The term Progressive Home Ownership (PHO) refers to alternative housing schemes that aim to make home ownership more accessible and affordable, particularly for individuals or families who are struggling to get into the housing market. 

In this article, we explore PHO schemes in NZ, Australia and the UK as well as opportunities for developers. We conclude that the current government appears to be removing some of the funding around such schemes but is still committed to making housing more affordable by reducing development costs.

What is a PHO scheme?

PHO schemes are a way to bridge the gap between renting and full home ownership, allowing people to build equity and eventually own their homes outright. Some PHO schemes include ‘rent-to-own’, shared equity or long-term leaseholds, and such schemes are typically delivered by government, charitable and/or other purpose-focused organisations.

A common trait for PHO schemes is that a person can gradually increase their ownership stake in a property over time, instead of being confronted by the impossible or impracticable hurdle of securing sufficient funding to acquire full ownership of the property up-front. According to the OECD, by the middle of 2023, New Zealand had the eighth highest house price to income ratio of OECD countries.

The term PHO used in this article is a reference to PHO schemes generally, and not specifically in relation to the Ministry of Housing and Urban Development’s Progressive Home Ownership Fund unless specifically stated.

How PHO schemes may be useful to developers

There are various benefits for developers in New Zealand that can arise from the PHO schemes discussed in this article.

1. Increased market accessibility:
   PHO schemes can make homeownership more accessible to a broader segment of the population. This includes individuals who may not have the financial capacity to purchase a home outright but will be able to do so through a PHO scheme.
2. Adaptation to market dynamics:
   PHO schemes, whether created by a developer or in partnership with a PHO provider, offer flexibility by adding another alternative product to property development, assisting developers in adapting to changing market conditions.
3. ESG commitment:
   Participating in PHO schemes can demonstrate a company's commitment to Environmental, Social, and Governance (ESG) principles. By providing affordable housing options, developers contribute to the social aspect of ESG, addressing housing needs and promoting community well-being and can assist with a developer’s social licence within the community.

Care needs to be taken to get the commercial and legal arrangements correct for PHO schemes, including tax structuring and compliance.

While there are now established examples to work with and build upon, the different PHO schemes, and variations of those schemes, can raise tricky issues, for example in relation to the cashflow and compliance impact of any GST-exempt rental or financial service aspect of the arrangements.

PHO Schemes in NZ

Common criteria

In almost all PHO schemes, successful applicants will need to satisfy a number of criteria such as a being a New Zealand resident or citizen, being a first-time home buyer and having a total household income within a certain range. The purpose of these criteria is to ensure that PHO schemes are benefiting those New Zealanders who are most in need of support to achieve home ownership, rather than simply creating an alternative or subsidised investment scheme.

Each different scheme and provider have their own specific requirements, which we have not addressed in detail here.

Ministry of Housing and Urban Development - Progressive Home Ownership Fund

The Progressive Home Ownership Fund offers interest-free loans to approved PHO scheme providers. As at 31 December 2023 (according to MHUD’s website) there were 21 ‘Approved PHO Providers’ providing three types of PHO schemes: rent-to-own, shared ownership and leasehold. We briefly describe these schemes and a few of the PHO providers below.

Rent-to-own

Rent-to-own schemes (also known as rent-to-buy) are leasing agreements that allow tenants to purchase a property at the end of (or part way through) a lease period.

The New Zealand Housing Foundation charitable trust (through one of its charitable subsidiary companies) is one of the New Zealand organisations which offer rent-to-own opportunities. Under the Housing Foundation’s rent-to-own offering, tenants are entitled to occupy a property for up to five years, with the option to purchase the property at the end. In some cases, the purchase of the property at the end of the lease period will be on a shared equity basis (as described below).

Importantly, under the lease arrangements rent is based on 30% of the tenant’s gross income and never more than market rent.

In addition, although the tenant will need to buy the property at market value, the Housing Foundation will contribute 25% of the value of any increase in the property's value over the rental period towards the deposit. For example, if the property's value goes from $800,000 to $1,000,000, the renter will have $50,000 added to their deposit. To support this, the initial property price is set below the market value, ensuring that any increase benefits the renter by providing more money from their 25% share. If a property's value has decreased, the starting price becomes irrelevant. While the renter won't receive the additional 25% contribution in this scenario, the overall home affordability is maintained.

Shared ownership

Shared ownership schemes (also known as shared equity or co-ownership schemes) involve the organisation delivering the scheme partnering with participants to purchase a home, with participants subsequently being able to buy-out the organisation’s share in the property.

Crown agency Kāinga Ora-Homes and Communities (Kāinga Ora) has been offering a shared ownership scheme, known as First Home Partner, which aids first-time home buyers who do not have sufficient equity required for a deposit. In partnership with Kāinga Ora, applicants purchase a property and then gradually acquire more equity in the property, moving towards full ownership. The First Home Partner program assesses applicants individually, with Kāinga Ora contributing a maximum of 25% or $200,000 (whichever is lower) towards home purchases. Applicants must meet lending requirements, secure a home loan from one of four participating banks (taking into account Kāinga Ora’s contribution), and pay a minimum of 5% of the property’s purchase price. Kāinga Ora encourages full home ownership within 15 years of buying the property by either a single lump sum payment to Kāinga Ora or smaller individual payments over time. 

At the time of publication, however, the First Home Partner scheme is fully subscribed and not accepting new applications.

Aera's Ownership Accelerator (not yet launched) requires a 2.5% minimum savings for the deposit. Aera intends to assist by providing a contribution so the applicant has a total 20% deposit, helps the applicant to secure a mortgage and eliminates the rental model. Applicants would share any property gains with Aera and have the option to buy back Aera's share in the property. At this stage, it is not clear exactly how Aera’s interest in the property will be recorded or secured, with more information to become available later in 2024. Aera is an initiative of the Aera Foundation charitable trust and its support comes from private investment firms and charitable trusts. At the time of publication, Aera is not listed on the MHUD website as an Approved PHO Provider.

Tāmaki Regeneration Company (TRC), a public purpose Crown-controlled company jointly owned by the Crown and Auckland Council, offers a shared home ownership program called OWN IT. Through OWN IT, TRC aims to place whānau with a connection to the Tāmaki area into 1,500 new homes across Glen Innes, Point England and Panmure. In addition to offering these homes under a shared ownership scheme, TRC also provides financial workshops and mentoring. Whānau in the program will typically own 70% of the home, while TRC owns the remaining 30%. Over time, whānau can increase their share of ownership in the house until they own it outright.

Long-term leasehold

A long-term leasehold refers to a lease that grants the tenant the right to use and occupy a property for an extended period, typically for several decades. While the lessee has exclusive possession and use of the property, they do not own the underlying land. The ownership of the land remains with the land owner (being the landlord).

During the lease period, the lessee may have the freedom to make certain improvements or alterations to the property, but they are generally required to return the property to the landlord in its original condition at the end of the lease. Long-term leaseholds are common in real estate, especially for commercial properties, and are structured to provide a sense of long-term stability for tenants while allowing the property owner to retain ownership control.

According to the MHUD website there were six Approved PHO Providers offering a leasehold PHO scheme. 

By way of example, Queenstown Lakes Community Housing Trust, and also Bridge Housing Charitable Trust (which uses the Queenstown trust’s scheme), offer ‘secure homes’ programs that involve long-term leasehold arrangements. Participants are granted a 100-year ground lease and pay the construction costs of the home up front, and then pay a relatively low ground lease rental plus rates, insurance and maintenance costs going forward. When participants wish to move, the organisation delivering the program is required to pay for the home, with the price payable by the organisation being the original price paid by the participant adjusted for inflation.

This type of scheme gives participants security of tenure and home ownership without the participants having to fund the purchase of the underlying land. As a consequence, however, participants do not receive or share in the benefit of any uplift in the value of the underlying land.

Progressive Home Ownership schemes in the UK and Australia

London Living Rent (LLR) - The Greater London Authority (GLA) Rent to Buy scheme

LLR homes cater to middle-income households aspiring to save for home ownership through shared ownership. The homes are offered on a minimum three-year tenancy, and if not purchased by the tenant within a decade, providers are expected to sell to another eligible buyer through shared ownership.

Eligibility criteria include:

·       living or working in London;

·       a maximum household income of £60,000; and

·       no ownership of other homes, and inability to buy a home locally.

Housing providers must advertise through the GLA’s Homes for Londoners tool and prioritise applicants based on local criteria or, as a last resort, first-come first-served. Providers must ensure tenants can afford rent and savings through standard affordability tests.

Help to Buy - Australia

The Australian Labor Government has introduced a Bill in Parliament for a Help to Buy scheme (not to be confused with ‘Help to Buy’ in England and Wales, which was a Government-sponsored equity loan for first home buyers).

As the Bill is still going through Parliament the final framework is not yet known. Under the current Bill, the Government proposes to loan 30% for existing homes and 40% for new homes, and the Government will own a share of the property until the loan is repaid. The proposed scheme allows for 10,000 successful applicants per year for four years. Eligible homeowners will only need a 2% deposit.

It is currently estimated that the legislation will be passed in the first half of 2024.

Next steps for the National Government

National's Going for Housing Growth Plan aims to address housing demand by mandating councils to zone land for 30 years of housing needs. The plan involves reforming the Infrastructure Funding and Financing Act 2020 to simplify the process for developers to fund infrastructure. Additionally, there is a proposed $1 billion fund for Build-for-Growth incentives, rewarding councils for achieving increased housing delivery, with funding sourced from discontinuing MHUD’s Affordable Housing Fund and Housing Acceleration Fund, KiwiBuild, and the Kāinga Ora Land Programme. While the funding will be removed from these specific programmes, National is clearly committed to creating a landscape for developers to deliver affordable housing.

Summary and get in touch

The Government has not yet indicated that it will end MHUD’s Progressive Home Ownership Fund, being the fund for loans to PHO providers.

But, it seems then that the direction of the current Government is to steer away from schemes such as PHOs and instead seek to make housing more affordable by reducing development costs. It remains to be seen then what government funding will remain available for these schemes to continue.

If you would like advice on PHOs or anything else discussed in this document, please get in touch with one of our experts.