The age of co-ownership
A new way into the market for low-equity home buyers
Auckland’s property market is increasingly hard to crack for first-home buyers, but co-ownership could be the answer. Executive director of YouOwn, Nigel Spratt explained how it works to Alice Webb-Liddall.
Despite the constant headlines about yet another 19-year-old who’s bought a house, the property market seems geared against anyone under 40 purchasing property. Coming to terms with the fact that I might be renting for the rest of my life is a hard pill to swallow. The bank of mum and dad is one I sometimes draw on for emergency bus money, but there’s no way it can stretch to a house deposit.
So what are my options? Save 5% for a deposit then be stuck with a low equity loan that drains all of my weekly spending money? Stop engaging in all social activities and save every cent that I have spare and hopefully scrape together enough for a 20% deposit by 2039?
That’s the conundrum that Nigel Spratt noticed two years ago when he started YouOwn. His company has now helped around 25 people and couples purchase their own homes, and aim to assist a further 50 in 2020.
The model is relatively simple: you save enough for a 5% deposit, then YouOwn will come on board with the other 15%. The transaction is customer-driven, and Spratt says YouOwn realises not all of its customers think alike. The team is happy to take a back seat with their more independent customers, Spratt says, or to provide contacts in finance and real estate for those who want a bit of help. And you only have to pay them back when you decide to sell. It seems too good to be true, so what’s the catch?
Alice: What was it about the local property market that led you to starting YouOwn?
Nigel: What’s happened in New Zealand is that property prices have gone up rapidly in the past five years, and at the same time the Reserve Bank has made the requirement that home purchases need to have a 20% deposit, so we’re in the space where it costs more and you need a bigger deposit. It’s a real conundrum.
What I saw when this happened was an increasing demand from people coming through who wanted this kind of product. I was working for the Housing Foundation and that has a shared ownership product. It’s a charity and it was targeted at that sector in the market and had an income cap of $95k. What we saw was a lot of people coming through saying “we don’t have a 20% deposit,” and the foundation would say “we can’t help you because you earn too much”. I had a lightbulb moment: there was a whole market out there and they can’t get that deposit, so what are their options?
What does shared ownership actually mean?
Shared ownership is you buying a house with a partner, so you’re buying a house with us. The legal phrase is ‘tenants in common,’ and that’s where two people are buying a house but aren’t in a relationship. That simply means that both of our names go on the title. Why that’s really important is that the Reserve Bank and the consumer banks look at that, and because you’re an owner, with your 5% and YouOwn’s 15%, that’s a 20% deposit. Then you qualify for the prime rates that banks offer for people who have 20% deposit – that’s the magic of our model, and that’s why it works financially.
Okay, so you pay 15% towards the initial deposit, but then what? There has to be a catch.
What happens is you buy a house and we put our share in for as long as you want to own that house. You pay us 4.95% p.a. on our 15%, then when you sell the house, YouOwn receives the capital gain on our investment. You have options if you want to buy us out along the way, but if you sell, we go. For us it’s a long term investment.
Why not just buy rental properties then?
We’re an investor and we’re buying property as an investment. For us it’s better than buying rental property because you’re not a tenant, you’re an owner. We try to be as passive and as out of your hair as possible. We want you to treat it as your own home. The idea is that you have a bank and you have us, who helped you buy the home. We don’t go around and inspect the houses, you can do everything that you want to do with it, we’re just there to help you get into it.
Banks don’t necessarily need house buyers to have a 20% deposit. What’s stopping people from using their 5% deposit and borrowing 95% from the bank?
Our product is really cost effective. If you have a 5% deposit, your option is looking to get a low equity loan from a bank. Let’s assume you’ve ruled out mum and dad, you don’t want to do it with a friend, you’re going to do it on your own. If you decide this is something you want to do, with a 5% deposit you can go and talk to most of the banks who will give you a 95% loan; that’s called a low equity loan. If you don’t have a 20% deposit, you have to pay a higher interest rate.
Our pitch is this: for an $800,000 house, if you use YouOwn, the cost to you will be $200 less each week. It’s a trade off because you’re going to give YouOwn 15% of the capital gains on your house if you sell.
You’ll look at our product and say either “yes, I want to cash it in now” or “no, I don’t want another party buying my house with me”.
So where did the model for co-ownership come from?
Property co-ownership is not new. We’ve simply adopted a product from the UK and Ireland. Nearly all first home buyers now in London are buying co-ownership because they can only afford part of a house, but it still gets them into the market. What I think is that in Auckland, house prices doubled in seven years or so. $400,000 then is around $800,000 now, so if you can buy a house with us for $600,000, you’re still spending that on a house, you just own 85% of it, instead of the whole thing. It still gets you into the market.
Who’s your target market?
There are probably three groups that our customers now are falling into. The first will be young couples who may have student loans but don’t have too much other debt. Generally they’ll be graduate-to-young professionals who have been in Kiwisaver for three to five years so can use that for the deposit.
The other key group, which we’re really passionate about, is what we call ‘key workers’ and that will tend to be families with children and both adults working with fairly stable income. People like teachers, nurses, firefighters, civil servants, people on wages or salaries who have quite a good income – usually a minimum of $60,000 each – and stable employment. They’ve got into a house and put their roots down. What that means is that they can get their children settled, get them into school zones, and they’re not going to get moved around.
The third group, which we’ve started seeing come through is ‘second chance,’ where the marriage is dissolved or something has happened and so one partner is going out on their own.
What if someone is unsure of what’s best for them and their situation?
A lot of people, when they buy their first home, don’t even know how to get a mortgage, they find the whole process daunting – will the bank fold their arms and get grumpy, will they put the ruler over it and make it quite scary?
Most of the people who come along like YouOwn to be with them all the way. We have property partners and real estate partners. We can introduce you to Kiwibank or BNZ, we can go through the sale and purchase agreement and help you with a solicitor, so they find that all the way through they’re getting helpful advice to get their home. Others like to be a lot more independent, they come to us and say “I’ll do it all on my own and when I’ve found it all and found the house then I will get back to you.” It depends on the person and what’s important to them.