Starter Home Deposit Loan Scheme (P.131-2012)

STATES OF JERSEY

STARTER HOME DEPOSIT LOAN SCHEME

Lodged au Greffe on 4th December 2012 by the Minister for Treasury and Resources

STATES GREFFE

2012   Price code: B  P.131

PROPOSITION

THE STATES are asked to decide whether they are of opinion

to refer to their Act dated 1st May 2012 in which they approved the Draft Strategic Plan, which, inter alia, set out a priority to "house our community" and  undertook  an  action   to  bring  forward  schemes  to  support  first-time buyers, and –

to approve, in accordance with the provisions of Article 2(1) of the Building Loans (Jersey) Law 1950, the transfer of £3 million from the Dwelling  Houses  Loans  Fund  to  the  Consolidated  Fund  for  the purposes of providing cash balances for the operation of a Starter Home Deposit Loan Scheme for an initial trial period in accordance with the principles and processes outlined in paragraphs 1.6 to 4.2 of the  Report  of  the  Minister  for  Treasury  and  Resources  dated  4th December 2012.

MINISTER FOR TREASURY AND RESOURCES

REPORT

1. Background

1. Adequately housing our community is one of the priorities of the Strategic Plan, including schemes to support affordable and first-time buyer home ownership[1].
2. The Minister for Treasury and Resources and the Minister for Housing have therefore developed the Starter Homes Deposit Loan Scheme as a means of advancing this objective.
3. Jersey is true of many communities where residents have long held onto the belief that owning your home is a symbol of success and security. But the increase in prices in the local housing market over the past decade, followed by difficult economic conditions, has created significant barriers to home ownership.
4. The lending market has transformed since 2008, with a tightening of lending criteria. The standard rate of borrowing now is generally considered to be 4 times income, although other multiples are achievable dependent upon individual circumstance. Loans are generally around 80% of LTV (loans-to- value) of the property. Again, variation is possible in individual circumstances. Deposits therefore are in the region of 20% of LTV. This means that very substantial proportions of the Island's population cannot afford to be home-owners because of the size of repayments and the ability to raise sizeable deposits in the first place.
5. At today's LTV, for example, a 20% deposit on a three-bedroom house priced at £494,000 is just under £100,000; or around £66,000 for a two-bedroom flat priced at £331,000[2], exclusive of legal fees and stamp duty. These are considerable sums to save, even for the most cautious of spenders, especially if households have other significant outgoings, for example, living costs, rent, childcare costs, etc.
6. The challenges of purchasing a home in Jersey are well appreciated and highlighted by the Jersey Housing Affordability Index[3], notably: 79% of householders cannot afford a three-bedroom house and 51% of householders are unable to afford a two-bedroom flat.
7. For these reasons, itis proposed that a targeted pilot scheme be established to support Islanders to attain home ownership suitable to their needs and means, where they otherwise cannot afford the full deposit, but can afford to make repayments if a low interest deposit loan is available.

2. Starter Home Deposit Loan Scheme

1. Under the proposal, the States would lend up to a maximum of 15% of the purchase price of the unit, repayable at 0% interest over an agreed period, with the subsidy on market rates recoverable if the property is sold at a profit before the term of the mortgage.
2. The prospective home-owner must have a minimum deposit of 5% to reward frugal  households.  The  balance  of  any  lending  is to be  provided  by  an approved mortgage provider.
3. It is acknowledged that, in itself, the lending of a deposit does not improve house price affordability, itis merely an alternative financing source for those who might not otherwise be able to obtain finance because of the lack of a deposit, and only improves affordability per se if the interest rates charged by the public sector are lower than private rates, hence the proposed parameters of the scheme.
4. As to which Islanders should be assisted by the scheme, by its nature it will assist those Islanders who can afford to make repayments if low-cost deposit financing is available and who have themselves saved part of the deposit.
5. The scheme will be targeted to assist households with a maximum (gross) income with reference to a maximum property purchase price:

6. The purpose of the above isto limit lending to households with income at or below the level required to purchase a property at the upper limit of the lower quartile of property sales, i.e. those who could afford to repay a mortgage and 0% interest deposit on a property in the lower quartile, but who could not generally do so otherwise without this scheme.
7. (Maximum  purchase  prices  and  maximum  household  incomes  for  other property types would be set using the same methodology; and the above parameters will updated to reflect the latest House Price Index prior to going live with the scheme).
8. Additional eligibility criteria will be imposed, notably –

• Loans cannot be obtained for major new build developments (so as not to discourage developers from offering new purchase discounts).
• Purchasers must be first-time buyers within the rules established by the  Population  Office  (which  allow  persons  who  have  previously bought a flat and sold to a first-time buyer to remain eligible as "first- time" buyers) and residentially qualified for housing purposes.
• Loans will not be provided for properties whose size exceeds the immediate needs of the household, with reference to single people, can only purchase up to a two-bedroom unit; and couples with or without children and single parents with children can purchase units with more than 2 bedrooms.
• Liquid Assets, after the payment of 5% deposit and fees, should not exceed £9,200 for a single person household or £15,200 for a couple (these limits being consistent with Income Support rules).

9. These parameters are outlined with reference to the pilot nature of the scheme, and could be revised subject to the performance of the scheme. They are considered prudent when first approaching a scheme of this nature and are targeted at those least able to afford to purchase property. The Minister for Treasury and Resources will retain some discretion with reference to granting of loans, and will exercise this discretion having consulted with the Minister for Housing, and with a view to securing the objectives of the scheme as outlined in paragraph 1.6 above.
10. Using  these  parameters  and  within  the  £3 million  funding  envelope,  it  is estimated that up to 100 Islanders could be supported, depending on the types of property for which an application is made.
11. It is proposed that the scheme will run as a 6 month pilot starting in 2013, which may be extended subject to its success, impact, market conditions, and identification of a long-term funding source.

3. Financing and Governance

1. The Starter Homes Deposit Loan Scheme will be established by way of a transfer of £3 million from the Dwelling Houses Loan to the Consolidated Fund. The Dwelling Houses Loan Fund had a net asset value of £11.7 million as at 31st December 2011, with liquid investments of £5.6 million.
2. The Dwelling Houses Loan Fund was established by way of the Building Loans (Jersey) Law 1950, to authorize the lending of money for enabling persons to acquire dwelling-houses. The Dwelling Houses Loan Fund has been largely inactive in recent years – given that private financing has been available and that public lending for the full value of a loan is no longer affordable at today's property prices.
3. However, given the Strategic Priority to support affordable home ownership, and reflecting the issues in today's lending market, itis proposed that the monies accrued in the Fund should be transferred to the Consolidated Fund and  used  to  support  home  ownership,  in line  with  the  objectives  of  the Dwelling Houses Loan Fund, but under the ambit of a new Starter Homes Deposit Scheme that is more targeted and more affordable.
4. Any loans granted under the proposed scheme would be made in accordance with  Article 23(3)  of  the  Public  Finances  (Jersey)  Law  2005  and Regulation 13  of  the  Public  Finances  (Transitional  Provisions)  (No. 2) (Jersey)  Regulations  2005.  This  allows  the  Minister  for  Treasury  and Resources, in any financial year, to lend up to £3 million, providing each individual transaction does not exceed £500,000, and the loans outstanding under this delegation do not exceed £10 million. Any amount lent is repayable within 20 years. Such loans must be made from cash balances (Consolidated Fund).
5. Loans  would  be  made  following  an  assessment  of  the  applicant  against eligibility criteria, including having the 5% deposit contribution themselves, and alongside confirmation that they were able to obtain a mortgage for the balance of the property price from a mortgage provider as the primary lender. The primary lender would assess the affordability of the loan repayments, after  other  outgoings,  including  the  deposit  loan.  As  the  purpose  of  this scheme isto provide loans for part of the deposit, there will clearly be another charge on the property, i.e. from the primary lender.
6. The Accounting Officer for the Scheme will be the Treasurer of the States, and eligibility for loans in relation to individual applications with reference to the scheme criteria will be signed off under the auspices of the Strategic Housing  Unit.  Detailed  process  and  internal  controls  will  be  applied, mirroring and utilising the processes and controls applied over other States Loans.
7. Local mortgage providers have confirmed the viability of the scheme, and their  preparedness  to lend  under  the  scheme  and  arrangements  will  be finalised should States approval be forthcoming.

8. The Minister for Treasury and Resources must, at periods of no longer than 6 months,  report  to the  States  details  of  any  lending  made  under  this Regulation.

4  Financial and manpower implications

1. The scheme would cost £3 million, of which £2.97 million would be lent to qualifying  households  and  £30,000  utilized  to  meet  the  costs  of administration, being 1% of scheme costs.
2. The scheme would require an additional 0.5 FTE for the life of the pilot scheme,  and  ongoing  collection  and  administration  thereon  would  be undertaken alongside other loan collection activities with negligible financial and manpower implications.

5.  Conclusion

5.1  The States is asked to lend its support to this proposal which, although modest in its scope, will allow members of our community, especially the younger generation of first-time buyers, the opportunity to take their first steps onto the property ladder with the purchase of their starter home.

APPENDIX

Affordability Assessment

House Price s -v- Earnings – Disparity

In 2011, the States of Jersey's Statistics Unit produced a report entitled "Housing Affordability in Jersey 2002 – 2011". The principal aim of the report was to provide an analysis of the ability of working households (defined as having at least one adult in employment) in Jersey to purchase accommodation affordably.

It is evident by comparing mean household incomes and qualifying incomes that in both years, median priced properties were unaffordable4. In Tables 1 and 2 (below),

affordability indices are shown separately for flats and houses, based on net household income –

Table 1 – Affordability indices based on net household income – flats

4 States of Jersey Statistics Unit – Housing Affordability in Jersey 2002 – 2011

Table 2 – Affordability indices based on net household income – houses

However, the effects of household income on affordability need to be also considered in relation to the effect of interest rates and property prices during the same period.

Table 3 reflects the effect on affordability of three-bedroom houses of changes in mortgage interest rates and property prices. The improvement in the affordability index between 2008 and 2011 was marked by lower interest rates (notable between 2008 and 2009 – the height of the global financial crisis) coupled with the relative stability of local property prices.

Table  3 –  The  JHAI, median  dwelling  price (three-bedroom  houses)  and mean mortgage interest rates

Property prices

When assessing the median priced property (based on one- and two-bedroom flats and two-, three- and four-bedroom houses) in the Island and based on a ratio analysis (4 x gross  household  income)  a  household  would  need  to  earn  £85,500  in  gross household income and have a 10% deposit to afford to purchase a median priced property.  More  than  three-quarters  (78%)  of  working  households,  representing 21,000 households,  do  not  earn  the  requisite  gross  income  of  £85,500  needed  to purchase a median priced property. Using the JHAI, a household would need to earn £72,000 in gross income and have a 10% deposit to afford a median priced property. More than two-thirds of working households, representing around 18,000 households, do not earn the requisite £72,000 needed to purchase a median priced property.

Household earnings

When considering working households that have gross earnings between the 25th and 75th  percentile  (the  middle  50%)  and  based  on  a  ratio  analysis,  essentially  no household  in  the  middle  50%  can  afford  to  purchase  a  median  priced  property (£380,000), even with a 10% deposit. Using the JHAI model, about 1 in 7 (14%, corresponding to 1,800) working households that have gross income in the middle 50% can afford to purchase a median priced property. For a median priced property to be affordable to every working household in the "middle 50%", it would need to be discounted by around £200,000 (depending on the model used: £195,00 using ratio analysis and £240,000 using the JHAI)5.

5 Assumptions: Data includes working households only; all households have at least one adult in employment. Households are assumed to have a 10% deposit towards the cost of purchasing a property. Criteria of Affordability: Ratio analysis = Dwelling purchase price should not exceed 4 x annual gross household income. JHAI = mortgage payments (principal and interest) should consume no more than 30% of gross household income.

Source – States of Jersey Statistics Unit.