How would you like your stake?

The idea of offering social housing tenants a financial stake in their home originally came out of discussions about how to help people on lower incomes accumulate assets and thus a modicum of financial security – a concept known as "asset-based welfare". Housing is an important thread of this debate because of the way tenure and price reflect social divisions. So it's hardly surprising that the idea of tenant equity stakes has proved popular with New Labour policymakers or that, in its last election manifesto, the Labour Party promised to look into ways to make the idea into reality.

Ideas and theories have been flying around but this week, in an attempt to give substance to the discussion, the Chartered Institute of Housing and the Institute of Public Policy Research published a report called A Stake Worth Having? that shows how equity stakes might work in practice. The report is based on research conducted with landlords and tenants and it explains three possible ways tenant equity stakes could be offered.

Tenant asset accounts
The first option would give each tenant a savings account linked to his or her tenancy. Tenants could accrue "rental miles" based on how long they had lived in the property and how they have maintained their tenancy conditions.

This is a simple approach that gives a tangible financial stake and encourages social housing tenants to have bank accounts – a step in tackling financial exclusion, one of the government's favourite bugbears. As this approach is not hooked in with property values, tenants do not have a link to equity in their properties, although if bonus payments or rental miles are linked to the rent, this could provide some link to value. It would also be possible for accrued rental miles to be used for rent-free weeks or even to build into a share in ownership. In high-demand areas, the account could involve a smaller stake and a bonus for satisfactory termination of tenancy, or a larger stake could be offered as an incentive in a low-demand area.

Shared ownership
The second option, shared ownership, has the advantage of being based on established models of equity in an individual property, and tenants would be able to see their equity grow as the value of the house went up. But a direct link with housing equity is also the biggest disadvantage of this approach. There is a significant problem for lenders' security if it means an extra charge on the property and this may lead to higher premiums for lending.

The greatest concern, though, is that shared ownership would reinforce the divisions between richer and poorer areas. Tenants in better-off locations would benefit the most, and this would be apparent to their neighbours both nationally and in the same town or city.

There are ways around these problems. For instance, a cash value of £1000 could be given to all tenants. This could then be converted into a share of the individual property and so become, say, 1% in east London and 5% in east Manchester. This could be done in a way that was transferable, avoided a charge on the property and put a floor under it so that tenants did not risk losing their stake.

However, the initial stake would still grow in relation to local house prices. This presents the danger that tenants in high-value areas would benefit most.

Both the landlords and the tenants consulted during research into this idea were concerned about what they saw as a lack of fairness in such a policy because, whereas when somebody owns their home the money is all theirs, equity stakes would be introduced in a tenure provided or regulated by the government. There is also the issue of how the concept of a tradeable stake can be squared with an allocations policy based on need. If an outgoing stakeowner has to sell his or her stake to the incoming tenant, someone nominated by the landlord's allocations policy, should the incoming tenant get help to buy it?

Having a stake in your housing association was seen as an incentive to look after the property

One case study did show, however, that a shared ownership model does have the potential to help turn a neighbourhood around. Linking the stake to the rising value of properties in an area as improvements take place could be a great motivation for tenants to support regeneration.

Link to landlord's equity
In the third model, tenants would benefit from the increased value of their landlord's equity or their landlord's business plan, rather than the individual value of their own homes. There are a number of ways this option could work and the best one depends very much on the landlord's financial circumstances.

"Equity" might also take on a different meaning in this context. It could be linked to the operating surpluses or rising capital values of landlords, or to a government grant based on improving values.

This model looks promising. Research with tenants found that "a share in your housing association is interpreted largely as an incentive to look after your property". It could also make possible ownership or voting rights in relation to the landlord.

This option therefore has the potential to do most to empower tenants, as it would not only give them a stake in the value of their housing but would also make the landlord accountable to them. In fact, one landlord consulted during research into this approach suggested that there was an opportunity to create an entirely new kind of public interest company, able to share its success with its users, as owners, in a virtuous circle of mutual self-interest.

Individual or collective?
Any of the above options could be used with individual tenancies or alternatively could be based on a communal approach.

The communal approach would be more suitable where the tenancy is based on communal provision, such as shared or sheltered schemes, or where there was a strong tenant-led approach to management. It would also be best where improvement or regeneration schemes were taking place which depended on residents being involved. Indeed, two landlords involved in the research into the three options saw scope to use equity stakes to give declining communities a leg-up if stakes were linked to regeneration, neighbourhood management strategies, or both.

The research proved that equity stakes schemes can be developed which meet the very different housing situations found in different places, and that stakes could be a useful tool in modernising social housing, reforming tenant-landlord relationships and helping tenants accumulate assets.