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Could leasehold become illegal?

Posted by Aaron Tunstall on 31, Aug 2017

The UK’s government is planning to ban the sale of new leasehold properties. Why are they taking this step and could it happen here? Aaron Tunstall writes.

No new leasehold properties allowed: that’s the upshot of the legal changes being planned in the UK’s property sector. A whopping four million dwellings in the UK are leasehold, including around 170,000 detached homes – and selling new-build homes under a leasehold has become far more popular over the past 20 years. New-build leasehold homes represented 14.6% of all new-build sales in England and Wales last year.

 

But new proposals will put a stop to all that. The government’s communities secretary has described leasehold properties as “exploiting home buyers with unfair agreements and spiralling ground rents… These practices are unjust, unnecessary and need to stop.” The planned law changes will also restrict ground rent increases to very low levels and the proposal seems likely to be put into law in just a few months.   

 

This sea change comes after publicity over homeowners trapped in properties they can’t sell, with ground rents they can’t pay. We Kiwis have seen first hand what that looks like. The owners of 110 leasehold houses on the edge of Auckland’s Cornwall Park pay $5.1 million in annual ground rents – up to $90,000 per property per year according to a NZ Herald story. That group is asking Parliament to change the law (the outcome was pending when I wrote this). So far 15 homeowners have simply been forced to walk away from their properties because the ground rents have crippled them and the remaining homeowners say they’ll likely do the same when their current lease is up.  

 

Around 15% of Auckland’s current apartment stock is leasehold, but as more apartments are built this is likely to reduce, proportionally speaking. That’s because they’re hard to sell and hard to borrow against. The average buyer looks at leasehold apartments the same way most of us look at pet snakes: even if you fully understand the dangers, the rewards aren’t enough to make it seem worthwhile and the whole thing just gives you a bad feeling. Banks don’t like them much more than buyers.

 

I’ve written before about leaseholds and I certainly have investors making good money out of them. The resale value is not much to brag about but the returns can be astoundingly good. Only the bold are prepared to take the risk on ground rents that could increase dramatically and render an apartment almost sale-proof. But the fact that they still do sell means there’s definitely a market for them, even if a leasehold apartment sells for about a quarter or less of what an identical freehold apartment would fetch.

 

So, the big question: could leasehold be banned here too? I have no idea, but it’s interesting to consider. In the UK, leasehold has traditionally been seen as well-established and offering an opportunity to get into the market more affordably. In New Zealand, any first-home buyer contemplating leasehold would get advised in no uncertain terms to think again. Arguably, it would be easier to ban here than in England. What about existing leaseholders and the owners of the land? In the UK, the land is often held by large development companies, whereas here it’s often iwi, churches or other long-standing charitable organisations. In the Cornwall Park case, the money pays for the upkeep of the park. Having said that, there are certainly some people making money hand over fist from ground rents here as they do in the UK.

 

When you look at the basic situation, it seems from a layman’s perspective that if they can ban new leaseholds in the UK and keep ground rents at low levels, it would be even easier to do it here. I think it could happen. Should it happen? I’m not sure I know enough about the ramifications, but on the surface it seems like a good idea. Once this happens in the UK I expect to hear a lot more about it in New Zealand and I’ll be watching with interest to see how this plays out.

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