 80% of the house price and are excused rent for five years on the balance of the equity. John Barker, head of mortgages at Co-operative Bank, was quoted in Inside Housing as saying that it was committed to the project, despite the current financial turmoil. “We see this as a long-term investment,” he said.
Erskine explained that Co-ownership Housing has reserves of £250m and offered the bank the security of its own equity against any losses on repossession, the same terms as those accepted by other banks who support the project. But the Co-operative Bank has refused to get involved. “You will have noticed the bank’s losses of £31m, mostly on sub-prime lending bonds,” said Holmes. “Pity they did not put the money into Northern Ireland instead…. The bank’s performance in Northern Ireland has been very disappointing. They have a duty to be equitable and turning down NICHOA could be seen as either discrimination or incompetence.”
The criticisms were rejected by the Co-operative Bank. John Barker, told Co-operative News: “We have had a number of discussions with the NICOHA, but the opportunity discussed was to be added to a panel of lenders. We discussed our shared ownership arrangement with Places for People, but NICOHA were content with their current arrangement and did not feel it necessary to work with CFS to develop any exclusive arrangement. After consideration it was decided that this did not present a commercially viable opportunity for The Co-operative Bank. However as a lender, we remain fully committed to widening access to housing throughout Northern Ireland and as a result we continue to offer a wide range of mortgages, including our first time buyer range, via our Belfast branch.”