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3. THE IMPACT OF THE POLICY ON THOSE EXERCISING THEIR RIGHT TO BUY

3.1 Introduction

3.1.1 This chapter focuses on the impact Right to Buy has had on the buyers themselves and their families. Much of the research to date on Right to Buy has focused on its effects within the housing system. In order to examine the effects of the policy on tenants, the Executive commissioned some qualitative research in 2006 from Holt Brook et al. with the aim of providing some insights into tenants' and buyers' experiences of Right to Buy. This chapter also explores the impact former Right to Buy properties can have on potential buyers, and the role of Right to Buy in building assets for buyers and facilitating the transfer of wealth.

3.2 Impact of right to buy on housing choice and opportunities

3.2.1 The research by Holt Brook et al. found that Right to Buy was often seen to have offered council tenants a unique opportunity to purchase a home. Many respondents considered that they would have continued to rent council properties had the Right to Buy not been available to them. Right to Buy made home ownership affordable to these tenants, which it might not otherwise have been. Issues around affordability were not, however, the only reason for Right to Buy making home ownership accessible to these respondents.

3.2.2 The impact that Right to Buy had on tenants' confidence in the idea of becoming home owners emerged as particularly important. The research suggested that family housing history could exert a powerful influence on attitudes, expectations and behaviours regarding home ownership. Many of the respondents had come from family backgrounds where there was little or no history of home ownership. This often inhibited respondents in purchasing a home. The research suggests that for some families Right to Buy prompted a generational shift from a culture of long-term rental to a culture of home ownership. Those who had bought under the Right to Buy were often conscious of breaking a family pattern of non-home ownership. Some spoke about having been influenced or encouraged by close friends, colleagues and neighbours who had exercised the Right to Buy. Sometimes brothers and sisters had exercised their Right to Buy within a few years of each other, influenced by their siblings' example. For other respondents, their own parents - previous council tenants - had been the first in the family to exercise the Right to Buy. This had set an example and influenced their decision to buy. In a few cases there were accounts of the adolescent and adult children of respondents who had exercised their Right to Buy developing their own expectation of home ownership. Unlike their parents, when leaving home, these children expected to buy a house or flat on the private market without renting from the council first, although they might rent privately for a short spell in their late teens and early twenties.

3.2.3 Some tenants who did not buy reported that they knew people who had exercised the Right to Buy, but these were more likely to be acquaintances or neighbours, rather than close friends. These respondents had usually not considered the possibility of exercising their Right to Buy and had not found out about the details of Right to Buy, their property's value or finance options.

3.2.4 A few purchasers believed that the Right to Buy had improved their opportunity to purchase a home. Typically these respondents predicted that they would have purchased a home eventually, even if Right to Buy had not been available. The Right to Buy had, however, provided them with an easier route into home ownership. Occasionally respondents were more explicit about exercising the Right to Buy as a way to move up the property ladder, in that it allowed them to sell and buy a more desirable home. The respondents who thought they would have bought a property even without the assistance of Right to Buy often had a family history of home ownership. This included many of the respondents who later went on to sell their Right to Buy property.

3.2.5 The Right to Buy appeared to give purchasers a greater sense of autonomy and control over their housing choices. Some respondents considered that the Right to Buy offered them greater freedom of movement, while others felt that it gave them an increased sense of security, as they could stay in their home as long as they wanted. As discussed above, some respondents explicitly identified the Right to Buy as a way of moving on to better or more suitable houses or to better areas. For others, however, the Right to Buy provided a sense of options and opportunities, should their circumstances mean they needed to move. Older respondents, for example, felt that should they experience poor health and need to move to a property without stairs or a smaller property, owning their own home would give them this option. There was also a perception among some respondents, particularly older respondents, of greater security in their right to stay in their property as home owners than as tenants (although in fact they did have security of tenure as tenants).

3.2.6 This greater autonomy and control was reflected in discussions of respondents' future housing intentions and aspirations. Right to Buy purchasers whose properties were not meeting their current needs were generally positive about their aspirations to be able to move to a more suitable property, and felt that these aspirations were achievable. Tenants were more likely to worry that their aspirations were unrealistic, and/or had not thought through how they would achieve them.

3.2.7 Less positive impacts of home ownership might be expected to be increased financial responsibilities and affordability issues over the long term. The discount on the market value of the property at the point of purchase minimises the risk to purchasers and as Jones & Murie (2006) argue because of the substantial equity in the property, Right to Buy purchasers have a much greater ability to negotiate with lenders if they do experience problems. They are also less likely to face problems of negative equity even in a period of falling property values. Research into mortgage repossessions found that lenders reported that only 7% of repossessions in 1999 were Right to Buy properties (McCallum & McCaig, 2002). At this time, around 15% of owner-occupied properties were former Right to Buy dwellings and were still occupied by the original Right to Buy purchaser. It would therefore appear that Right to Buy owners were less likely to be subject to repossession than other owner-occupiers.

3.2.8 Holt Brook et al. (2006) found that no respondents identified the Right to Buy as having a negative impact on their finances. Most respondents found the overall costs of ownership to be less than or similar to the costs of renting, with those who had paid off their mortgage finding that their monthly disposable income had increased.

3.2.9 The biggest risk to Right to Buy owners is probably the inability to sell their property. There is some anecdotal evidence that this may be a problem in less popular areas and may lead to these properties being rented out privately, but this is difficult to confirm. Although the evidence is now somewhat dated, Pawson et al.'s survey of vendors (1997) found that most sold their homes without difficulty, 47% believed it was easier to sell former public sector homes than other properties whilst only 17% believed it was more difficult.

3.3 Wider impacts of the Right to Buy

3.3.1 Whilst some respondents considered the Right to Buy in terms of its impact on their personal housing opportunities, others made more general references to Right to Buy increasing opportunities for 'working class' or 'unemployed' people to buy their own home. Respondents often distinguished between the impact of the Right to Buy on individuals, communities and specific types of people, and their views about the Right to Buy varied depending on which impact they were discussing.

3.3.2 Respondents who had exercised their Right to Buy often talked about the positive impact of purchasing a council property on individuals. They felt very positively about Right to Buy and the opportunity it offered of a stable, affordable home and the option of home ownership for those who otherwise might not have had that opportunity.

3.4 Trading up and building assets

3.4.1 Holt Brook et al. (2006) found that 'investment' had been a factor in many respondents' decisions to buy. There was considerable variation in what was meant by investment but this was not simply about immediate financial profit. Inheritance was important in this context, with buyers not intending to profit themselves from their property but being influenced by the opportunity of leaving the property to their children after their death. For others, investment was about a more general sense of security, of the permanence of owning a home and holding assets, but with no specific intention of cashing in on these assets. A further concept of investment was related to increased quality of life and the opportunity to improve the fabric of the property.

3.4.2 It appears that the majority of Right to Buy purchasers do not buy their home with the intention of moving on, but that this is the intention for a significant minority of purchasers. Pawson et al. (1997) found that a fifth of vendors said that at the time they had bought their previous home they had expected to move within five years. Holt Brook et al. (2006) also found that occasionally respondents were explicit about exercising the Right to Buy as a way to move up the property ladder, allowing them to sell and proceed to buy a more desirable home. No respondents, however, discussed buying a property in the knowledge that they could make an immediate profit because of the discount. This may be because the clawback arrangements on the discount discourage early sales. Occasionally, respondents did acknowledge the role of the discount in providing them with a deposit for future moves. Holt Brook et al. concluded that the discount appeared to have become so far absorbed into the decision-making process that it did not specifically influence the decision, and that it was the overall cost of buying that mattered.

3.4.3 Pawson et al. (1997) found that the single most important motivating factor to sell was the wish to live in a larger home (the main reason for 22% of vendors). Other factors included the desire to move to a better neighbourhood, the desire to move to a smaller dwelling, work-related reasons and difficulties with neighbours. Holt Brook et al. (2006) found that most respondents who had sold their property were prompted to do so by 'life changes', such as increasing family size, retirement, older age, children leaving home or the death of a partner. A few respondents had bought a property that they considered less than ideal, because they thought that they would have a greater opportunity to move to a more suitable property as home owners than as tenants.

3.4.4 The discount on market value available to Right to Buy purchasers provides an immediate financial gain to buyers although this is mediated by the repayment arrangements on the discount if the property is sold within three years. This equity, and the potential for capital gains through house price inflation, may make it possible for Right to Buy purchasers to use their Right to Buy property as a first step on the property ladder and stay in touch with the wider market should they wish to trade up to larger or more desirable housing. Where information is available, all studies report strong capital gains on resale. It is difficult to present data on capital gains in a meaningful way because it depends on when the original purchase and subsequent sale took place. By way of illustration, however, research by Pawson et al. (1997) estimated that the average price of a first resale was £32,750, while the average discounted price of original sales was £10,438, giving an average 'capital gain' of some £22,000. Research by Jones & Murie (1999) on resales in Glasgow up to 1996 found that the average capital gain was not less than £27,000 for resales between 1991 and 1996.

3.4.5 Until the mid 1990s the mean market value of sales to sitting tenants had been close to the average price paid by first time buyers in Scotland. Since the mid 1990s the market value of houses sold to sitting tenants has not increased as quickly as the price of houses sold to first time buyers (Figure 3.1). This trend is also reflected in Right to Buy resales, which also appear not to have increased in value as quickly as other house prices in recent years. However, the strong growth in house prices witnessed in the last few years means that the average market value of houses sold to sitting tenants has still increased significantly in each year since 2001/02, and increased by 18% for houses and 14% for flats between 2003/04 and 2004/05. It is likely therefore that realised capital gains for those purchasing and subsequently selling their former council houses have increased substantially in recent years.

Figure 3.1: Mean market value by property type

3.4.6 While purchasers may have made substantial capital gains, the key issue for those looking to trade up is the relationship between the increase in market value of their property between purchase and resale (and the resulting amount of capital gain they can achieve) and the increase in house prices in the housing market more generally. If general house prices have risen faster than the price of Right to Buy resales, Right to Buy purchasers may still not be in a position to trade up, despite making capital gains.

3.4.7 Later local studies suggest that more recently the rate of house price appreciation for Right to Buy resales has been slower than the rate of increase for other second-hand properties. Research in East Lothian found that between 2000 and 2002 the rate of house price appreciation in the Right to Buy resale submarket was only one-half the rate of increase in the wider second-hand market, with prices increasing by 23% compared with 45% for all second-hand transactions (Brown & Rosenburg, 2003). In Glasgow, the rate of increase of Right to Buy resale prices was consistently lower than that of all second-hand prices (Binns, 2005). The Right to Buy resale median ¹⁵ price fell from 87.5% of the total second-hand price in 1995 to 72% in 2003, although there was very wide variation in prices by market area. In Falkirk, research (Falkirk Council, 2003) found that Right to Buy resales had become relatively cheaper compared to average house prices over the previous six years, with an average Right to Buy resale house costing 60% of the price of an average house (new and second-hand). While this might have made former Right to Buy properties more accessible to lower income buyers, it may have decreased the options for Right to Buy purchasers who want to sell and move up the property ladder, as the gains they make when selling may not be sufficient to compensate for house price increases in other parts of the market.

3.4.8 The growth in home ownership and the current strength of the housing market have dramatically increased the number of people with access to assets. For most people, housing wealth will form their largest asset and there has been increasing interest in the role of housing wealth, particularly in the context of pension shortfalls. This increase in assets opens up a range of opportunities for home owners, including using housing wealth to improve standards of living through trading down properties or equity release, or being able to bequeath housing assets to younger generations.

3.4.9 Research by Rowlingson & McKay (2005) found that a quarter of current or former owner-occupiers (all owner-occupiers not just those who had bought under Right to Buy) had accessed equity in their home through a range of methods, from extending a mortgage to trading down. The most common reason for accessing equity was to pay for property repairs or improvements (39%), although 28% said they had used it to pay bills/debts, including mortgages, and 23% said they had spent the money on essentials of daily living. Housing wealth had also been accessed to pay for non-essentials, such as holidays (11%) or to give it to family or friends (6%) or retire early (6%). Nearly half of respondents (45%), however, said that they did not know whether they would ever consider accessing housing equity. There was a very steep social class gradient in terms of interest in borrowing against the value of one's home or selling part of the home to an equity release company. While 16% of owner-occupiers in social class A said they would consider borrowing against the value of their home, only 8% of those in social classes C2 and D said the same.

3.4.10 In the qualitative research carried out by Holt Brook et al. (2006) financial security was mentioned by older respondents in particular. While these respondents did not have any concrete plans to access these assets, the possibility is now open to them. However, given the findings in the Rowlingson & McKay study (2005) in relation to social class factors, it may be the case that Right to Buy purchasers are less likely to exploit their housing assets than non-Right to Buy owners.

3.4.11 Inheritance was also an important aspect of what respondents meant by investment, with buyers not intending to profit personally from their property but being influenced by the opportunity to leave the property to their children after their death. This could have a potential impact on the housing opportunities of their children, particularly given the tendency for the children of Right to Buy purchasers to look to buy properties on the open market. The timing of inheritance, however, is obviously important in this context; if children are inheriting later in life then this is less likely to make a difference to their housing circumstances.

3.5 Widening access and choice

3.5.1 Key to understanding the impact of Right to Buy is the debate on whether resales (former Right to Buy properties which are subsequently sold on the open market) widen access to owner-occupation or widen choice in owner-occupation. Depending on price, resales may enable people to become owner-occupiers who could not otherwise have afforded to buy, or they may widen the choice of potential properties for those already in a position to enter the market. Looking at the position of resales in the housing market and their cost to owner-occupiers, the evidence does suggest some widening of choice at the lower end of the market. The extent to which Right to Buy resales widen access is less obvious and varies geographically. Given the variations in local housing markets across Scotland, the prices which resales achieve vary greatly. They may be affordable to those on lower incomes in some areas, but in more buoyant local housing markets they will be unlikely to widen access at all. Chapter 4 explores the role of resales in the housing market in more detail.

Impact on buyers - summary of key findings

• Right to Buy is commonly considered to have offered a unique opportunity for tenants to become home owners. This is because Right to Buy has made ownership affordable but also because it has changed attitudes and expectations about home ownership.
• Affordability is not in itself the over-riding factor in influencing tenants' decisions to exercise their Right to Buy. The ability to exert some control over their housing choices is also important for tenants.
• The majority of Right to Buy purchasers are motivated to move subsequently by 'life changes' which require a different type of property. Most purchasers do not appear to buy their home with the intention of moving up the property ladder, but this is the intention for a significant minority.
• Since the mid 1990s the market value of houses sold to sitting tenants or as resales has not increased as quickly as the price of houses sold to first time buyers. However, the average market value of houses sold to sitting tenants has still increased by 18% for houses and 14% for flats between 2003/04 and 2004/05.
• Whilst purchasers may have made substantial capital gains, if general house prices have risen faster than the price of Right to Buy resales, Right to Buy purchasers may still not be in a position to trade up, as the capital gains they make when selling could be insufficient to compensate for house price increases in other parts of the market.
• The growth in home ownership has dramatically increased the number of people with access to assets, and this increase in assets opens up a range of opportunities for home owners.
• Some buyers see 'investment' as a factor in their decision to buy, and this could mean a general sense of financial security, or leaving something for children to inherit.
• Resales of Right to Buy properties can widen choice at the lower end of the market, but they do not necessarily widen access to owner-occupation, as this will vary according to local housing market conditions.

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