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.
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.
123. In December, the Government published proposals
for change to the CPO system
alongside the Planning Green Paper. The Committee has resolved
to undertake an inquiry into the Planning Green Paper later this
year. 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."
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
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.
The House Builders' Federation explained, "Where a market
has collapsed, this valuation would not enable remaining owner-occupiers
to purchase alternative properties."
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.
Such people already face negative equity; it becomes "crystallised"
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.
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.
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.
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. 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,"
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. 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."
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.
Of course compensation would need to be limited to home owners
to avoid abuse of the system by speculators trying to make a quick
128. The Government's proposals for a Regulatory
Reform Order 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.
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
"There are now formally being demarcated
by local authorities, central government and quangos, areas which
are deemed very high risk and it is clear that a lender would
be very foolish to consider lending in those areas, without the
appropriate safeguards. Of that there is no doubt."
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
"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."
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.
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
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."
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.
The Minister told us that a Housing Market Renewal Fund would
provide a mechanism for dealing with housing market rapid change.
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
Sixteenth Report of the Environment, Transport and Regional Affairs
Select Committee, 1999-2000 Session, HC714 Back
Described in EMP83 Back
Q 462 Back
Q 484 Back
Terms of reference for this inquiry are set out in Press Notice
No. 23 of the 2001-02 session Back
Note of visit to the North West. See also Neighbourhood Renewal
Unit, Q 565 Back
Q 455 Back
Q 456 Back
Compulsory Purchase and Compensation: the Government's Proposals
for Change Back
Terms of Reference for this inquiry are set out in Press Notice
No. 24 of the 2001-02 session Back
Paragraph 2.5 Back
We will return to the Government's proposals for the CPO system
as part of our inquiry into the Planning Green Paper Back
Described in more detail in EMP66 Back
Letter from the public, 14 Back
Minutes of Evidence 5 December 2001, Q 392 Back
Qq 430-44 Back
Q 442 Back
Q 430 Back
Letter from the public, 42 Back
Q 447 Back
Described in paragraph 169, Fundamental Review of the Laws and
Procedures Relating to Compulsory Purchase and Compensation, Final
Report, DETR, July 2000 Back
Letter from the public, 42 Back
Q 449 Back
Draft Regulatory Reform (Housing Assistance) (England and Wales)
Order 200 Back
Eg Qq 217, 447 Back
Q 382 Back
Letter from the public, 14 Back
Qq 400-1 Back
Q 223 Back
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
Q 643 Back