Shared ownership dip in house prices - good news for staircasing?

annetheman

Can anyone help me get my head around the implications of a dip in house prices on shared ownership valuation and staircasing?

My initial thoughts are that if the full market value of the flat I'm leasing decreases, buying more shares will be more affordable if my personal income increases too - buying more shares will obviously be more affordable if my income increases but will it be more affordable if I dip into negative equity. I suspect I may be missing something.

Here is the scenario based on bold assumptions about a house price dip in the next, let's say, 5 years:

• Buy a 50% of current FMV
• FMV decreases due to house price dip over 5 years
• In 5 years, resultant negative equity on FMV is £30,000
• Savings above £30,000 accumulated in the 5 years
• OR dip in FMV means FMV in 5 years is not much more than it is now (little equity gained)
• Pay increase/additional income over 5 years allows affordability on 75% share (without borrowing more against the property)
• 75% share costs less than it would have 5 years ago

What am I not considering about these scenarios?
Edit to add: calculator I'm using to assess affordability based on assumptions about income increase and FMV decrease: https://assets.publishing.service.gov.uk/media/58d55b72e5274a06b300000e/Homes_England_initial_eligibility_and_sustainability_shared_ownership_calculator_-_March_2020__CFG_.xls

My plan has always been to staircase in my SO flat over time, and am under the impression a dip in the market would be beneficial in that respect - is this incorrect?

Thanks for any thoughts!

princeofpounds

Not sure what's confusing you about this - if house prices fall, you lose on the equity you do do own falls in value (which is obviously not crystallised as a cash loss) but the equity you don't own becomes cheaper - assuming it is based on a fair market valuation - so less cash is required to staircase at the time you choose to do it.

So yes, it can be cheaper in a hypothetical situation to buy less of an SO property now and staircase at a later date. In the same way it can be cheaper to not buy a property now and buy it at a later date.

Obviously there are other considerations in a detailed calculation - the cost of rent vs. the interest cost of funding to hold equity etc.  And there is a huge great assumption about house prices driving all of this.

eddddy

The spreadsheet you're linking to is an initial eligibility assessment - I doubt it applies to staircasing. I suspect it's much simpler than you describe.

In simple terms, if property prices drop in the next 5 years
- the downside is that the 50% you own drops in value
- the upside is that the 50% you don't own also drops in value, so you can buy it more cheaply in 5 years time.

If you think property pries will drop over the next 5 years, perhaps the answer is to buy the smallest percentage possible today, and buy more of the property in 5 years time - because it will be cheaper then. Or better still, don't buy any property today, and wait 5 years until they're cheaper.  (But taking into account the rent you'll have to pay in the meantime, interest charges etc). 


But obviously, if you're wrong and property prices increase - you'd lose out. (If you think property prices will increase, you should buy the biggest percentage possible today.)

annetheman

eddddy said:

The spreadsheet you're linking to is an initial eligibility assessment - I doubt it applies to staircasing. I suspect it's much simpler than you describe.

In simple terms, if property prices drop in the next 5 years
- the downside is that the 50% you own drops in value
- the upside is that the 50% you don't own also drops in value, so you can buy it more cheaply in 5 years time.

If you think property pries will drop over the next 5 years, perhaps the answer is to buy the smallest percentage possible today, and buy more of the property in 5 years time - because it will be cheaper then. Or better still, don't buy any property today, and wait 5 years until they're cheaper.  (But taking into account the rent you'll have to pay in the meantime, interest charges etc). 


But obviously, if you're wrong and property prices increase - you'd lose out. (If you think property prices will increase, you should buy the biggest percentage possible today.)

Cheers, very helpful. With this in mind:
-Dunno if it's standard but with my housing association, you are required to buy the highest %age you meet the affordability <45% for, so I couldn't buy less if I wanted to.
-If I stay where I am, I will have spent £72,000 on AST rent in 5 years, as I pay £1,200 pcm!
-I definitely consider the rent on un-owned share to be very cheap at 2.75%; taking into account that amount + increases of x1.005 over 5 years, I would still be much, much better off than in AST if I'm in negative equity in 5 years.

So for those reasons I want to proceed now, regardless of any Crashy-predicted crash.

My assumption about very small or no increase in FMV is based on the fact that flat prices rocketing is VERY unlikely given

• The cladding crisis, no nearby resolution.
• Recently-announced leasehold reform potentially making "old" leases like this one with ground rent very unattractive (125 years, GR starts at £100 increase every 10 years at RPI) .
• Massive EWS1 issue resolution nowhere in sight - I have one and have scrutinised report of course.

If I am wrong and prices do go up significantly, I could then staircase to a smaller extent, on the basis my income has increased and the equity share owned is higher. 100% may be unattainable on my own, though, in the event of a big price increase, but then I guess I'd get 50% of good equity..

So for this reason, I'm thinking this flat purchase amid above crises at this specific time amid bigger global crises is a good thing for future staircasing - it's not a 'step up the ladder' and I don't want to sell up any time soon, definitely a long term investment. Hope that makes sense!?

Depends what happens in future I guess!

Crashy_Time

I think there are probably better long term investments, and rent is only going down the longer Covid is here.

annetheman

Crashy_Time said:

I think there are probably better long term investments, and rent is only going down the longer Covid is here.

Noted, but this ^ would be a consideration I made before even deciding to go for SO. For me it isn't an 'investment' per se, I shouldn't have used that term.

I'm not hoping to move in 5 years and make some equity, it's a long term home. I expect I will still be there in 10 years hence desire to staircase.

So my question is more about the positive implications a house price dip would have on that, rather than the decision to lease SO at all.

Crashy_Time

How would rising interest rates affect you?

princeofpounds

Leasehold reform (not that we have any idea what it really means yet) is not going to drastically impact the value of 'unreformed' properties that are somehow left untouched. They are already worth somewhat less than properties with longer leases and lower ground rent. 

As I said on another thread, there is already a vast market of properties with infinitely long leases and zero ground rent - it's called freehold (all property in the UK being ultimately a tenancy under the crown).

Furthermore your property is not going to be valued based on the average flat. Surveyors and market participants are well aware of price differentials between flats with cladding/EWS1 problems and those without and will account for them in any valuation, as far as they are able.

Interest rates on the other hand... now that's something that really can move property prices. But I'm not offering any forecasts.

annetheman

Crashy_Time said:

How would rising interest rates affect you?

In a very similar way to anyone else with a mortgage, not really specific to staircasing. I guess I hope someone who had a SO home throughout 2006-maybe 2016 can tell me what their experience was in real terms when they came to staircase. Did the crash of 2008 mean it was easier for them to staircase and if so what else had changed for them?

Hopefully this will still be open and someone will bump it with an answer in the next 5 years!!

Crashy_Time

annetheman said:

Crashy_Time said:

How would rising interest rates affect you?

In a very similar way to anyone else with a mortgage, not really specific to staircasing. I guess I hope someone who had a SO home throughout 2006-maybe 2016 can tell me what their experience was in real terms when they came to staircase. Did the crash of 2008 mean it was easier for them to staircase and if so what else had changed for them?

Hopefully this will still be open and someone will bump it with an answer in the next 5 years!!

IMO SO/HTB etc shouldn`t exist, but as already pointed out all that is happening is that you may have overpaid for 50% of a property and may or may not get a better deal on the other 50%, interest rates being the outlier that has a crucial effect but is very hard to predict with any accuracy.

Crashy_Time

eddddy said:

The spreadsheet you're linking to is an initial eligibility assessment - I doubt it applies to staircasing. I suspect it's much simpler than you describe.

In simple terms, if property prices drop in the next 5 years
- the downside is that the 50% you own drops in value
- the upside is that the 50% you don't own also drops in value, so you can buy it more cheaply in 5 years time.

If you think property pries will drop over the next 5 years, perhaps the answer is to buy the smallest percentage possible today, and buy more of the property in 5 years time - because it will be cheaper then. Or better still, don't buy any property today, and wait 5 years until they're cheaper.  (But taking into account the rent you'll have to pay in the meantime, interest charges etc). 


But obviously, if you're wrong and property prices increase - you'd lose out. (If you think property prices will increase, you should buy the biggest percentage possible today.)

That is exactly how the scam, sorry scheme works!