Select Committee on Transport, Local Government and the Regions Sixth Report


III. FAILING MARKETS

Gap funding for housing schemes

119. In the areas we visited private sector housing development is not viable without public subsidy.[264] Bill Stevenson explained that with the right approach the attractiveness of an area can be changed so that values rise, making later stages of private sector investment viable. One of the tools that the Housing Market Renewal Fund will need in its early years is a European Commission approved mechanism for providing gap funding for private sector housing development, to ensure that private sector expertise and funding can be attracted to redeveloping these areas and create a healthy tenure mix. Housing gap funding used to be provided through the Partnership Investment Programme, which was closed following a decision by the European Commission that it was in breach of the State Aid rules. Our predecessor Committee published its report into this decision in the last Parliament.[265] New land and property, gap funding schemes have since been approved.[266] Chris Brown explained that they do not allow gap funding for predominantly housing schemes:

    "It does not apply to schemes with more than 50 per cent housing content. If you go into the sort of areas Bob is talking about, trying to do private sector housing development, you simply cannot do it. This is what urban renaissance is about and we cannot do it. It seems crazy."[267]

Bill Stevenson, Chairman of Bellway Urban Partnership, added that, "The absence of the gap funding programme has stopped a huge amount of work."[268] The memorandum from the Office of Project Appraisal Training noted that, "The Government may now be willing to consider making a fresh approach to the European Community for a gap funding scheme targeted more explicitly on housing."[269] We recommend that the Government should seek notification of a new housing gap funding scheme to cover the period prior to the new European Regeneration Framework being agreed. The need for a new European Regeneration Framework will be the subject of an inquiry by the Urban Affairs Sub-committee.[270]

Community consultation

120. It is essential that local communities are involved when wholescale changes to the areas in which they live are proposed. The University of Birmingham's memorandum explained what a difficult process this can be:

Glasgow City Council described one way to ensure that the process of consultation was as sensitive as possible "On the basis of lengthy experience, the Council considers intensive resident involvement essential where demolitions are in prospect. It is also essential that proposals should be seen as part of a process of 'area renewal' and never purely as demolition."[272] It is hard to balance the needs of current and potential residents in an area. We heard in Manchester how giving local residents a "right to return"[273] at the end of the regeneration scheme, can help to reassure local people that the regeneration is intended to benefit them as well as potential residents.

121. We recognise the importance of good community involvement and planning as part of the development of any proposals for housing market renewal. Given the scale of the problem, consultation needs to recognise at the outset that change is required and that speed is of the essence so that it does not further delay the much needed regeneration of these areas. We recommend that consultation should take account of the needs of both existing and potential residents of an area, to ensure that the former enjoy the benefits of redevelopment through a "right to return," whilst also attracting working families and middle income groups to the area as well as increasing levels of owner occupation.

Compulsory Purchase Orders

122. One of the biggest issues facing local authorities wishing to undertake housing market renewal is site assembly. Unless an authority is redeveloping one of its own estates, the site is usually in multiple ownership. Compulsory purchase is frequently required. The current low levels of usage of CPOs by local authorities are described in paragraph 22 above. One of the barriers that they face, where the requirement for a CPO comes about as a result of a desire to regenerate an area, is the need to have detailed proposals in place for the future use of the land, which is often taken to mean detailed planning permission.[274] Chris Brown argued that where a regeneration area is declared, it should be sufficient to have a masterplan in place since in these areas the rationale for undertaking the CPO is predicated on the removal of the poor housing stock, within a general strategy to re-configure the area, rather than the need to acquire a site for a particular development.[275]

123. In December, the Government published proposals for change to the CPO system[276] alongside the Planning Green Paper. The Committee has resolved to undertake an inquiry into the Planning Green Paper later this year.[277] The Government has proposed the introduction of new legislation which would:

    "Define a full range of physical and regeneration purposes, including halting the physical, economic and social decline of an area, for which compulsory purchase powers can be used," and "Clarify and amend the law with regard to the justification required for the exercise of compulsory purchase powers for planning purposes."[278]

We recommend that the new compulsory purchase legislation should include housing regeneration and renewal as one of the purposes for which compulsory purchase can be used. In housing regeneration areas, a masterplan should provide sufficient indication of end use to allow a CPO to be confirmed. We urge the Government to bring forward the legislation as a matter of priority.[279]

124. When a local authority compulsorily purchases a property, it can only pay open market value (which for many of the houses we saw can be in the range £4,000-£8,000) plus a relocation allowance towards the costs of a new home.[280] The House Builders' Federation explained, "Where a market has collapsed, this valuation would not enable remaining owner-occupiers to purchase alternative properties."[281] To compound the problem, many people in low demand areas have outstanding mortgages at a much higher level than the house's current value, having bought it when it was worth much more. One Manchester resident has an outstanding mortgage of £24,000 on a property now worth around £5,000.[282] Such people already face negative equity; it becomes "crystallised"[283] by the CPO process, turning negative equity into an actual debt. In an attempt to overcome this problem, we heard how Salford Council has been piloting the 'Home Swaps' scheme. We have also heard more wide-ranging proposals about insurance against housing market collapse and how the risk of such collapse could be better shared.

125. The Home Swaps scheme in the Seedley and Langworthy area of Salford is intended to allow people whose homes have been designated for clearance to move to another house nearby, where house prices are slightly higher, and to transfer their existing mortgage to the new property. The cost would be financed by the public sector-either through local authority funding, the Single Regeneration Budget or New Deal for Communities.[284] The existing regulations governing compensation have meant that the council has had to get many approvals, which have taken eighteen months in all, before any Swaps can begin.[285] Home Swaps places restrictions on the home owner's ability to move again as he or she is expected to remain in the new property for at least five years, in an attempt to sustain the neighbourhood he or she is moving into.[286]

126. With the Home Swaps scheme, Salford Council has been much more innovative than other authorities in looking at how the costs of negative equity can be spread between the resident, local authority and mortgage lender. However, by limiting the places that participants in the scheme can move to, it does not give residents choice about where to live. We received a letter from a Salford resident who lives in the area covered by the scheme. She was frustrated by the fact that the only alternative housing offered was elsewhere in the in the local area, where she would be expected to remain for five years. She was concerned that the neighbourhood that people were expected to move into faced similar problems of crime and deprivation to the street that she was trying to escape.[287] To create genuine choice for residents who have been trapped in their homes by low demand, Home Swaps would need to be only one of a number of schemes on offer.

127. One way to allow residents greater choice, would be a more fundamental change to the rules governing CPO. We received evidence arguing that open market value is an inappropriate way to compensate home owners, when their house is compulsorily purchased. Chris Brown argued that compensation should be provided on the principle of a "home for a home,"[288] the principle used in Canada under which home owners receive sufficient compensation to enable them to relocate to an alternative residence, which is "at least" equivalent to the house purchased by CPO.[289] The House Builders' Federation's memorandum agreed that the principle of "equivalent reinstatement" would be more appropriate than the payment of open market value in such cases. "Equivalent reinstatement would provide sufficient value for the owner to purchase alternative appropriate accommodation."[290] Our correspondent from Salford argued strongly that "appropriate alternative accommodation" should be in an area of her choice and that compensation should be sufficient to allow such a move.[291] Of course compensation would need to be limited to home owners to avoid abuse of the system by speculators trying to make a quick return.[292]

128. The Government's proposals for a Regulatory Reform Order[293] to provide local authorities with a new power to provide assistance for housing renewal should provide greater flexibility on compensation. It is intended, amongst other things, to remove many of the restrictions currently surrounding compensation and instead provide local authorities with an enabling power. Several witnesses welcomed these proposals.[294] We welcome the proposed Housing Assistance Regulatory Reform Order, which is intended to give local authorities greater flexibility over compensation to people being relocated as part of a regeneration scheme. We recommend that the principle of a 'home for a home' be used to compensate owner occupiers subject to compulsory purchase, with sufficient compensation to allow them to move to a home in an area of their choice and that this should be included in the amendments to the CPO system proposed by the Government.

Housing markets at risk

129. A collapse in house prices affects individual home owners. It also affects local authorities and other agencies who have to bear the high costs of managing a declining area. Furthermore, it increases the financial risks facing mortgage lenders, whose loans are now secured against a worthless asset. Whilst the Director General of the Council of Mortgage Lenders denied that there were any parts of the country which are "redlined" by the lenders so that no mortgages are offered there, he warned that there is a risk that the demarcation of areas as risky by central or local Government, could result in lenders refusing to offer loans in those areas in future, which would further undermine demand.

130. With the exception of the Home Swaps scheme in Salford (and the various shared ownership schemes offered by some councils and housing associations), individual home owners bear the full cost resulting from a collapse in house values (unless they default on their mortgage), despite it being entirely outside of their control. A Manchester resident facing negative equity wrote:

"It seems grossly unfair that of all those involved (bank, surveyors, city council, national government) I should be left to bear the brunt of this."[296]

131. We heard about a number of mechanisms, used in the United States since the 1930s, aimed at reducing the risk to mortgage lenders and/or home owners:

  • The Council of Mortgage Lenders described the "capitalised vehicles" used to underwrite the mortgage market in the United States. The risk of a collapse in house prices is borne by the capitalised vehicle, rather than individual mortgage lenders. This is managed by pooling risk across popular and unpopular areas within the portfolio with an implicit Government guarantee.[297] This reduces the risk to the lender but not the home owner.
  • Another option could be a combination of private insurance and local authority guarantees for the home owner. Manchester City Council explained that it was exploring such an approach for new homes within its proposals for a Housing Market Renewal Area.[298]

132. Reducing risk would increase confidence in an area. The Abbey Hey Residents' Association's memorandum explained:

    "If you know you that having bought a terraced house for £16,000 you could sell it for at least that sum in four or five years, this would provide the confidence residents and potential buyers need."[299]

There is little evidence about which of these mechanisms for direct sharing of risk would be most appropriate in this country. We recommend that the DTLR, working with the Council of Mortgage Lenders and the Treasury, should undertake a full feasibility study into the financial, community and social costs and benefits of each of the options available for sharing the risk of housing market collapse. A simple solution would be for local authorities in areas of market weakness to underwrite the market with a guarantee to buy back the property at their valuation of it at the point at which the sale took place.

133. Generally there has to date been very little emphasis on preventative measures designed to restore confidence and prevent housing market collapse in areas at risk of housing market failure, such as Abbey Hey in Manchester. The focus of the National Strategy for Neighbourhood Renewal has been the 10 per cent most deprived neighbourhoods. We have heard how this needs to be balanced with greater emphasis on markets at risk. We recommend that through a conurbation-wide approach, the emphasis of Government interventions should be changed so that priority is given to both failing and 'at risk' neighbourhoods. A much greater emphasis on prevention by the Neighbourhood Renewal Unit could prevent decline and result in significant cost savings in the long term.

134. Moreover, neighbourhoods can change very rapidly from being 'at risk' to failing. As a result, public sector interventions need to be able to respond quickly.[300] The Minister told us that a Housing Market Renewal Fund would provide a mechanism for dealing with housing market rapid change.[301] A Housing Market Renewal Fund should contain sufficiently flexible powers and funding to allow local authorities to respond quickly, to prevent 'at risk' neighbourhoods from falling into decline.


264   Note of visit to the North West Back

265   Sixteenth Report of the Environment, Transport and Regional Affairs Select Committee, 1999-2000 Session, HC714 Back

266   Described in EMP83 Back

267   Q 462 Back

268   Q 484 Back

269   EMP83 Back

270   Terms of reference for this inquiry are set out in Press Notice No. 23 of the 2001-02 session Back

271   EMP47 Back

272   EMP89A Back

273   Note of visit to the North West. See also Neighbourhood Renewal Unit, Q 565 Back

274   Q 455 Back

275   Q 456 Back

276   Compulsory Purchase and Compensation: the Government's Proposals for Change Back

277   Terms of Reference for this inquiry are set out in Press Notice No. 24 of the 2001-02 session Back

278   Paragraph 2.5 Back

279   We will return to the Government's proposals for the CPO system as part of our inquiry into the Planning Green Paper Back

280   Described in more detail in EMP66 Back

281   EMP59 Back

282   Letter from the public, 14 Back

283   Minutes of Evidence 5 December 2001, Q 392 Back

284   Qq 430-44 Back

285   Q 442 Back

286   Q 430 Back

287   Letter from the public, 42 Back

288   Q 447 Back

289   Described in paragraph 169, Fundamental Review of the Laws and Procedures Relating to Compulsory Purchase and Compensation, Final Report, DETR, July 2000 Back

290   EMP59 Back

291   Letter from the public, 42 Back

292   Q 449 Back

293   Draft Regulatory Reform (Housing Assistance) (England and Wales) Order 200[2] Back

294   Eg Qq 217, 447 Back

295   Q 382 Back

296   Letter from the public, 14 Back

297   Qq 400-1 Back

298   Q 223 Back

299   EMP62 Back

300   By contrast we heard how it has taken 18 months to get the approvals required to implement the Home Swaps scheme in Salford, Q 442 Back

301   Q 643 Back


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 20 March 2002