PERSONAL FINANCE:The collapse of the property market has changed the rules for affordable housing – and Fingal County Council is leading the way

BACK IN THE days of sky-high property prices, the affordable housing scheme seemed like a win-win situation for first-time buyers.

Simply put your name on the waiting list (if your income was between certain thresholds) and you could be offered a new home at cost price.

Sure there were a few catches, but a discount of 30 to 40 per cent off the open market price was, for thousands of people, an offer too tempting to refuse.

Unfortunately, many affordable buyers now find themselves trapped in homes that are too small for their needs, in the wrong location for work or not so affordable after all.

When the affordable housing scheme was conceived, the idea was to give first-time buyers the chance to purchase a home that they couldn’t otherwise have afforded.

The bulk of these homes are located in large urban centres such as Dublin and Cork. To prevent profiteering, the discount provided to the buyer is clawed back (on a reducing scale) if they sell the property within 20 years of buying it.

Another condition is that the affordable home has to be owner-occupied to prevent people from using them as investment properties. So while buyers are allowed to rent out a room, if they let out the whole unit they will be in breach of their contract.

However, there is anecdotal evidence that people whose circumstances have changed are now renting out their affordable property in order to service their mortgage while they temporarily move in with relatives, or in some cases relocate or emigrate.

In doing so, they are running the risk of being reported to their local authority, but in many cases they have little choice.

In an effort to deal with this, and other more general problems with affordable housing, local authorities have been tearing up the rulebooks.

In Fingal, where a significant proportion of affordable buyers are struggling with their mortgages, Fingal County Council has decided to allow people to rent out their affordable homes.

Although many people took out mortgages with mainstream lenders to buy affordable homes, others got finance through their local authority. Fingal County Council has 1,500 such borrowers, of which about 9 per cent have arrears of more than a month.

“The decision to allow affordable purchasers to rent out their properties was based on the difficulties faced by borrowers as a result of unemployment,” says a spokesperson for Fingal County Council. It says there are no penalties for renting out an affordable home, but certain conditions apply.

For instance, the council will no longer apply tax relief at source to the borrower’s mortgage, with the result that their monthly instalments will increase.

Since this change was introduced in Fingal last November, 36 borrowers have rented out their property, with half doing so because they had to relocate for work. Other reasons included a reduction in their income, the size of the property or moving into a spouse’s property.

Dublin City Council has also made some changes but it is more restrictive than Fingal. Renting out an affordable home can be discussed as an option, but only if the finance to buy the property was advanced by a bank. Approval from the lender is required.

“Properties purchased with finance from Dublin City Council cannot be considered for renting,” it said. Dún Laoghaire-Rathdown County Council says “sympathetic consideration” will be given to purchasers who can no longer pay their mortgage or whose circumstances prevent them from occupying the affordable property.

The Department of Environment, within whose remit the affordable housing scheme falls, says there has been no change in the general policy on renting out affordable homes, but it will be keeping a close eye on how the initiative in Fingal works out.

“The matter will be considered as part of overall policy developments to support struggling mortgage holders to meet their ongoing mortgage costs,” a department spokesman said.

The second fundamental tenet of the scheme that is unravelling in the face of changed market conditions is the price discount.

For the scheme to make any sense, affordable homes have to be cheaper than those on the open market. If the local authority built the property themselves, then the asking price was typically based on the build cost. If the home was provided through Part V (legislation whereby a number of units in a development are provided to the local authority), the “affordable” asking price was based on what the local authority paid for the property.

This typically resulted in a discount of 30 per cent off the open market price. However, as property prices began to fall, this discount was squeezed to 15 or 10 per cent, and in some instances the discount has been eroded altogether.

“In some cases the local authority has had to reduce the prices in line with the market values,” says Martina Burke of the Housing and Sustainable Communities Agency, which supports local authorities and the Department of Environment in the delivery of housing.

Not surprisingly, demand for affordable housing has dropped away significantly. Waiting lists are a thing of the past, and local authorities are now saddled with an overhang of almost 1,000 affordable homes.

Of the 985 homes on hand around the country, 101 are in the process of sale, and 326 are likely to be transferred for temporary use as social housing.

This still leaves a glut of over 550 units. So what is to become of them? “Authorities will continue efforts to sell the remaining units while also exploring alternative deployment options such as temporary use for social housing purposes,” the Department of Environment spokesman said.

Some local authorities have abandoned all pretence that the scheme is still a runner and are using estate agents to sell ‘affordable’ units on the open market.

In these cases the claw-back condition does not apply, as no discount is provided.

Surprisingly, there are still some discounted properties to be found, as local authorities try to flog of units left on their books.

In the controversially-named Honeypark development in Dún Laoghaire (there is already an estate called Honey Park nearby), one-bed affordable units are being sold from €136,000 (compared to a market price of €170,000) and two-beds from €184,000 (compared to €230,000 on the open market), representing a 20 per cent discount.

To qualify for affordable housing, you must be a first-time buyer and your annual income will generally have to be between the thresholds of €25,000 and €58,000 if you’re applying on your own, and up to €75,000 for a couple applying together.

However, prospective buyers should not be swayed entirely by the discount on offer. The key question is whether or not they would be happy to live in the property for the next 20 years, in case they are unable to sell or rent the property either because of scheme restrictions or market conditions.

The silver lining for those who bought affordable homes at a discount is that they have considerably more protection from negative equity than those who bought on the open market.

Say an individual bought a house in 2007 which had an open market value of €300,000, for an “affordable” price of €200,000. The property would have to fall in value by more than €100,000 before they would find themselves underwater (assuming their mortgage was about €200,000). Why? Because the original discount will not be clawed back if the property is sold for less than the purchase price (ie, if you sell at a loss), with the result that it acts as a significant buffer against negative equity.