The trouble with shared equity
The Week in Housing bonus post 04/02/25
Thanks again to everyone who has signed up as a paid subscriber. As a result of this support, I’ve decided to spend a bit more time on the Newsletter and with this in mind I am releasing this ‘bonus post’ on shared equity. In recognition of the support from paid subscribers, this post will first only be available to paid sucribers. In two weeks it will be freely available to all subscribers.
Perhaps the most remarkable measure included in the new Programme for Government is the expansion of Shared Equity (First Home Scheme) to second-hand homes. The policy was already subject to quite a bit of critique from various quarters, but its expansion to the second-hand market is sure to raise some eyebrows. With this in mind, I recently read the Central Bank’s note on the early proposal for the scheme. As usual, the empirical research on the scheme’s impact so far is non-existent, but the CB’s piece gives us a useful starting point for discussion.
How it works
The aim of the scheme is to increase households purchasing power by providing an additional source of finance, on top of a mainstream mortgage. Households can access a mainstream mortgage to cover a minimum of 70% of the cost of purchase. For the remaining 30% they access a second source of funding, this is the ‘shared equity’ component. This comes from a mix of Government provided money and money from banks. The money is pooled together in a Special Purpose Vehicle, a legal/financial entity which pays for the remaining 30%. The SPV is then the ‘owner’ of 30% of the house, i.e. 30% of the equity, hence the name. The owner and the SPV share ownership of the house. If they wish, the owner can then ‘buy out’ this 30% share and become the full owner. If they don’t do this and at some stage sell the property, they take 70% of the sale price while the SPV takes the rest (which would then be split between the Government and the participating bank).
The scheme thus allows purchasers to buy housing which is significantly more expensive than that which they could buy relying solely on a conventional mortgage. In so doing, it will (allegedly) enable more people to become homeowners.
There are no income limits associated with the scheme, but house prices must be between €350,000 - €500,000.
Potential issues
The CB paper focuses on the financial stability side of the scheme. There are a number of different aspects to this, but the main ones relating to housing policy are:
1. It could put participating households at greater risk of default;
2. It could increase house prices by adding demand.
The CB don’t seem to think the first issue is too much of a problem because of how the scheme is structured. The household doesn’t have to pay off the 30% equity share if they don’t want to, so they are not ‘on the hook’ for this extra portion of funding.
The second question is the more problematic. The CB note that the impact on house prices will depend on a number of factors:
1. How much of the additional funding households will draw down: the maximum Shared Equity component is 30% (or 20% if the household is also availing of Help to Buy), but households may draw down a lower amount, which would reduce the additional demand generated by the scheme;
2. Whether or not the scheme is used to facilitate purchases by households who otherwise would not buy, or to allow households who would have bought anyway to buy more expensive households. We know from the research on Help to Buy, that a large portion of participants in that scheme do not actually require support to purchase, and instead use it to buy more expensive houses than they would have absent the scheme. It stands to reason that something similar will occur in relation to Shared Equity.
3. The extent of funding: the CB research was published in 2021, at the time they estimated Government funding would be €400 million, with an annual spend of €133. Since then, however, additional funding has been allocated and the fund is now €680m.
Based on some assumptions about the above factors, the CB estimate that the Shared Equity scheme could increase overall mortgage credit by about 7.1% of 2019 volumes, which is actually quite significant given that house prices are already thought to be overvalued to the tune of 10%.
Since the CB’s report, more information on the actual level of funding involved can be found in the First Home Scheme annual reports (see the recently released 2024 summary report here). These show about 3,700 drawdowns since the scheme launched in 2022, with an average value of almost €66,000, representing 17% of purchase price. The average value of properties purchased was €384,752, and they are overwhelmingly in the Greater Dublin Area (74%).
UK research
As Shared Equity is based on a very similar scheme in England (Help to Buy, ended in 2023 I believe), the CB paper summarizes evidence in that context:
“Carozzi et al. (2019) show Help-to Buy increased construction numbers without affecting prices in some locations but in areas subject to severe long-run constraints, for example London, it substantially increased house prices with little impact on construction volumes and aggregate mortgage lending. Benetton et al. (2019) [show]… that the net effect is the same households purchasing more expensive housing rather than higher levels of supply and homeownership… [T]hese studies do point to the potential for schemes which operate through the demand side of the market to result in upward price pressures, particularly in the context of supply constraints.”
In short, in supply constrained contexts (like Ireland), schemes like this can push up prices without any benefit in terms of supply or increased homeownership. The UK research suggests price inflation as a result of their version of Shared Equity has been between 3% and 4% for new homes.
In its original form, the Shared Equity scheme was thus highly dubious with regard to the evidence base supporting the likelihood of the scheme delivering on its own objectives. As it was targeted at new homes only, however, the Government could at least claim it increased viability by increasing purchasing power. However, its extension to the second-hand scheme, as far as I can see, has no possible justification. It thus smacks of a Celtic Tiger era ‘throw money at people’ approach. My gut feeling is that the extension of shared equity can seen as breaking a taboo which had developed in policy making since the crash around inflationary homeownership policies. Hopefully its inflationary effects will be limited, and we won’t see the extension of Help to Buy or similar schemes in the second-hand market under this new Government.