Select Committee on Office of the Deputy Prime Minister: Housing, Planning, Local Government and the Regions Memoranda

Memorandum by Council of Mortgage Lenders (HOU 22)


  1.  This is a supplementary response prepared by the CML, updating the previous submission made in May and responding to the new issues set out in the Press Notice issued on 26th July.

  2.  The housing market has been very active in recent months and it was felt important to analyse these market developments in the context of the Inquiry. These are considered in the Affordability section below. In the remainder of the submission we cover the specific questions raised in the Press Notice, namely

    (a)  the impact of the Spending Review on the Decent Homes Target;

    (b)  the balance between home-ownership and social housing in any spending which might flow from the Review;

    (c)  the role of planning obligations in affordable housing;

    (d)  the effectiveness of the Housing Market Renewal Fund; and

    (e)  ensuring the quality of new affordable housing and avoiding past mistakes on housebuilding programmes.


  3.  It is evident that the UK has been experiencing a period of very rapid house price growth. There are a wide range of views about the future direction of the market and what should be done about it. In a recent detailed paper by the CML Head of Research and Analysis, Bob Pannell, assessed where the market is going (see Pannell, 2002). In summary he argues the following;

    —  Income multiples have climbed to record levels on the back of a strong economic background and sharp reductions in interest rates. A recent acceleration of high income multiple lending may indicate that affordability pressures are beginning to bite.

    —  Although first-time buyers and movers are borrowing more and mortgage tax relief has been abolished, lower interest rates mean that mortgage payments relative to incomes are significantly lower than they were at the height of the late 1980s boom.

    —  There is a relatively modest comfort zone for interest rates within which mortgage repayments are easily affordable and sustainable. An increase in interest rates of as little as 1 per cent could begin to reveal payment stress on the part of some borrowers.

    —  The UK economy is unlikely to be as positive for the consumer sector and the housing market as it has been.

    —  Our transition to a low-interest rate economy has provided a significant "windfall" effect for the housing market. If we have already seen most of the adjustment to this, then the housing market faces a prolonged period of much more modest house price growth and sales.

  4.  His paper develops these arguments in some detail. It does suggest that although there are risks perhaps the worst of a price driven "affordability crisis" is over and that the market will begin to adjust and most recent evidence does support this. However there remain significant supply questions that the Government had been slow to respond to, especially in relation to high growth areas.

  5.  To assist the deliberations of the Committee we have updated tables from our previous submission. Table 1 shows the regional house price to income ratio for all buyers by "region". This shows how the ratio continues to rise in all parts of the UK and that in many areas it is high by historic standards (post 1969). Table 2 explores the ratio of interest payments to incomes for all buyers by "region" and here the effect of lower interest rates is obvious. The ratio has fallen back and is now well below previous historic highs. This is true of all "regions".

  6.  Although press comment often suggests lenders have been "stoking" price increases by lending more this is not borne out by the average loan to value ratio for all buyers data given in Table 3. As may be evident borrowing power is increased by lower interest rates but this has not translated into higher LTVs. As Table 4 suggests even first-time buyers are currently enjoying, on average, lower LTVs than in previous periods. The last table (Table 5) looks at income multiples for first-time buyers over the period 1985 to 2002. This shows that relative to income some first-time buyers are borrowing more in recent years albeit that the vast majority, around 85 per cent are borrowing with multiples of less than 3.5.

  7.  The CML expectation is that house price increases will abate. The CML forecast for 2002-04 is given in Table 6.


  8.  The impact of the spending review on the Decent Homes target is a little difficult to estimate at present because not all of the subsequent spending announcements have been made. Clearly the extra resources were welcome. However, the apparent shift away from local authority stock transfer as the primary mechanism for levering in extra money to social housing raises questions as to how achievable the target might be. Arms length management companies or any new prudential borrowing regime are so far untested in terms of their ability to deliver better homes. At this stage stock transfer is the only known vehicle (beyond direct investment) but there is no doubt many authorities have been distracted, temporarily at least, by the apparent shift in policy towards other vehicles for local authority housing.

  9.  It should also be noted that the standard set in the Decent Homes target is still not high even though it is a great advance. The Government should expect to increase the standard and thus the spending in subsequent years.


  10.  It is clear that home-ownership is the preferred tenure of the majority of households. Recent developments in the housing market and the wider investment market have probably re-inforced that desire. The move towards lower interest rates and a more stable macro -economic framework may indeed mean that, given an adequate housing supply, more households might both reasonably aspire to home-ownership than in previous decades and be able to translate that into reality. This has certainly been the case in the United States of America.

  11.  Although there are still some significant "regional" variations regarding incomes, unemployment and tenure preferences it might be reasonable to assume that, going forward, between 75 per cent and 80 per cent of the UK households might become home-owners at some stage in their life cycle and that at any time approaching 75 per cent of households would be home-owners. There are a range of issues underneath this which must be addressed including ensuring this level is sustainable by building an adequate safety net for home-owners in difficulties, easing the access of the rising number of single person households into home-ownership and dealing with the consequences of rising student debt and relationship breakdown.


  12.  Low cost home-ownership (LCHO) has been a "cinderella" activity in housing policy and practice. The commitment of central and local government, the Housing Corporation and housing associations to this area of activity has been at best lukewarm. Partly this stemmed from a view that the LCHO programme was seen as a further unnecessary promotion of home-ownership and this was best left to the market itself and second it was seen as a distraction from the priority which should be given to social rented housing. Many local authorities know so little about their local housing markets they do not attempt to provide for LCHO in their housing strategies. Now there is renewed interest. LCHO is seen as giving stability and balance to areas which might otherwise be dominated by social renting. It is seen as a way of helping key workers and of facilitating housing market change.

  13.  However in going forward with LCHO it is clear renewed attention has to be given to the way housing associations and others have managed their programmes. The lack of attention given to LCHO referred to above has been reflected in the modest performance of some associations in the running of LCHO. The recent ODPM and Housing Corporation reviews of LCHO only partly dealt with these weaknesses and further work will be necessary to ensure proper advice, guidance and assessment is given to the client group entering home-ownership via LCHO. This needs to be in line with the new regulated mortgage regime being introduced in 2004.

  14.  LCHO can play a very valuable role and lenders are very supportive of a major expansion of this programme. They are particularly supportive of Homebuy which is regarded as simple and more consumer-friendly than other forms of LCHO. The industry would like to explore ways in which Homebuy might be developed further in terms of both the nature of the product and the ways it is made available. To date there has been no great willingness within the public sector to engage with lenders as to how this might be taken forward.

  15.  There is a case for suggesting that all new publicly funded housing should be available for renting and/or owning (subject to status/capacity) and that public investment might be safeguarded by a first option to buy back principle. Setting this idea aside, the industry would support a doubling of the programme to restore it to levels seen in the mid 1990s and for further expansion beyond this. To date the programme has been seriously run down over successive years.


  16.  None of this is to suggest we should not have buoyant private and social rented sectors as well. Both are needed (and both are funded by lenders) for a number of reasons. Accessible rented property (private and social) is necessary for an ever more mobile society (though we should not ignore the continuing improvements in the house buying/selling process with the result that house purchase transactions are being completed more quickly) with households needing to move at short notice reflecting flexible labour markets, personal circumstances etc. At the start of a working life private renting continues to make very good sense just as it might after retirement. Much turns here on questions of conditions, cost and security. The same is true of social housing and there is no doubt that there is a continuing need and demand for this type of housing.

  17.  The proportionate balance between the different tenures will always be fluid, reflecting economic circumstances, changing preferences and demographic change. There can be no fixed proportion (numbers will tend to increase regardless of the proportion reflecting the growth in the number of households/people). In other countries with mature home-ownership markets there has tended to be a decline in the proportion of home-owners (see Holmans, 2000). Given that at the margins there will be some fluidity in and out of home-ownership there is much to commend the creation of more flexible tenure arrangements in which households can move between renting and owning without moving. Such arrangements are still in their infancy but the lending industry is keen to see more work done in this area.


  18.  Our comments in our response of 20th May remain valid here. We have no new evidence to add.


  19.  The effectiveness of the Housing Market Renewal Fund will largely depend on the robustness of the strategy that is developed in each of the pathfinder areas. Any solutions for the housing market must be supported by wider regeneration activity and an understanding of the causes of the low demand problem in the particular area. There is no point improving housing, if there are no jobs or transport for people to get to work, failing schools, high crime rates or no local shops. These issues need to be addressed alongside improvements in the housing market to ensure success and importantly to ensure that private finance is levered in for developments and that lenders will continue to lend to those wanting mortgages in these areas. It is important that the pathfinders have a clear understanding of the housing needs in their area too. A considerable amount of work needs to be done to ensure that the housing is what people want and will meet the needs of the population both now and in the future.

  20.  The effectiveness of the schemes will also depend on the pathfinders sharing good practice. To ensure efficient and effective intervention it will be necessary to develop models and schemes nationally that can be applied locally. Particularly where lenders are concerned they do not have the resources to work with each pathfinder individually. However, if national protocols and models are developed which are clear and well understood this will help to ensure co-operation. Local authorities should also be prepared to share information about initiatives or ideas that have not worked as well so that others can learn from their mistakes. This is where ODPM has a clear role to play. Whilst ODPM should not dictate how the pathfinders should operate it would clearly be sensible for them to co-ordinate good (and bad) practice and develop any necessary models and protocols. The Market Restructuring Unit that has been set up within ODPM has this role and it is important that they receive sufficient funding to ensure that they are able to fulfil this role to its full potential.

  21.  We are aware that some of the pathfinders are exploring the potential for development of affordable housing as part of market renewal. This includes offering home-owners in properties that are going to be cleared the option of shared ownership in a new property if they cannot afford to purchase it. Again the success, or otherwise, of such initiatives needs to be analysed and shared.


  22.  Our previous submission highlighted concerns about the mortgageablility of new forms of construction for affordable housing. It will be important to ensure that the problems associated with non-traditional construction in the past are avoided in the future. The CML has recently produced a report "Non-traditional housing: A brief review". This provides an overview of the history of non-traditional housing and considers some of the issues that need to be addressed in the future. A copy is enclosed for the Committee.

  23.  There are concerns about new types of construction not just amongst lenders but also amongst other stakeholders, not least consumers. One way to address these issues would be to have a form of accreditation scheme for new types of building. This could cover, for example, mortgageability, insurability, consideration of potential faults and ease of maintenance. The scheme could be developed by the Housing Forum who already have a working group to consider offsite fabrication techniques, involving the Building Research Establishment who have a wealth of experience in non-traditional construction techniques. A form of kitemark would provide reassurance to lenders, insurers and the public alike.


  Holmans, A. (2000), Home Ownership, House Purchase and Mortgages: International Comparisons, CML Research, London.

  Pannell, B. (2002). Affordability—how much higher can UK house prices go?, Housing Finance 55, CML, London.

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