Select Committee on Transport, Local Government and the Regions Memoranda

Memorandum by the Council of Mortgage Lenders (EMP 57)



  1.  The Council of Mortgage Lenders welcomes this opportunity to submit a memorandum to the House of Commons Select Committee on Transport, Local Government and the Regions Inquiry into Empty Homes.

  2.  The CML is the representative trade association for mortgage lenders in the UK. Its 118 members are banks, building societies, and other specialist mortgage lenders who together undertake around 98 per cent of all residential lending in the UK.


  3.  Key points:

    —  Consequences of long-term empty homes are severe;

    —  However, a certain level of vacant properties are necessary to allow the housing system to function effectively;

    —  Not all privately owned empty properties are mortgaged;

    —  The plans to allow householders to retain their homes when moving into care and to charge costs against their homes may increase the number of "empty" private sector homes;

    —  Difficult for lenders and/or local authorities to take action if the property is in good repair and mortgage is being paid;

    —  Owners are often reluctant to let vacant properties;

    —  In selected areas low demand may also be a factor, often combined with negative equity;

    —  Empty homes need to be addressed as part of a wider housing strategy; and

    —  Ways forward might encompass "Home Swaps", further consideration of compulsory purchase orders, financial incentives, and cuts in VAT for renovation.


  4.  Lenders are involved in all sectors of the property market, not only owner occupied but also the private rented sector and social housing. The Department for Transport, Local Government and the Regions (DTLR) statistical data shows that the majority of vacant properties are privately owned. The consequences of empty homes are many. Large numbers of empty homes can be a factor in inhibiting the regeneration of an area. Empty housing increases the sense of decay and may encourage crime as well as giving people more reasons for leaving the area (thus exacerbating the problem). Even a single empty home can cause problems. The Royal Institute of Chartered Surveyors estimates that if you live next door to a long term empty home, your property is likely to be devalued by at least 10 per cent.

  5.  It is inevitable though, that a number of dwellings will be vacant at any one time to allow the housing market to function effectively. Different data sources gave a vacancy rate in the total housing stock of between 3.4 per cent and 4.6 per cent in 1991. A higher rate may be justified now to facilitate longer distance and more frequent moves. It has always been the case that vacancy rates are higher in the private sector than in social housing (though this may now be changing).

Why are private properties empty?

  6.  It would be helpful to know more about why privately owned properties are empty. There has been little research on the nature and extent of the problem and how this has changed over time. The last DTLR study "Vacant Dwellings in the Private Sector" was published in 1996. The study concluded that:

    —  There were two main types of vacant property in the private sector:

      —  Transactional vacancies which might be expected to be re-occupied quickly. These are necessary for the mobility of the housing market; and

      —  Problematic vacancies which are often in poor condition and vacancy is likely to be prolonged.

    —  Problematic vacancies are over-represented among the private rented sector.

    —  They tend to be concentrated amongst pre-1919 terraced houses and converted flats.

    —  Half the problematic vacancies would cost more than £5,000 to bring back into long-term use.

    —  Most vacant property changed hands before being brought back into use.

    —  The main reason for vacancy generation was related to the death of the previous occupant or their movement into hospital or long-term care (27 per cent and 14 per cent respectively giving a total of 41 per cent).

    —  A lack of resources for improvement was often a major barrier to the speedy re-use of empty housing.

  7.  The current plans for long term care and encouraging people to release the equity in their homes are likely to increase the number of "empty" homes.

Tackling privately owned empty homes

  8.  It should be remembered that not all privately owned empty homes will be mortgaged, they will often be owned outright. There is a real issue of what local authorities can do about empty homes in this category. Likewise what can a local authority and/or lender realistically do if a property is empty but the mortgage is being paid? An owner might quite rationally hold property empty, not least for a capital gain but also for many other reasons. In the current volatile economic market people consider property to be a relatively "safe" investment and may be willing to continue to pay for it even if the property is not being used.

  9.  If the property starts to fall into disrepair, neighbours complain to the local authority but the local authority only has power to take action if the property becomes a danger to health or safety. Whilst the mortgage conditions require borrowers to keep the property in a good state of repair this is very difficult to enforce if the mortgage is up to date. In addition, a lender may not know that a property is in disrepair or unoccupied unless they are advised accordingly.

  10.  It is clear that not all empty property is damaging to individuals, areas or the country, but we can create a package of incentives/disincentives for it to be limited. One solution is for the owner to let the property out if they do not want to live in it themselves. However, one reason why this is not done more widely is that owners still believe they cannot get tenants out. There is still considerable ignorance about landlord and tenant law and continuing fear that the Government will act to tighten the freedom currently enjoyed by landlords.

  11.  The possibility of Registered Social Landlords (RSLs) taking on the leasing of empty properties has also been explored. Again owners are fearful that they will not be able to get tenants out or they do not want tenants who are reliant on Housing Benefit. In addition, RSLs are often looking for a long-term lease, sometimes five to seven years which may not suit either the borrower or the lender. Lenders are often reluctant to effectively change a residential lending arrangement into a commercial one. RSLs argue that it is not worth their while to invest in the administration and necessary repairs and maintenance for the property for a shorter period. The key consideration for lenders is their ability to repossess if it all went wrong. As a result of these difficulties, these schemes have not been widely taken up. They do operate in some areas but should not be seen as unproblematic.


  12.  Low Demand is often a factor where there are large numbers of empty homes. DTLR estimate that there are 470,000 homes in the social rented sector and 375,000 homes in the private sector which are in areas of low demand. Research recently published by the CML concluded that low demand is the result of economic restructuring, de-population, the physical and social decline of specific neighbourhoods and cumulative processes of decline and abandonment. It may be manifested in high void levels, stagnant and collapsing house prices, severe negative equity, speculative landlordism and apathy towards maintaining stock condition. A copy of the CML research paper "Low Demand in the Owner-Occupied Sector: Issues for Lenders" is enclosed for the Committee.

  13.  The report of the Policy Action Team 7 (PAT 7) "Unpopular Housing" explored the nature of low demand and unpopular housing and made a series of recommendations for tackling these problems across all tenures. The PAT 7 report highlighted a range of strategies that are being developed for problematic private sector stock, including declarations for Renewal Area status, bids for other area-based programmes such as the Single Regeneration Budget, empty property strategies, Compulsory Purchase Orders (CPO) and selective demolition within renewal or clearance areas. However, the report puts emphasis on a key research finding that in over a quarter of private sector areas that were defined as problematic by the responding local authority, no action was reported.

  14.  Low demand has been prominent in the recent housing policy debate including the Housing Green Paper and the subsequent Housing Statement. For example, the Housing Green Paper recognises that in areas of chronic low demand, renewal may not be a viable long-term solution and selective or wholesale clearance may be the only option.

Strategies for dealing with empty homes

  15.  This suggests that the problem of empty homes needs to be addressed as part of a wider housing strategy. DTLR have commissioned research to explore the decision making processes and the types of successful strategies that are being developed by local authorities and other housing and regeneration practitioners to tackle the problems associated with run-down private sector housing. CML welcomes this research, the results of which should help to identify best practice.

  16.  Specific initiatives are being trialled. The CML and the Local Government Association are working with DTLR and specific local authorities to address some of the problems in declining areas. In Salford a "Home Swap" policy is being used as part of a wider regeneration initiative in partnership with a lender to facilitate clearance. Home Swap allows negative equity home owners to move to improved homes within the area with greater mortgage security whilst at the same time freeing up a strategic site for development of better housing at lower density.

  17.  A commitment was made in the Urban White Paper to "consolidate, codify and simplify" the law relating to compulsory purchase and compensation when Parliamentary time allows. CML broadly welcomes this, as the current powers are not always broad enough to facilitate clearance. However, CPO needs to be used with care as news that CPO powers are to be used can depress markets further. In addition, some local authorities have suggested that lenders should bear part of the loss when a home owner in negative equity has their property compulsory purchased. This will only serve to damage lender confidence in regeneration areas. Initiatives such as Home Swap where the lender works in partnership with the local authority are much more likely to be successful.

  18.  For lenders, intervention in a low demand area has to be justified and the response must be appropriate and measured. The case for intervention (and a positive role for lenders) is stronger when it relates to actions that support the mortgage security in the property and acts to stabilise local markets.

  19.  A common solution suggested by lenders during consultation on the CML research mentioned above concerned insurance. One possibility would be the underwriting of new loans in low demand areas by a capitalised vehicle similar to Fannie Mae in the USA (the Federal Mortgage Provider). Alternatively, local authorities could underwrite loans (provided the attendant risks are properly priced and insured). Assuming that any insurance solution could be set up, it only works for new lending, not the existing mortgage book. However, if new lending was underwritten, this may enhance market confidence in the area and help to promote demand.

  20.  Measures such as charging full council tax on empty homes may help but strategies for dealing with empty homes need to think about incentives as well as penalties. We welcome the measures announced in the Budget 2001 which may help to reduce the number of empty homes. These include abolishing stamp duty on property transactions in Britain's most disadvantaged communities and 100 per cent capital allowance for converting space above shops into flats. It needs to be recognised that definitions are a problem though. How are "disadvantaged communities" identified? And does labelling a community "disadvantaged" create its own problems? The Government have found similar problems in its proposals for reforming the home buying/selling process in areas of low value/low demand housing.

  21.  We also welcome the announcements in the Government's Housing statement and the Budget to cut the VAT rate to five per cent for residential conversions and removing the VAT burden on the sale of renovated houses that have been empty for 10 years or more. We suggest that period be reduced to five years to encourage more empty homes to be brought back into use. This would need to be linked to a local authority Empty Homes Strategy otherwise the local authority will not know where the empty homes are and owners will not be aware of incentives available to them to bring them back into use.

  22.  One reason that properties are not brought back into use is because of the cost of repairs and maintenance that may be required. We therefore welcome the Government's proposals to simplify the current regime for local authority loans or grants for private sector housing renewal. However, there is a concern that the increased discretion available to local authorities could lead to a multiplicity of schemes and product requirements. Too much variety will restrain lenders appetite for the home improvement loan market. DTLR and the National Assembly for Wales will need to give detailed guidance to authorities on how they might operate any new system. This need not be unduly prescriptive. It is also crucial that sufficient safeguards are retained to protect individuals and lenders. We understand that proposals are due to be brought before Parliament this autumn.

  23.  A further incentive to renovate would be the reduction of VAT on home improvements and repairs. The current 17.5 per cent rate is a disincentive to refurbishment and encourages people who do not want to incur further costs to use "cowboy" builders. Reducing or removing VAT on home improvement could significantly encourage investment in the existing housing stock.


  24.  Clearly the issues surrounding empty homes are complex and will require co-operation between public and private sectors if they are to be comprehensively dealt with. The CML and its members have been and remain, open to suggestions about how to tackle these problems and, indeed, have been involved in local initiatives. However, lenders are clear that while they can help address some of the problems that arise, the primary responsibility for urban regeneration issues lies with central and local government.

25 September 2001

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