The relic of the Victorian property market, leaseholds, have steadily been returning to the modern day property and house building market since the 1990’s. Over the past 20 years, the amount of new build leasehold properties sold has doubled from 22% in 1996 to 43%; with nine out of 10 new builds in London being built and sold as leasehold.
However, new research from the HomeOwners Alliance, shows that for many the leasehold system has become a trap holding them hostage in houses which are becoming unsaleable whilst landlords and investors cash in through doubling ground rents and refusal to sell leases.
The HomeOwners Alliance found that in 2014, the official rate of home ownership in the UK was 64.6% but when you remove leaseholders (who are not legal owners), the rate falls significantly to 58.9%. Of the 5 million leasehold properties in England and Wales only 1.58m are owner occupied and four out of 10 leaseholders are not currently aware of the time left remaining on their lease.
One of the main concerns for the HomeOwners Alliance regards extending leases for the 370,000 home which have less than 80 years to run on their lease; the cost of extending these is likely to exceed £4bn.
Another issue regards rocketing ground rents which are hitting many homeowners who were unaware of how pricey these costs would become and are finding themselves trapped in houses which are becoming unsaleable.
There is a growing number of new build leasehold houses which are being sold by their developers, they are then selling the leaseholds on to investors but the ground rent and maintenance costs remain with the homeowner. The ground rents in these contracts double every 10 years making them unaffordable for a substantial amount of homeowners and buyers but attractive for investors as on average they are earning 7% interest on their initial investment.
This sort of practice is being used by many housing developers including Taylor Wimpey who have recently decided to pay up more than £130m to some of the buyers of their leasehold properties in an attempt to settle the dust around the ground rent scandal.
Like many other developers, the ground rents on a significant majority of their houses were doubling every 10 years rendering them near-worthless. Alongside the £130m in compensation, Taylor Wimpey will be altering the terms of their leases to make ground rent review terms less expensive and therefore less damaging to homeowner’s wallets and the overall property price.
Homeowners affected by these types of leases feel further trapped as many investors that own the freehold are making it difficult to buy out the lease with attempts to buy being met with demands for thousands or being refused outright.
As a result of this recent scandal for Taylor Wimpey and their findings, the HomeOwners Alliance have put forward suggestions for the next government to deal with these leasehold contracts which are ruining the housing market for many.
Their suggestions include outlawing leasehold for new build houses, making sure existing leases run for a minimum for 250 years with peppercorn rent and in the event of leaseholds on flats, scrapping leases and opting for commonhold.
Commonhold is popular in the US and sees the freehold given to the buyer of the flat alongside a common responsibility for the building. It is thought that it has not worked in the UK so far as there is too much money to be made for developers and investors with the current system.
Paula Higgins, who runs the HomeOwners Alliance, spoke to the Guardian about the lack of enthusiasm for making commonhold mandatory in the UK; “Why would a housebuilder hand over commonhold ownership to flat buyers, when it can retain the freehold and sell that freehold on to investors at a premium a few years down the line, and collect ground rent and administration fees in the meantime?”
This report has shown the extent of the problem and how much of an issue it is now becoming. The widespread ignorance on the part of potential buyers alongside the poor and unclear information provided by estate agents and developers regarding the tenure of a property and how long is left on the lease, when there is one present, shows that there is much to be done to improve the housing market and make it work much better for homebuyers and homeowners alike.