The Evaluation of Low Cost Initiative for First Time Buyers (LIFT)

7. VALUE FOR MONEY

Introduction

7.1 This chapter provides a comparative value for money assessment of the LIFT schemes. In order to provide a 'rounded perspective' we have considered the cost to the public purse and the cost to the home owner.

Value for Money to the Public Purse

7.2 We have reviewed the initial costs of the four LIFT schemes in terms of the public subsidy required to fund them and their longer term costs, taking account of purchasers' ability to acquire additional equity or sell their home and generate a receipt for the Scottish Government.

7.3 A significant challenge in comparing the capital costs has been the way information is currently recorded by the Scottish Government. NSSE and shared ownership funded projects are currently recorded as a single 'Low Cost Home Ownership' cost centre. In order to disaggregate them, we have used sales log information collected by the Scottish Government (which does not include all properties funded) to arrive at a breakdown of costs for NSSE and OMSEP funded properties on a consistent basis. We have assumed an average development allowance of £3,607 for a NSSE property and £702 for an OMSEP property. Shared ownership costs have been extracted from scheme data provided by the Scottish Government for design and build schemes only. In all three cases we have established average figures for the period 2005/06 to 2009/10. Information on GRO and shared ownership schemes is based on annual data published by the Scottish Government.

7.4 We have brought all capital costs to a three person equivalent house size to provide an accurate comparison, using the conversion factor agreed by the Scottish Government for comparing its social rented housing programme.

Upfront Costs

7.5 In comparing the capital costs for each scheme some caution is required for two reasons. Firstly, the number of units is relatively low in some cases and could be distorted by 'exceptional' scheme costs. Secondly, in the case of NSSE scheme, the existing datasets do not allow us to compare the relationship between scheme costs and property values. We therefore have no way of establishing whether property values overall are greater or lower than scheme costs.

7.6 As Table 7.1 identifies, the average capital cost of an OMSEP property over the past five years is the lowest at £98,340. This is in part a reflection of the fact that the majority of properties are second hand and may be of varying standards. GRO properties were on average around 12 per cent higher than OMSEP properties; NSSE properties around 20 per cent higher; and shared ownership around 21 per cent higher.

Table 7.1: Comparison of Average Capital & Subsidy Costs for 3 person equivalent LIFT & Social Rent Schemes 2005/06 to 2009/10

	NSSE	OMSEP	SO	GRO	Social Rent
No. of Units	1,658	1,530	127	379	24,125
Average cost/unit £ (3pe)	118,290	98,340	119,270	110,463	111,298
Average subsidy/unit £ (3pe)	51,109	34,158	55,843	26,696	71,965
Average subsidy rate %	40.3	34.7	51.4	24.4	65

The number of units is based on information for which data is available.
Shared ownership subsidy levels include other public contributions.

7.7 On average GRO required the lowest level of subsidy at £26,696 per property. The average subsidy level for OMSEP properties was around 28 per cent higher; 91 per higher for a NSSE property; and 109 per cent higher for a shared ownership property.

7.8 Within the OMSEP scheme we were able to identify 157 properties purchased by a household that included a person with a disability. We have not been able to establish the proportion of these households where specific housing needs may have affected capital costs.

7.9 The capital value of these properties ranged from £57,000 to £210,000. The average level of subsidy provided (adjusted to a three person equivalent) was £43,005 per property and the average grant rate 36 per cent.

7.10 Taking the top ten per cent of these OMSEP properties (on the basis that they are more likely to have been purchased to meet a specific housing need), the average cost per unit (adjusted for a 3 person equivalent) was £156,688. The average subsidy per unit was £58,943 and the average grant rate 37.6 per cent. The most expensive property was a four person property that required subsidy of £84,702 and had a subsidy rate of 40.2 per cent. This suggests that, only in very exceptional cases, did the level of subsidy required exceed the average for a social rented property.

Receipts

7.11 There is no comprehensive database maintained of receipts received by the Scottish Government for the four LIFT schemes. Data available for receipts received for NSSE and OMSEP identify three NSSE and 46 OMSEP sales had concluded up to the end of 2009/10. During the same period the data identifies that one owner in a NSSE property and 15 in OMSEP properties acquired additional equity. In all but two cases this resulted in the owners acquiring outright ownership of their homes. In these two cases it is not possible to determine whether a 'golden share' exists preventing the owner acquiring the property outright.

7.12 However, as we have previously highlighted these figures appear to be an underestimate of what has actually taken place. Conclusions drawn from the following analysis must therefore be treated with some caution.

7.13 Based on the data available, there is no significant difference in the average level of receipts being received between NSSE and OMSEP properties, although numbers are low to make meaningful comparisons.

7.14 The data available identifies that the Scottish Government received receipts of £2,702,189 from equity loans of £2,795,180, a net loss of £92,991. The position was particularly worsened by the downturn in the housing market in 2009/10 when receipts were significantly lower than the original equity loan.

Table 7.2: Receipts from staircasing and sales of NSSE and OMSEP properties 2005/06 to 2009/10

	Year	Value of Equity Loan Provided	Number of Receipts	Value of Receipts	Gain/ Loss
NSSE	2005/06	-	-	-	-
	2006/07	87,714	-	-	(87,714)
	2007/08	128,524	1	62,062	(66,462)
	2008/09	-	1	41,300	41,300
	2009/10	-	2	73,933	73,933
	Total	216,238	4	177,295	(38,943)
OMSEP	2005/06	318,363	-	-	(318,363)
	2006/07	1,562,480	1	38,200	(1,524,280)
	2007/08	588,928	12	596,908	7,980
	2008/09	73,841	24	1,015,149	941,308
	2009/10	35,330	24	874,637	839,307
	Total	2,578,942	61	2,524,894	54,048
Cumulative	2005/06	318,363	-	-	(318,363)
	2006/07	1,650,194	1	38,200	(1,611,994)
	2007/08	717,452	13	658,970	(58,482)
	2008/09	73,841	25	1,056,449	982,608
	2009/10	35,330	26	948,570	913,240
	Total	2,795,180	65	2,702,189	(92,991)

Assumes an average development allowance of £3607 for a NSSE property and £702 for an OMSEP property.

7.15 Taking account of the loan period and the value of receipt compared to loan, the rate of return (for those transactions we can identify) for NSSE properties was -12 per cent, for OMSEP properties -1 per cent, and cumulatively -2 per cent.

7.16 In the case of shared ownership, the Scottish Government requires an RSL to repay the HAG element of any receipt they obtain as a result of an owner acquiring an additional share or selling their property.

7.17 During 2009/10 the Scottish Government has identified receipts of £2,324,690 being received in respect of 96 shared ownership properties. This suggests the average receipt was £24,216. However, no information is available on when the property was provided or the amount of shares being purchased.

7.18 The Scottish Government receive a receipt from GRO funded property purchased at below market value in a pressured housing market area which is sold within a prescribed period (generally ten years). Receipts have been received for 25 properties provided in the period 2005/06 to 2009/10, totalling £516,100. This represents an average of around £20,600 per property.

Table 7.3: Receipts received from GRO funded properties provided between 2005/06 and 2009/10

Year	No. of Receipts	Value of Receipts
2005/06	-	-
2006/07	3	£54,738
2007/08	7	£153,079
2008/09	10	£200,836
2009/10	5	£107,447
Total	25	£516,100

7.19 Based on our estimate of 140 GRO properties provided in pressured housing market areas over the past five years, this suggests that around 18 per cent have now been sold.

Net Long Term Costs

7.20 Given that all the LIFT schemes have the potential to generate receipts, these require to be factored into a Net Present Value calculation to provide an objective comparison of their relative costs to the public purse. The challenge however is predicting the level of receipts each scheme will generate, given the lack of consistent historic data.

7.21 In order to estimate the receipts that might be generated for NSSE and OMSEP schemes we have drawn on our survey of purchasers. Our survey of NSSE purchasers found that around 16 per cent of those interviewed indicated they intended to move over the next five years, and around 20 per cent of the remainder said that they would purchase some additional equity over the next five years. We have assumed that, on average these purchasers will acquire 20 per cent more equity.

7.22 We estimate this would result in average annual receipts of 4.9 per cent of the upfront subsidy provided. On the basis that purchasers may be more optimistic in predicting their action than actually transpires, we have considered the impact of the level of receipts reducing to 2.5 per cent annually.

7.23 Of the OMSEP purchasers interviewed, 26 per cent indicated they intended to move over the next five years and just under 20 per cent of the remainder said they would purchase additional equity over the next five years. We have assumed that, on average these purchasers would acquire 20 per cent more equity.

7.24 Our assessment is that this would result in average annual receipts of 5.9 per cent of the upfront subsidy provided. Again, we have considered the impact of a lower level of receipts of three per cent annually.

7.25 Given the lack of information on shared ownership receipts by year of provision, we have used the (limited) survey data we have available suggesting that 23 per cent of sharing owners wish to move house over the next five years. When compared against an average receipt per house of £24,216, this suggests that Scottish Government may receive an average annual receipt of two per cent of the upfront subsidy. As an alternative we have considered the impact of receipts reducing to one per cent annually.

7.26 In terms of GRO funded projects, we estimate that, if the trend over the past five years was to continue, this would provide an average annual receipt of around 0.85 per cent of the upfront subsidy provided for the next five years and none thereafter.

7.27 However, as the period gets closer to the security being discharged, the likelihood of purchasers selling their property will decrease. We have considered as an alternative no further receipts being received.

Table 7.4: Comparison of long term subsidy costs for LIFT schemes

	NSSE	NSSE	OMSEP	OMSEP	SO	SO	GRO	GRO
	Option 1	Option 2	Option 1	Option 2	Option1	Option 2	Option1	Option 2
Projected annual receipt %	4.9	2.5	5.9	3	2	1	0.85	0
Up front subsidy £	51,109	51,109	34,158	34,158	55,843	55,843	26,696	26,696
NPV subsidy cost 20 yr. £	11,624	30,537	5,117	17,776	37,670	46,281	25,196	26,696

Assumes net house price inflation of -1% in 2011, 0.6% in 2012, 1.2% in 2013 and 1% in 2014 based on Office for Budget Responsibility predictions and 1% thereafter.
Assumes Treasury discount rate of 3.5%.

7.28 Care needs to be taken about interpreting the NPV subsidy costs, given the inconsistency in information on receipts currently held. However, the figures demonstrate that, if receipts can be achieved for shared equity as purchasers interviewed predict, both NSSE and OMSEP have the lowest subsidy requirements in the long term. In particular OMSEP properties, whilst requiring more upfront subsidy than GRO provide significantly better value for money in the longer term. Shared ownership provides least value for money in terms of both upfront and long term subsidy cost.

7.29 It is also worth noting that whilst the application of the golden share may have the effect of reducing the level of receipts from shared equity properties (and hence lead to a higher NPV), it does result in affordable housing being 'recycled' at the point of sale, with limited additional expenditure.

Value for Money to the Purchaser

7.30 In terms of value for money to the purchaser, we have compared typical housing costs of a sharing owner and a purchaser of a shared equity home. The Scottish Government's survey of RSLs providing shared ownership property identified considerable variations in occupancy charges between landlords. We resurveyed these RSLs to clarify their current occupancy charges excluding maintenance, and received responses from 25 RSLs. We found the average annual occupancy charges for a 3 person 3 apartment flat to be:

25% sharing owner's stake	£2,003
50% sharing owner's stake	£1,451
75% sharing owner's stake	£835

7.31 Within the range of charges, there were considerable variations. For instance, the difference between the lowest and highest charge made by an RSL to a sharing owner with 25 per cent equity was £941 per annum or 62 per cent.

7.32 As an illustrative example, we have compared the cost of a sharing owner acquiring a 25 per cent share in a house valued at £115k. Based on an average occupancy charge, they would pay £2,003, plus a mortgage of £3,156 (assuming an interest rate of 7 per cent over 15 years). They would therefore have annual outgoings of around £5,159. This compares with annual outgoings of around £7,576 for a shared equity owner with 60 per cent equity in a similar valued property.

7.33 Put another way, a purchaser acquiring 25 per cent equity in a shared ownership property with a value of £115,000 paying average charges could acquire around 40 per cent of a shared equity property with the same level of outgoings.

7.34 To compare the cost of shared ownership to social renting, we have taken the notional rent for a 3 person 3 apartment property used by the Scottish Government to calculate subsidy levels for social rented property (£3,224) and deducted notional maintenance costs (£992). This suggests an equivalent annual rental cost for a tenant would be £2,232. A tenant in social rented accommodation is therefore notionally paying just £265 per year more in rental charges than a sharing owner with 25 per cent equity pays in occupancy charges. In addition, the sharing owner has full responsibility for the maintenance of their home and has to fund the 25 per cent of equity they own. Based on these assumptions social renting represents better value to a household than shared ownership.

7.35 Perceptions of value for money was significantly different among shared equity and shared ownership purchasers. Whilst 29 (out of 30) respondents who had acquired their home through NSSE and 38 (out of 44) respondents felt that shared equity represented a good financial investment for them, the position was far more mixed among sharing owners. Although ten households indicated that it was the right option for them, a further 11 had reservations or felt that it was categorically the wrong option.

7.36 Of the 113 GRO properties we have purchaser details for the periods 2005/06 to 2009/10 where the Scottish Government does not hold a Standard Security, we can identify from Sasines records that 34 (30%) have been the subject of a resale.

Table 7.5: GRO resales in properties provided between 2005/06 and 2009/10 where the Scottish Government does not hold a Standard Security*

Year	No. of Resales	Average Length of Ownership (months)	Average Purchase Price (£)	Average Resale Price (£)	Average Gain (£)
2005/06	2	11.5	104,000	117,500	13,500
2006/07	6	17.2	73,542	102,750	29,208
2007/07	13	17.2	89,069	112,269	23,200
2008/09	6	19.3	86,083	108,583	22,500
2009/10	7	37.9	87,857	104,138	16,281
Total	34	25	88,208	108,264	20,056

*for which data is available.

7.37 The average length of ownership of these 34 properties was 25 months with purchasers achieving, on average, a surplus of £20,056 (28%) on the price they originally paid. The minimum period of resale was one month for which the purchaser made a gain of £16,500 (23%). The largest gain made was £39,500 (41%) over a 27 month period. In one case a purchaser made a loss. This was of £16,985 (-16%) for a property that had been owned for 44 months and was sold in 2009/10. However, this was an exception with only one other purchaser not making a gain, and selling a property for the original purchase price.

7.38 Given that there is no claw back available to the Scottish Government to recover any of the subsidy provided, these purchasers have generally achieved a very good rate of return on their investment.

Summary

Value for Money to the Public Purse

7.39 When compared against other LIFT schemes, OMSEP properties generally provide best value for money. Although they require more upfront subsidy than GRO, they require substantially less subsidy in the longer term.

7.40 Conversely, whilst GRO properties require the lowest level of upfront subsidy, in the longer term they represent least value for money, as receipts are only received if a purchaser sells a property which the Scottish Government holds a security over within an agreed timeframe. Shared ownership is the least cost effective in terms of both upfront and long term subsidy costs.

Value for Money to the Purchaser

7.41 Shared ownership is a relatively expensive option to the purchaser compared to shared equity or social renting. This is due to the level of occupancy charges sharing owners have to pay which vary significantly between some RSLs.

7.42 GRO purchasers in properties where the Scottish Government does not hold a security have benefited significantly from the resale of their home, with average surpluses after two years equating to around three-quarters of the upfront subsidy provided.