How the Strategy Works
The shared equity strategy, also known as shared ownership or housing equity partnership, is designed to support homeownership when the purchaser cannot afford a conventional mortgage on the entire value of home.
Shared equity tenure arrangements make homeownership easier and more accessible for people with low incomes. Typically, this strategy is used by a not-for-profit organization, often with support from the municipality, to provide access to affordable housing in areas where high prices keep lower-income households out of the ownership market.
As the name of the strategy suggests, in a housing project with shared equity ownership, the homeowner and the project proponent benefit from any equity appreciation of the dwelling unit. The project proponent typically earns its equity share by providing the owner with access to a mortgage down payment loan. The equity share of the project proponent is equal to the proportion that the down payment represents of the initial purchase price. For example, if the down payment loan is equal to 10 per cent of the original purchase price, then the lender receives a 10-per-cent share in the equity appreciation of the dwelling. Down payment loans usually are made with no interest or at a low interest rate. Equity appreciation may also be linked to the consumer price index or to the increase in household incomes.
In some shared equity programs, the homeowner is placed within a community-based support system (that is, homeowner training) in order to mitigate the risks of homeownership for the benefit of the homeowners, their neighbours and the community.
The shared equity strategy includes equity co-operatives, which are associations of shareholders or members incorporated under the relevant provincial legislation. A co-operative holds title to the land and building(s). Through their equity participation, the members own shares in the co-operative, which entitles them to occupy a unit. Equity co-operatives combine various aspects of co-operative and individual ownership. The term covers a variety of options, but generally they include these main characteristics:
- members provide development capital,
- they share ownership of the project,
- they usually manage the project themselves,
- they control who can join the co-operative, and
- they operate on non-profit principles.
Like other shared equity projects, most equity co-operatives built recently allow the members to take out a more significant part of the increased value but limit the share to an amount that reflects the original affordability of the unit. For example, if the units were initially valued at 85 per cent of the market value for comparable units, then the members are often allowed to sell their shares for 85 per cent of the enhanced market value. This gives members the opportunity to benefit from property appreciation, while allowing the co-operative to maintain a comparable level of affordability.
One of the main barriers to the wider use of equity co-operatives is the financing of the units on an individual basis. Because most provinces do not have legislation that allows for the individual units to be titled, co-operative members are generally unable to raise conventional financing toward securing their own unit. Although members own shares in the co-operative that holds title to the property, those shares cannot be used as a security for a mortgage.
This barrier may be overcome if members pay cash for their units or if the equity co-operative arranges a blanket mortgage and charges individual members for their share of the mortgage. Some provinces have dealt with this problem through legislation that permits the units to be individually titled through strata titles, which identifies a residential unit in three dimensions and is similar to titles used in condominium ownership.
Maintaining Long-Term Affordability
Shared equity homeownership programs are designed to ensure that homes remain affordable to lower-income households on a long-term basis. Price restraint is achieved by restricting the equity appreciation realized on resale that the owner may retain. For example, there may be a cap on the resale price, such as a fixed percentage below the prevailing market price for the dwelling.
Like most shared equity housing, equity co-operatives generally use a limited-equity approach to maintain longer-term affordability. When the equity-holding members wish to leave the co-operative, the home is not put on the open real estate market and the resale value of their shares is generally controlled in some way. In a common approach used in early co-operatives, the outgoing members get back their original equity, but none or only a limited part of the increased value of their shares.
Shared equity projects in Canada have developed mainly in markets where private market home prices are high and where financing a home purchase is beyond the capacity of moderate-income households.
McPherson Place in Calgary is an excellent example of a recently developed, multi-unit project that provides access to homeownership for renters who otherwise would never be able to afford to buy a home. A not-for-profit organization (INHOUSE Attainable Housing Society) provides a down payment loan that covers approximately 35 per cent of the value of the home. Qualified buyers, who make no down payment, take a conventional mortgage with an independent lender for the remaining 65 per cent of the purchase price. INHOUSE and the purchaser share in any equity appreciation of the home in proportion to their financial contribution to the initial purchase price-35 per cent for INHOUSE and 65 per cent for the homeowner (see the McPherson Place case study).
Another example of a shared equity project is Verdant, a 60-unit strata condominium townhouse community that is part of the UniverCity project serving faculty and staff of Simon Fraser University (SFU) in Burnaby, British Columbia. Verdant is a partnership between the SFU Community Trust and a private market developer, Vancity Enterprises Ltd., to create affordable housing within the university community. Verdant uses an innovative pricing program that allows owners to purchase their homes at 20 per cent below the prevailing market price. On resale, the residence must be sold at the same percentage discount on the market price as at the time of the initial sale. Purchasers benefit from the lower price and mortgage payments in exchange for sharing any appreciation in the value of their home with the SFU Community Trust (see the Verdant@University case study).
With regard to equity co-operatives, most of them in Canada are located in British Columbia, Alberta and Quebec. To date, the majority have been non-profit, rental co-operatives for seniors, which can be attributed to the equity they can provide from their existing homes. Equity co-operatives for seniors have been sponsored by some municipalities as a way of providing more affordable housing for them in the absence of non-profit funding. Most equity co-operatives are built on freehold land, but several have been built through long-term leases on government-owned land.