Why Right to Buy could be very wrong

Jun 20, 2012, 10:47

Merryn Somerset Webb

Posted byMerryn Somerset Webb

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"Property asking prices hit record high" claimed a story all over the internet on Monday. It's a headline government ministers must have looked at with some satisfaction. Why? Because it shows that the plan is working.

The plan is to do everything possible to make house prices around the UK to look, on average, as though they aren't falling in nominal terms, and so to stop the UK economy utterly imploding.

However, the truth is that even asking prices for houses are falling in nominal terms and everyone knows it. But it is in real terms that they are really falling. As the FT points out, add in the retail price index (RPI) to the Rightmove data on asking prices and you see something pretty nasty.

Asking prices are not 2% higher than they were in 2007. They are 13% lower. And in some places that's just the beginning: in Wales they are 24% lower. But even these numbers aren't really telling us the truth about what people really pay for houses (rather than what they are asked to pay).

At a Scottish lunch party last week, all the talk was of houses that just aren't selling at anywhere near their asking prices. Occasionally one goes when one of the 'more money than sense oilies' from Aberdeen turns up with cash. But mostly the houses just sit there - waiting for someone to buy at the wrong price or the seller to cut to the right price.

So we still have no idea what the real clearing price for houses in most areas is. When will we? Impossible to say for sure. But the day might be getting closer. Nearly 30,000 new houses came on the market in the weeks before the Jubilee. That's the highest figure for two years. It might even be one that gets some price competition going among sellers.

It is with this in mind that I noted housing minister Grant Shapps tweeting about the “reinvigorated” Right to Buy scheme this morning (you can follow him on @grantshapps and me on @merrynsw). He tells us that 2.5 million social tenants have “the chance to buy their home with discounts of up to £75,000” as long as they are “a secure council tenant and have been a public sector tenant for five years.” Then he send us off to DirectGov to learn more.

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Here you can find out how much of a discount you can actually get on the house in which you live. You can also take a look at what happens if you need to sell the house in the five years after you buy it. If you sell in the first year you have to pay back all the discount (as a percentage of the sale price). In the second year, you would have to pay back 80%, in the third, 60%, in the fourth, 40% and in the fifth, 20%.

So let’s say the house is 'worth' £100,000 and you get it for £60,000 (a 40% discount). You then sell it for £110,000 under a year later. You now have to pay back the full discount - 40% of £110,000, or £44,000 - (regardless by the way of any improvements you may have made to the house to get the higher price). You will have probably spotted the problems by now.

First, who decides what a council house is worth? The state provided information on this all talks about the discount being from the 'market value'. But we already know that in a low volume market such as this, the clearing value of a house is very different to the perceived market value as suggested by the indicies.

So what price does the tenant pay? The Housing Act requires it to be set via 'direct comparison' – ie, looking at prices recently paid in the open market. But what if, as is the case now, the open market isn’t working? (Let’s not forget that volumes in the UK market are down 40% in the last five years.) I suspect there is a pretty high risk that the tenant will end up paying too high a price.

Then what if he tries to sell it quickly when he can’t meet the mortgage payments, finds that paying for the upkeep of the house is all too much, decides to have a go at trading up or worst, gets repossessed? If he sells the £100,000 house for £80,000, he still has to pay back 40% in the first year, so £32,000.

That means he clears £48,000 rather than the £60,000 he put in. If he hangs on into the second year, he’ll only have to pay back £25,600. But he is still looking at a loss – something I am guessing that anyone who buys into Shapps’ spin won’t be expecting.

Look at any of the official literature on Right to Buy and you will see nothing on what happens if house prices fall – the scheme appears to simply assume that they will not (there may be a contingency plan to prevent buyers ending up in negative equity as a result of discount paybacks but if so, I can’t find anything on it).

That is, as most of us now know, a dangerous assumption. I’ve sent Shapps a message asking him if it has occurred to him that prices sometimes fall. I’ll let you know what he says.

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  • 1. whiket

    (20 June 2012, 12:42PM)  Complain about this comment

    I disagree with any policy allowing people to by council houses, but it is clearly a very good deal for anyone wanting to buy and stay there for five years.
    I get tired of all this nominal v real terms stuff. I understand completely what is being said but it is almost impossible to be sure to make real gains anywhere and so the target for us all is to make the best nominal gain possible.
    Someone who bought other than 2007 with cash or a low mortgage has done comparatively well for themselves.

  • 2. Mike

    (20 June 2012, 02:23PM)  Complain about this comment

    The real risk is not the discount itself as even in a first year sale any absolute loss would be reduced by the amount of the discount - i.e., £12000 rather than the £20,000 he would have lost had he had to pay the full £100,000 purchase price. Rather it is that the discount may encourage him to pay way over the market value in the first place especially if the mortgage is cheaper than the rent. However, if interest rates rise significantly he may end up paying far more in mortgage repayments than he did in rent not to mention insurance and maintenance costs which may have been overlooked or underestimated. Coupled with an unexpected drop in earnings this could go badly wrong if he's forced into a quick sale in the first year or two. Nevertheless, for social tenants with relatively secure incomes who are happy to stay put and who do appropriate due diligence this could be a good deal.

  • 3. RP

    (20 June 2012, 11:50PM)  Complain about this comment

    A price correction is required to make it viable. Retired millionaire locally have each bought 25+ houses to rent in the last 4 years - they are propping up the market, families cannot compete with retired millionaires when buying a 2 bed cottage. I never thought I would advise my kids against home ownership but I wouldn't want them to enter this market at dangerous salary multiples, with the job market insecurity - home ownership is too hazardous for 80% of under 35 year olds. I would scrap stamp duty for people buying their only home, impose 20% for purchasers of 2 homes, and 50% for 'home collectors' buying their 3rd concurrent home, regardless of its value.

  • 4. mic

    (21 June 2012, 08:52AM)  Complain about this comment

    Govt. simply have to keep (prop!) house prices up in this recession (or worse).
    If houses prices are seen as falling all consumer confidence will be lost (there ain't much now) and the economy -whats left of it will go down the plug hole.Not goood fopr any govt 3 yrs away from election!!
    personaly , i believe we should let them crash now and get over it-but crash they will and there will be tears.

  • 5. Roberto Birquet

    (21 June 2012, 11:27AM)  Complain about this comment

    The right to buy is the Bereft of Affordable Housing for future generations. But future generations don't vote in present elections. So just as Maggie did, government will attempt to bribe voters; except all parties are signed up to this raping of national resources, without a care for the future.
    Future generations, and even today's yioung, what have they got? No affordable homes to buy, no social housing, just a six-month short-term tenancy agreement in which they are meant to bring up the kids. Oh, and £30K uni fees, £50k deposit requirements, and work till they are 70. In the 90s, it was free uni, £5k deposits, and work to 65-66. Well and truly shafted by their parents' generation, who refuse to admit the awful legacy they are bequeathing.

  • 6. Roberto Birquet

    (21 June 2012, 11:33AM)  Complain about this comment

    4 Mic
    That is certainly the typical narrative we are fed, but there are two huge flaws in the argument.
    First, the surely most obvious is that the political economy that got us in this mess was rising house prices, as a source of alternative income to keep the economy turning and creating ever more debt. Is it not the first sign of madness to carry on with a policy that has so far proven to have created a catastrophe?
    Second, as I noted above. High house prices means larger deposit requirements for FTBs (unless you think we should compound repetition of failed policies by reviving 100% loan to value mortgages. Having to save even greater amounts means there is less left over - if anything - to spend in shops, online etc. So, it actually harms consumption. there are too many vested interests to end this madness. But that is what it is, and why we remain in recession.

  • 7. Tom O'Neill

    (23 June 2012, 12:43PM)  Complain about this comment

    But if the tenant keeps the house for five years, (s)he then sells and pockets all the money - so no problem. Maybe I'm missing the point, but surely the only justification for selling off taxpayer-owned property to its tenant at a discount is a social one - that the tenants are a) financially unable to purchase the property themselves and b) poor but upright citizens who are likely to remain and to contribute to the local area. Yet we all know that often neither condition is the case - people have often just sneakily grabbed social housing to buy it and sub-let it.

  • 8. Smibby

    (23 June 2012, 05:49PM)  Complain about this comment


    Right to buy in the early 90's was a licence to print money.For many buyers and/or their relatives.

    You got,for instance an OAP who had lived in his/ her council house for 20 to 30 years.Her children or grandchildren put up the money to buy the house.It could be for sale then at about £10k,because she had lived there so long.All the buyers had to do was wait until the minimum years had gone past,which I think then was 3 years and then sell it for say £50k at the market value.

    That was the reality of RTB.That is why the stock of council housing was depleted.All the good properties were cherry picked and all the duff ones remained.That is why the theory of RTB was not the same in practice.

    At the end of the day,many houses were sold off,for a killing,for the buyers and a big loss to local councils.

  • 9. Smibby

    (23 June 2012, 06:20PM)  Complain about this comment


    The idea of RTB was that council tenants could purchase their houses that many had lived in for a long time.The theory being they would look after their properties well if they owned them outright.

    In practice,what happened was that often they were sold off for a killing for the tenants and a big loss to the council and the decent properties with the good tenants were sold while the not so good ones stayed on the council registers often with the not so good tenants.

    So most properties were sold at a financial loss.The number of council properties decreased and the effect was to leave more people on housing waiting lists without a council house.The council was then poorer,because their assets were sold off at a loss,but they still had plenty of would be tenants who they now could not house.

    That was the reality of Thatcher's RTB in the early 90's where I worked.

  • 10. David Fletcher

    (26 June 2012, 08:01PM)  Complain about this comment

    I don't have a problem with Right to Buy at all.... End of the day we all know its not an 'if' prices fall further and interest rates rise, its more a question of 'when' and by 'how much' - However, Some long standing council house tenants will be entitled up to £75,000 discount. If they do the maths and get a fixed rate deal for five years and can keep working then ultimately they have to be better off. I think there will be a lot of children buying their parents council house tho so anything could happen!

  • 11. Sam R

    (07 August 2012, 02:07PM)  Complain about this comment

    I bought my house in 2007 - for £57,000. I was entitled to a total discount of £16,000 as I live in Wales. When applying for a mortgage, an independent valuator valued the house at £90,000. It is common for housing authorities to undervalue the house. 5 years on and I am looking at moving. The house is now valued at £120,000 - as I have indeed upgraded the property. This is what the scheme is designed for - I would recommend it to anyone.

  • 12. Foxy

    (20 August 2012, 08:35AM)  Complain about this comment

    @Sam R. You have made a profit from a sector where you have not paid the same rent as those renting in the private sector. You have taken some thing you have not earned from the balance sheet belonging to the whole nation. I don't blame you as an individual, but the right to buy is exacatly as Squibby pointed out - a means for some making money often by the relatives of tenants at the expsense of others that cut down on the housing stock. Even if it were the tenants buying, then why should they have such a gift that was not given to others who saved their own deposits to buy?

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