Property prices may be falling but with mortgages harder to come by, for many the only solution is to buy a discounted home through the Affordable Housing Scheme, writes Caroline Madden

RECENT DEVELOPMENTS in the property market raise some interesting questions about the Affordable Housing Scheme, which provides discounted homes to lower-income buyers.

For example, is the Affordable Homes Partnership's (AHP) latest strategy of snapping up hundreds of houses and apartments on the open market simply bailing out builders desperate to offload a glut of unsold stock?

And given that property prices are plummeting to more reasonable levels, is the State-subsidised scheme even necessary anymore?

Affordable homes are usually acquired by local authorities under Part V of the Planning and Development Act, which requires builders to set aside up to 20 per cent of new developments of five or more houses for social or affordable housing.

The properties are then sold on by the authorities to people who can't afford to buy on the open market, at a discount of 25 to 50 per cent.

However, over the last few months the AHP, which co-ordinates and promotes the delivery of affordable homes, has entered into agreements with developers who are prepared to provide discounted houses or apartments for sale to eligible affordable home purchasers. So far the purchase of several hundred properties has been negotiated in locations such as Leixlip, Celbridge and Santry, and the target for the year is in the region of 600 properties.

At first glance this seems like a win-win situation. Developers get guaranteed sales, and buyers get discounted prices. However, judging by comments on various discussion websites, affordable housing applicants and other members of the public are suspicious of the initiative.

"I would be very wary of snapping up an affordable housing 'bargain' at the moment," posted one sceptical member of www.boards.ie. "Developers are quietly offloading unsellable properties on to the scheme."

AHP chief executive John O'Connor is quick to reject the suggestion that builders are jumping on this as an opportunity to shift substandard or undesirable properties. "We look to purchase in a development where there is some level of sales happening," he says. "We wouldn't want to be in a development where the only sales happening are affordable housing sales." He adds that a thorough vetting process is carried out. Each property is inspected by an architect, and the AHP assesses its quality and location.

The AHP also negotiates a discount from the developers. In a case where the builder has already slashed prices to boost sales, the discount may only be 5 per cent. "Where we don't consider the developer has reduced their prices to real market prices we would look for much more significant levels of discount," O'Connor says.

As an added sweetener, buyers of these properties also get a hefty subsidy from the AHP. This is usually in the order of €50,000 for a two-bedroom apartment, and €70,000 in the case of a house or three-bedroom apartment, although these amounts can vary depending on the area.

But with house prices on a downward spiral, O'Connor accepts that the gap between discounted affordable housing and open market prices is narrowing in some cases. So is the concept of affordable housing still relevant?

After all, you may pay more for a property on the open market, but you have none of the restrictions that come with affordable housing. Buyers of an affordable home must live in the property and if they sell within 20 years a clawback must be paid to the local authority, based on the percentage discount received when buying the home. Therefore some people may be better off avoiding the affordable housing route altogether.

O'Connor doesn't dispute this. "If someone can afford to purchase on the open market, I'd advise them to take that route," he says. However, he insists that the need for affordable housing remains: "Even with the [ property] price reduction, a lot of people still can't afford to buy on the open market."

In order to qualify for an affordable home, your annual income must be between €25,000 and €58,000 if applying on your own, and if applying as a couple, your combined income can't exceed €75,000 (although these limits can vary considerably, depending on the local authority in question). However in the current climate, even those near the top end of the income threshold may struggle to get a mortgage large enough to buy a home.

"The credit policies of the lending institutions have tightened up very significantly in the last six to eight weeks," explains O'Connor. "[ The amount] people can borrow has reduced significantly."

The Labour Party's housing spokesman, Ciarán Lynch, agrees that a need still exists for affordable housing. Although property prices have fallen in the last 12 months, in Dublin and Cork they are still "way, way off" what would be considered reasonably affordable. As long as house prices remain higher than four or five times the average industrial wage, there will be a role for affordable housing, he says.

One advantage of going down the affordable housing route is that buyers have a greater chance of getting a mortgage. Bank of Ireland, Ulster Bank and EBS are still operating in the affordable homes space, and will lend between 97 and 100 per cent of the purchase price (assuming the borrower meets all their stress tests and affordability criteria).

Shammy Khan, head of mortgages at EBS, says that the typical price discount that their affordable homes customers receive from their local authority is about 32 per cent. For example, a property worth €400,000 on the open market might be made available to an affordable home buyer at a purchase price of just €272,000. This means that the lender is actually only financing 68 per cent of the market value of the property, even if they provide a mortgage for the full amount of the purchase price.

"From the lender's perspective there is security in knowing that there is still a 32 per cent equity buffer built into the transaction," Khan explains.

O'Connor explains that affordable home buyers also have a significant degree of protection against negative equity (where the value of the property falls below the mortgage amount). In the above example, the value of the property would have to fall from €400,000 to below €272,000 for the purchaser to fall into negative equity territory.

But things don't always run smoothly. An affordable housing scheme operated by the Dublin Docklands Development Authority (DDDA) ran into difficulties recently because lenders were not willing to provide mortgages on the basis of a new shared ownership model.

According to the DDDA, two lenders - First Active and Ulster Bank - have now signed up to provide mortgages. The first four purchases have only now been completed, even though some buyers were made offers as long ago as last October.

However, the most common gripes about affordable housing are the oversubscribed waiting lists. "When I came on to Cork City Council initially in 2004, the affordable housing list at that time was in three figures," says Lynch. "It's now gone into four figures."

The situation is even more extreme in the capital. Between the four Dublin districts, there are about 13,000 applicants on waiting lists (although some applicants put their name down with several authorities).

Last year, 3,500 affordable homes were sold, and the AHP wants to increase this to 5,000 a year. O'Connor says that the waiting time is high if you're holding out for a prime property in a highly desirable area, but those who are flexible and keep their options open can expect a waiting period of a 18 months to two years.

However, given the dramatic slowdown in housebuilding, aspiring homeowners could be forgiven for wondering where exactly the supply of affordable homes will come from to meet the demand.

"Even with falling prices, a lot of people still can't afford to buy on the open market