The Downside To Shared Equity

[Guest The_Oldie]

Today his guest was, Melanie Bien of Savills Private Finance.

Declan asked her to explain Shared Equity.

When she had finished, he asked "what's the downside?"

She answered that you only own half the property, "so when you sell it on, say the government owns half of it, you have give the government 50% of your profit".

[davidhpc]

Today his guest was, Melanie Bien of Savills Private Finance.

Declan asked her to explain Shared Equity.

When she had finished, he asked "what's the downside?"

She answered that you only own half the property, "so when you sell it on, say the government owns half of it, you have give the government 50% of your profit".

What happens with these shared equity things if the property value falls?

e.g. say you bought a property for 100K, 50K-50K with the government, and it dropped to 80K? Where does the liability for the loss fall? Is that shared?

[A Fool & His Borrowed Money]

What happens with these shared equity things if the property value falls?

e.g. say you bought a property for 100K, 50K-50K with the government, and it dropped to 80K? Where does the liability for the loss fall? Is that shared?

No.

[davidhpc]

No.

so say it was sold for 80K, you'd have to give the government 50K and take the 20K hit?

[Bingley Bloke]

The value of the government's share is protected, so should the property fall in value your half will fall in value at double the rate so that the government's half retains 100% of its original value. Put another way, as prices fall your half of the propery is transfered, brick-by-brick, to the government, so that their stake in the property maintains the same monetary value. If prices fall by 50% your half has disappeared totally and the government now has a whole house which it purchased for half price. If you happen to lose your job at around the same time as this you can kiss goodbye to your home, and the money you borrowed to pay for it, and scratch your head as you wonder how to cover the debt that you took on to pay for something that no longer exists!

These schemes should be avoided at all costs. They're nothing more than a government scam to acquire large portfilios of property, in the pre-crash era, at post-crash prices, with 50% of the funding provided by the lowest-earners. The only real solution is for the house price:wage ratio to correct to a natural level.

Edited March 13, 2008 by Bingley Bloke

[DoctorJ]

The value of the government's share is protected, so should the property fall in value your half will fall in value at double the rate so that the government's half retains 100% of its original value. Put another way, as prices fall your half of the propery is transfered, brick-by-brick, to the government, so that their stake in the property maintains the same monetary value. If prices fall by 50% your half has disappeared totally and the government now has a whole house which it purchased for half price. If you happen to lose your job at around the same time as this you can kiss goodbye to your home, and the money you borrowed to pay for it, and scratch your head as you wonder how to cover the debt that you took on to pay for something that no longer exists!

These schemes should be avoided at all costs. They're nothing more than a government scam to acquire large portfilios of property, in the pre-crash era, at post-crash prices, with 50% of the funding provided by the lowest-earners. The only real solution is for the house price:wage ratio to correct to a natural level.

So is the same true of key workers allowance? - which IIRC is 50K

[davidhpc]

The value of the government's share is protected, so should the property fall in value your half will fall in value at double the rate so that the government's half retains 100% of its original value. Put another way, as prices fall your half of the propery is transfered, brick-by-brick, to the government, so that their stake in the property maintains the same monetary value. If prices fall by 50% your half has disappeared totally and the government now has a whole house which it purchased for half price. If you happen to lose your job at around the same time as this you can kiss goodbye to your home, and the money you borrowed to pay for it, and scratch your head as you wonder how to cover the debt that you took on to pay for something that no longer exists!

These schemes should be avoided at all costs. They're nothing more than a government scam to acquire large portfilios of property, in the pre-crash era, at post-crash prices, with 50% of the funding provided by the lowest-earners. The only real solution is for the house price:wage ratio to correct to a natural level.

thanks, yes it seems a very big risk in a falling market. any fall in property values hit you double, and any gains (unlikely) would be halved.

[crown]

I believe you are also liable for 100% of all repair bills and associated home owning expenses.

Do you have a link for an explanation of shared ownership details?

[cartimandua51]

I believe you are also liable for 100% of all repair bills and associated home owning expenses.

Yes- even if you only "own" 10%!

What I don't know is whether the Govt can pursue you for Govt losses-

e.g. if the house is 100K & you own 33.3%; if the house drops by 50% so is only worth 50K, obviously you lose all your equity, but can the Govt come after you for their loss of 16.67K?

[cartimandua51]

That depends on the terms of the loan.

If you "give back the keys", can they chase you?

And how do you escape from this bad bargain?

I suspect that in this case it'd be worth bankrupting your way out of - after all, the Official Receiver could hardly argue that you had behaved irresponsibly in signing up to a Government-backed scheme, so you'd probably get a very early release!

[General Melchett]

no?

What a horrible deal - Deal with the Devil!

He gets 50% of the upside. And you get all of the risk??

This is a deal for fools

Better walk when it goes into negative equity

Exactly. These things always have been: they were when they were trotted out at the peak of the last housing bubble and they still are. Same goes for all the other, ahem, imaginative one way bets (whatever happens, you lose) that people are encouraged to take on at this stage of the cycle.

Problem is, there are a lot of fools out there. If you doubt this - 50,000 new mortgage approvals last month......

Edited March 13, 2008 by General Melchett

[Leonard Hatred]

Crikey, as if it wasn't bad enough already to have to pay most of your wages for 50% of a house you could have easily bought a few years ago

[Cinnamon]

I dimly remember that unfair contracts are not fully valid and can be amended by the court -- and methinks this is the perfect example.

I have a feeling that if you signed the same thing with anyone but the government, the judge will tell your 'business partner' to take a hike.

[Borisina]

The value of the government's share is protected, so should the property fall in value your half will fall in value at double the rate so that the government's half retains 100% of its original value. Put another way, as prices fall your half of the propery is transfered, brick-by-brick, to the government, so that their stake in the property maintains the same monetary value. If prices fall by 50% your half has disappeared totally and the government now has a whole house which it purchased for half price. If you happen to lose your job at around the same time as this you can kiss goodbye to your home, and the money you borrowed to pay for it, and scratch your head as you wonder how to cover the debt that you took on to pay for something that no longer exists!

These schemes should be avoided at all costs. They're nothing more than a government scam to acquire large portfilios of property, in the pre-crash era, at post-crash prices, with 50% of the funding provided by the lowest-earners. The only real solution is for the house price:wage ratio to correct to a natural level.

This makes me feel sick. I bet that there are a lot of people going to jump into this deal because they have been so brainwashed ie get on the ladder, can't lose with property et al.

If there is a journalist on this forum, the word must be spread that this is a very bad game to enter into. I am going to do my bit tonight with some friends who are thinking of doing exactly this

[Timm]

The value of the government's share is protected, so should the property fall in value your half will fall in value at double the rate so that the government's half retains 100% of its original value. Put another way, as prices fall your half of the propery is transfered, brick-by-brick, to the government, so that their stake in the property maintains the same monetary value. If prices fall by 50% your half has disappeared totally and the government now has a whole house which it purchased for half price. If you happen to lose your job at around the same time as this you can kiss goodbye to your home, and the money you borrowed to pay for it, and scratch your head as you wonder how to cover the debt that you took on to pay for something that no longer exists!

These schemes should be avoided at all costs. They're nothing more than a government scam to acquire large portfilios of property, in the pre-crash era, at post-crash prices, with 50% of the funding provided by the lowest-earners. The only real solution is for the house price:wage ratio to correct to a natural level.

I hate SO / SE, and am always glad of an opportunity to trash it.

However I remain unconvinced of the above. Does anyone have any concrete evidence for this?

[Objective Developer]

I’m afraid that isn’t the case – shared equity is just that, a share in the value of the home. The part-owners are the resident and housing association, and between them they take equal risk on HPI / HPC.

You need to remember that housing associations are essentially private companies, so are not totally immune to market conditions.

[Authoritarian]

If you bought a place for 100k and then it lost 20% of its value who would you have to pay first the private lender or the government? There are far too many complications for my liking for these sorts of schemes and I don't think the vast majority of people that have got onto the ladder in this way really understand the various pitfalls. They're in for a rude awakening.

[Objective Developer]

If you bought a place for 100k and then it lost 20% of its value who would you have to pay first the private lender or the government? There are far too many complications for my liking for these sorts of schemes and I don't think the vast majority of people that have got onto the ladder in this way really understand the various pitfalls. They're in for a rude awakening.

You would have 10% neg. equ. on your share, so you would only be liable for that.

EDIT: it's 20% on your share, and 20% over all - but you get what I mean!

Edited March 13, 2008 by Objective Developer

[Housing Bear]

I’m afraid that isn’t the case – shared equity is just that, a share in the value of the home. The part-owners are the resident and housing association, and between them they take equal risk on HPI / HPC.

You need to remember that housing associations are essentially private companies, so are not totally immune to market conditions.

Dear Objective Developer,

Could you please provide a link to your understanding on shared equity schemes please? I need educating!

Best wishes, Housing Bear

[lets get it right]

"If the owner opts to sell then an independent market valuation is done and Notting Hill Home Ownership has two months to find a buyer from its books, or the property can be sold on the open market with the proceeds split according to ownership."

Makes a nonsense of the claim above that the person who takes on a shared equity scheme shoulders all the losses.

[Objective Developer]

Dear Objective Developer,

Could you please provide a link to your understanding on shared equity schemes please? I need educating!

Best wishes, Housing Bear

No link I'm afraid, but I am the affordable housing planning officer for a city council, and prior to that I developed affordable housing for an RSL. Does that count?

You could have a look on the housing corp. website if you can be arsed (I can't), or maybe just ring up and RSL and ask? That would be funny.

[Guest The_Oldie]

I’m afraid that isn’t the case – shared equity is just that, a share in the value of the home. The part-owners are the resident and housing association, and between them they take equal risk on HPI / HPC.

You need to remember that housing associations are essentially private companies, so are not totally immune to market conditions.

That is how I thought it worked. Ms. Bien, however, failed to mention a potential loss due to house price deflation, preferring to mention only the loss of 50% of the profit.

[Timm]

That is how I thought it worked. Ms. Bien, however, failed to mention a potential loss due to house price deflation, preferring to mention only the loss of 50% of the profit.

Well, at least she knows how anchoring works, unlike our idiot chancellor.

(If you want to keep expectations of inflation low, you don’t run about shouting about how it used to be really high.)

[MattW]

The value of the government's share is protected, so should the property fall in value your half will fall in value at double the rate so that the government's half retains 100% of its original value. Put another way, as prices fall your half of the propery is transfered, brick-by-brick, to the government, so that their stake in the property maintains the same monetary value. If prices fall by 50% your half has disappeared totally and the government now has a whole house which it purchased for half price. If you happen to lose your job at around the same time as this you can kiss goodbye to your home, and the money you borrowed to pay for it, and scratch your head as you wonder how to cover the debt that you took on to pay for something that no longer exists!

These schemes should be avoided at all costs. They're nothing more than a government scam to acquire large portfilios of property, in the pre-crash era, at post-crash prices, with 50% of the funding provided by the lowest-earners. The only real solution is for the house price:wage ratio to correct to a natural level.

This is very worrying! I have two friends who have bought shared equity houses (their decision!). I even looked into it myself about 4 or so years ago. Ironically, I 'wasn't earning enough' so ended up buying a run down ex-council flat instead. Even small flats seem to require applicants to be earning the best part of £18k! I think that no-one should be paying rent on the half owned by the Housing Association...especially as all s/e properties are leasehold and there are service charges to pay!

[OLDFTB]

Today his guest was, Melanie Bien of Savills Private Finance.

Declan asked her to explain Shared Equity.

When she had finished, he asked "what's the downside?"

She answered that you only own half the property, "so when you sell it on, say the government owns half of it, you have give the government 50% of your profit".

She's wrong. How can it be "50% of your profit" if you only "own" half the property?

She means 50% of the profit goes to whoever owns the other half! And of course you would take 50% of your halfs profit.

But seeing as how we are heading for a house price meltdown (forget just crash) it's all just academic anyway isn't it?