Tory’s new Temporary Council Homes Programme Only Affordable if no RTB for 20 Years

Here I assume that the price of a home (2 bedroom London) is equal to

  • The NPV of London living wage for the year it remains a council house
  • The average London rent for the remaining period to amortise the mortgage ( year 10 or 15 to year 25)

For simplicity I excluded Mortage and agents fees etc.  Current 3.75% mortgage rates.

A simple calculation shows that for no RTB period of less that 20 years would the income stream for the period before RTB be more than the income stream for the period after.  In other words the post RTB period makes the property unaffordable.

For 10 years RTB exemption the property would only be affordable at around 10% discount.

For higher interest rates the no RTB period comes down dramatically, for example at 5% the period comes down to 15 years.

With tweaks the policy could work – for example it could be a rent to mortgage policy where on top of the living rent renters paid a small premium to cover the 3.75-5% gap to purchase a shared ownership and the right to full RTB after 15 years.

 

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