Housing and the Credit Crunch - Communities and Local Government Committee Contents


Memorandum by London Councils (CRED 47)

SUMMARY

  This paper sets out London Councils' evidence to the CLG Select Committee Inquiry on housing and the credit crunch. The key points are:

The local authority role

    —  London boroughs are willing and able to play their part in delivering government's mortgage rescue package. It is imperative that this package is operational at the earliest opportunity.

    —  Local authorities are ideally placed to do more than is currently envisaged by the mortgage rescue package, for example (depending on local circumstances) to ensure that regeneration projects go ahead by providing mortgage indemnities or by taking equity share in a home to allow people to access cheaper mortgages or if the viability of a scheme is in jeopardy they may be willing to purchase a small proportion of properties.

Mortgage rescue

    —  Consideration should be given to extending the mortgage rescue package to cover vulnerable households in negative equity. In particular those who can no longer access low rates because of the fall in their house value. The costs of doing so should be balanced against the costs of providing temporary accommodation to those households who might experience the trauma involved in repossession.

London housing affordability

    —  First time buyers in London continue to find themselves facing high property values and a limited supply of affordable housing. This has pushed households to the limit as they try to gain a foothold on the housing ladder.

    —  The "stamp duty holiday" does not take high London property values into account. The upper threshold for waiver of stamp duty should be regionalised and in London this should be increased to £250,000. There are other regions with high property values such as the South East which might also need this approach.

    —  The reforms to support for mortgage interest (SMI) should become effective at the earliest opportunity. The capital limit for SMI should be regionalised to reflect different levels of mortgage lending across the country. In London SMI should be increased to £250,000.

Further action

    —  Consideration should be given to mechanisms to enable low cost home ownership (LCHO) purchasers to "staircase" down as well as up.

    —  There is an immediate need to clarify the range of intermediate housing products on the market. The variety of schemes on offer and the complexity of their eligibility criteria creates confusion amongst potential purchasers and limits their take up.

    —  The current housing association development model of cross subsidising affordable housing through sales is no longer financially viable in many cases. The Homes and Communities Agency (HCA) will need to more flexibly support developments via increased grant payments or earlier release of funds.

1.  INTRODUCTION

  1.1  London Councils is committed to fighting for more resources for the capital and getting the best possible deal for London's 33 local authorities. We lobby key stakeholders, develop policy and do all we can to help our boroughs improve the services they deliver. We also run a range of services ourselves, all designed to make life better for Londoners.

  1.2  This document sets out evidence from London Councils to the CLG Select Committee inquiry on housing and the credit crunch. It addresses the key points outlined in the brief and highlights the concerns and opportunities raised by London boroughs.

2.  BACKGROUND

  2.1  By December 2007 London was already facing significant affordability issues for market housing:

    —  First time buyers were paying up to 51% of their combined take-home salary on mortgage payments compared with 29% in the most affordable region of North East England.[71]

    —  The upfront costs of buying a home in London amounted to 132% of combined take home pay for a couple on lower quartile earnings.[72]

  2.2  Consequently, in London, the credit crunch takes place against a background of households already stretched to the limit with little or no capacity to meet increased mortgage payments.

  2.3  The reliance of London on employment generated by the financial, property and the hospitality industries will also exacerbate the probable impact of the credit crunch in London.

3.  MEASURES TO HELP EXISTING AND PROSPECTIVE HOMEOWNERS AFFECTED BY THE CREDIT CRUNCH

3.1  Mortgage Rescue Package

  3.1.1  The announcement of the £200 million mortgage rescue package (MRP) combined with the July 2008 announcement of a £10 million package of measures to fund face-to-face debt advice provided by third sector partners is welcomed.

  3.1.2  However, with mortgage repossessions already rising, we are concerned that the details of the MRP have yet to be announced and that the scheme is unlikely to operational until early in 2009.

  3.1.3  London boroughs are willing and able to play their part in delivering the mortgage rescue package. It is imperative that this package is operational at the earliest opportunity.

  3.1.4  We are also concerned that eligibility is restricted to those households that the LA would have to accommodate under homelessness legislation and are in positive equity. Households who would otherwise qualify but are now in negative equity, will not be helped.

  3.1.5  Consideration should be given to extending the scheme to cover vulnerable households in negative equity and the costs of extending the scheme balanced against the costs of providing temporary accommodation to these households who might otherwise have to move into temporary accommodation.

  3.1.6  The procedures developed for the package are overly complex. The householder is assessed under vulnerability criteria by the local authority, and then sent to a debt advice agency for debt advice and income assessment. They are then returned to the local authority which contacts a housing association to value the property and decide on the best option for the client.

  3.1.7  A package which could be delivered by one agency would be preferable. Funding for local authorities to coordinate and facilitate the mortgage rescue package rather than acting as a gate keeper could simplify the process.

  3.1.8  Local authorities with their strategic and place shaping roles are ideally placed to do more than is currently envisaged by the mortgage rescue package to ensure that regeneration projects go ahead: by providing mortgage indemnities or by taking an equity share in a home to allow people to access cheaper mortgages.

3.2  Stamp duty holiday for homes under £175,000

  3.1.10  While the government's decision to give a stamp duty holiday for purchases of properties at or below £175,000 is welcomed, in London the amount of help given by this measure is minimal. The London Property Watch website lists 43,315 properties for sale of which less than 2% (1,022) are priced at £175,000 or below, and of those 65% are studios or one-bedroom flats.[73] In particular this measure offers no incentive to families, unlike some other parts of the country where a wide range of properties will fall under this limit.

  3.1.11  The average house price in London is £328,927—nearly double the £175,000 upper threshold for waiver of stamp duty.[74] The average house price in the London Borough of Barking and Dagenham, the borough with the lowest average house prices in London, is £243,840—almost £75,000 above the £175,000 threshold.[75]

  3.1.12  Despite falling house prices, the volume of sales in London has dropped by 60% from 15,500 for July 2007 to 6,000 for July 2008.[76] This drop is a result of a combination of:

    —  higher mortgage interest rates;

    —  lower income multiples when calculating mortgage affordability;

    —  stricter lending restrictions from mortgage lenders; and

    —  the growing uncertainty of employment prospects as recession looms.

  3.1.13  London Councils considers that the upper threshold for waiver of stamp duty should be regional and that in London this should be increased to £250,000.[77]

3.2  Support for mortgage interest (SMI)

  3.2.1  The reduction in waiting time for support for mortgage interest (SMI) from 39 to 13 weeks is welcomed as is the increase in the capital limit for new claims to £175,000.

  3.2.2  However, given that mortgage repossessions orders made are rising,[78] the reforms to SMI should become effective at the earliest opportunity.

  3.2.3  There is a concern that SMI like the stamp duty holiday fails to take account of high London property prices, and Londoners who claim SMI are unlikely to be covered for the total interest payable on their mortgage.

  3.2.4  A further consequence of the high London property prices has been the number of mortgages where two incomes have to be taken into account. This creates a further disadvantage for London as if one of the couple is employed the likelihood of the household even qualifying for SMI is remote and they fail to gain any help.

  3.2.5  London Councils considers that the capital limit for SMI should be regional and that in London this should be increased to £250,000.

3.3  HomeBuy Direct and Rent to Buy

  3.3.1  The introduction of these products is welcomed. However, HomeBuy Direct is still very dependent on first time buyers regaining confidence in the market. The scheme may therefore only have a marginal effect on the market and it may be some time before confidence is restored enough for buyers to return if house values continue to drop as expected.

  3.3.2  Rent to Buy has attracted a great deal of interest as this will allow householders to choose if they want to enter to the housing market. The increased flexibility allowing people to move from intermediate renting to shared ownership in the same property is welcomed.

  3.3.3  London Councils is keen to ensure that home ownership is sustainable. In light of this consideration should also be given to mechanisms to enable purchasers to "staircase" down as well as up.

  3.3.4  The low cost home ownership (LCHO) model needs to be improved. The variety of schemes on offer confuses potential purchasers, and many fail to set out the advantages and disadvantages of shared ownership. As a result a significant number of people do not realise they could be eligible to apply for shared ownership.

  3.3.5  Consequently, there is an immediate need to clarify the range of intermediate products on the market as the different eligibility criteria and schemes add to customer confusion, making them less effective. There should be clear branding and promotion of a smaller range of shared ownership products.

3.4  Government clearing house for unsold property

  3.4.1  While the Government initiative to set up a clearing house funded by £200 million to allow housing associations to buy and manage this unsold stock is welcome, early indications from housing associations indicate they are wary of procuring these properties. In London, many of these unsold homes are one and two-bedroom flats which do not meet the demand for family homes or alleviate London's problems with over 200,000 overcrowd households. Equally the space and design standards do not reflect the aspirations of the HCA.

  3.4.2  Housing associations in London will only consider purchase of homes which meet the required space standards, are of a size they want for their portfolio and are in the right location.

  3.4.3  The number of "off the shelf" purchases resulting from the clearing house will not persuade builders back into the market for speculative development and there needs to be a more directed programme of house building to meet affordable housing demands.

3.5  Bringing forward £400 million grant funding

  3.5.1  The Government's decision to prime the market by bringing forward £400 million of the Housing Corporation's grant funding and opening bidding to local authorities and housing associations is a move in the right direction, but with little lead-in time local authorities who have not been allowed to bid for funds and build new council stock for some time may find it difficult to take advantage of the relaxation in rules.

  3.5.2  Housing associations with current plans and experience will be in a better position to bid but they are still faced with the economic viability of developing in this economic climate.

4.  ACHIEVEMENT OF THE GOVERNMENT'S HOUSE BUILDING TARGETS

  4.1  There are indications that the draft Mayor's Housing Strategy will aim for approximately 30,000 new homes per annum and a target in the region of 50,000 affordable homes for the next three years (2008-11). Indications are that this will be a testing target.

  4.2  Eight organisations, including London Councils were invited to give evidence to the London Assembly Planning & Housing Committee on 13 October. The consensus was that meeting the current new build targets would be extremely challenging in the current financial and economic climate.

  4.3  In the majority of developments the business plan for housing association new build is based on crossover funding from homes sold (both outright sale and low cost home ownership) in a development. In the current economic climate house prices are falling and both open market and shared ownership sales are drying up. In light of this housing associations will require greater levels of grant to deliver affordable housing. Some have decided to focus on small developments which can be completely grant funded and concentrate on the supply of larger properties. While this trend may alleviate London's overcrowding problem the numbers may not be sufficient to make a significant contribution while the reduction in overall supply could be disastrous. London needs both more affordable housing and more family sizes homes.

  4.4  The Homes and Communities Agency (HCA) has agreed to look at grant rates and the possibility of paying grant before building starts. This will be necessary to get developments off the ground, but the effectiveness on the scale required to reach the government targets is doubtful.

  4.5  Greater clarity on the use of local authority land to pump prime joint developments would be welcomed. Audit expectations are that local authorities should always get the best monetary value which may not be the case when using it to develop affordable housing sites.

4.6  Effect of the credit crunch on housing schemes

  4.6.1  London Councils has asked London boroughs to provide information on the effect of the credit crunch on current and potential affordable housing schemes. Results from this survey are attached as Appendix 1.

  4.6.2  Key trends emerging from the survey include the following:

    —  Six out of 15 boroughs have experienced schemes falling through but, in general the credit crunch is causing delays in delivery rather than complete withdrawals on schemes at this stage.

    —  Developers are building in time delays and pushing back start-on-site and completion dates.

    —  Affordable housing schemes which are primarily funded by free local authority land and developer cross subsidy from open market sales (due to free land) could be vulnerable and have a gap in their business plans.

    —  There has been a slow down in the intermediate sector, with sales of low cost home ownership still taking place but at a slower rate. Developers and housing associations are seeking to change the tenure of some shared ownership units to intermediate rent or social rent.

    —  On some sites, where housing associations have been unable to proceed, another housing association has approached the borough regarding the same site.

    —  Section 106:

    —  Planning gain sites with a mix of tenures are being delayed or mothballed primarily as a result of the risk of not being able to sell the private units.

    —  Some section 106 affordable housing schemes which were originally viable with no funding from the Housing Corporation (HC) now require some grant funding to proceed due to reduced income forecasted from the sale of the private units.

    —  Developers have approached boroughs stating that they cannot provide the section 106 affordable housing quantum required by boroughs' individual planning policies. This has been supported by the evidence of independent assessors and appraisals and borough have had to accept this.

    —  In the short term completions look healthy but there is likely to be a dramatic fall as current schemes are completed and new schemes fail to go ahead.

    —  Some housing associations are telling the boroughs that they are not getting involved in new shared ownership that completes in the next two years and that they just want to work on small 100% social rent schemes.

CONCLUSION

  London faces significant challenges in terms of affordability, homelessness and overcrowding exacerbated by the credit crunch. Recent improvements in providing affordable housing are at risk, but local authorities are ideally placed to work with government and their stakeholders to resolve the problems.

APPENDIX 1

AFFECT OF THE CREDIT CRUNCH ON AFFORDABLE HOUSING SCHEMES IN LONDON BOROUGHS


Borough
Have schemes fallen
through?
Comments
1NoTo date no affordable housing schemes have fallen through as a result of the credit crunch. Perhaps in a different situation to many other boroughs because of emerging Local Housing Company.

2
NoAware of three significant sites in the borough, which have planning permission and which cumulatively would deliver just over 200 affordable units, which have been put on hold by developers.

In addition, the effect of falling values on financial viability has delayed any further progress of two proposed schemes (not yet with any planning permission) of about another 70 units combined.

These are section 106 sites with a mix of tenures, where the risk of not being able to sell the private units is almost certainly what is holding things back.

Cannot be sure that others won't be affected in due course as well.

In terms of change of tenure, one recent example is a medium sized scheme where the eight shared ownership flats originally intended reverted to intermediate and social rented. The progression of the scheme was also clearly in jeopardy due to the Corporation's stance regarding the grant rate.

A further scheme providing 30 affordable units, which just received planning consent, was to be delivered grant free but now will need grant due to reduced income forecasted from the sale of the private units.

Conversely, there have been a few sites where developers have offered more units for affordable housing. The borough is considering the suitability and viability of these offers—although it is often the case that the properties are not up to the standards required to be funded as affordable housing.

3
NoNot aware of any developments that have been stopped on site because of the current conditions. Of those that are threatened

    —  Scheme A: 20 units affordable (6-LCHO, 14- rented) with allocation and Planning Consent. Developer trying to convert additional 32 private units to affordable- intermediate rented. (Developer will lose purchase deposit if scheme shelved; funding provider pulled funding for market sale units- market too risky.)
    —  Scheme B: funding providers reviewing overall cash flow rates—requiring reconsideration of phase 1 content. About 250 units affordable, including about 60+ Supported housing units, affected. So far only timing affected.

There are rumoured delays to starts on sites of schemes with consent or awaiting Section 106 signing. These are two large schemes of mainly commercial content. No confirmed cases.
4NoSlowdown rather than complete stop. Still in discussions with developers about most of the potential sites in the borough, however the need to resolve things quickly and push on to planning permission etc is not there. Developers are certainly building in time delays and pushing back start on site and completion dates. Seeing readjustment of tenure from market to affordable as developers continue to try to stack schemes up and build more margin into their schemes.

The borough has not seen a push to develop higher levels of affordable housing but this could be because the borough has high land values where even moving to a higher level of affordable housing doesn't work in terms of return against what it cost to buy the land in the first place. This may not be the case in other boroughs.

There has been a slow down in the intermediate sector, with sales of LCHO still taking place but at a slower rate. The three-year pipeline represents the situation well: the next two years look pretty healthy with c. 750-800 homes (gross) being completed each year. However, year 3 (2011-12) is different with perhaps as few as 150-350 homes being completed.
5YesTwo Section 106 schemes which have fallen through as a result of the credit crunch:



Scheme Total number of unitsSocial rent LCHOOutright sale Reason

Scheme A 3836141 281Developer has withdrawn from scheme due to market conditions
Scheme B 2606132 167The council has withdrawn from disposal of land due to market conditions which have led to developer significantly reducing the tendered offer.
Total 64312273 448

Currently no schemes have had to be substantially revised (eg change of tenure from LCHO to social rent). However, the borough has been informally approached by one agent enquiring as to the possibility of changing outright sale units to an alternative tenure such as intermediate rent, but it has not yet received a formal proposal.

6
YesAffordable housing schemes that have fallen through or stopped because they have been abandoned by developers or RSLs we have the following:

    —  Scheme A: RSL failed to complete purchase after exchange of contracts. 22 units—5 rent, 5 shared ownership, 12 private sale

    —  Scheme B: RSL withdrew offer before exchange of contracts 30 units(approx)—7 rent, 8 shared ownership, 15 private sale

It is likely that there may be others arising from planned Council disposals but we are unable to release further details at present.

We also have a significant number of sites where developers/RSLs appear to be delaying or seeking to re-configure the tenure due to the current market:

    —  Scheme A: RSL seeking tenure change to 100% affordable due to claimed non viability of approx 30 private sale units.
    —  Scheme B: Developer/RSL seeking tenure change to 100% affordable and reduced terms, change of 8 private sale units to intermediate tenure
    —  Scheme C: RSL not wiling to commit to construction following planning consent. 8 rented and 19 shared ownership units deferred to later year
    —  Scheme D: RSL claims to have acquired but not willing to commit to construction. 53 units, 15 rent, 26 shared ownership
    —  Scheme E: Slow progress by developer, RSL partner uncertain of situation.414 units—164 affordable, 250 private sale, delivery uncertain.
    —  Scheme F: Disposal of site deferred to later years

Few RSLs can demonstrate that they are actively seeking sites or doing more than keeping previous leads live so in general terms it is more a problem of new schemes not coming forward rather than existing schemes failing (so far) that is going to cause a supply drop from next year when the lack of new starts in 2008/9 is reflected in completions. Our situation is blurred by the large supply of units in 2010/11 that were both committed in earlier years. Existing commitments will largely meet our three year supply target although 2009-10 as an individual year is currently below target due to the low level of starts so far in 2008-09. Our partners have been questioned on this and they claim to be active but this is not evidenced by schemes coming forward. There are however 2 exceptions (L&Q and Origin) that are noticeably active locally.

7
NoWhilst no schemes have totally fallen through as yet, the borough is finding that schemes both pre and post planning consent are changing with developers and/or RSLs looking to increase the amount of affordable housing in a scheme (subject to funding) or moving LCHO units to rent or rent to buy. Some specific examples of difficulties are:

    —  Scheme of 99 units (51 full sale, 28 shared ownership, 20 rented) with full planning consent and a 07/08 HC allocation with grant already claimed. The private developer walked away from the full sale element this year although now both the developer and the RSL are separately looking at revising the scheme to make it work.

    —  Large mixed tenure scheme largely complete, developer wanted to change 30 1 & 2 bed units from full sale to shared ownership. Rejected by LA and HC as too expensive.

    —  Small mixed tenure scheme. Recently LA agreed to fund RSL to purchase 4x4bed houses. Developer then refused to sell houses to RSL without them also purchasing a block of small units. Borough negotiated directly with developer and purchase of houses only now re confirmed.
Estate Regeneration schemes

    —  The council has four4 schemes with its Arms Length Management Organisation (ALMO) where the ALMO will own the affordable rented housing. Three of the schemes have some public funding but otherwise the schemes were to be funded by free local authority land and developer cross subsidy from open market sales (due to free land). Two of the four schemes have planning consent and one was due to start on site within a very short period. In all four cases there is now a gap in the business plan and the council is currently working on how these gaps can be filled.

8
NoSchemes are not falling through but the credit crunch is causing delays in delivery and some of them could eventually fall through but it is unclear at this stage, which way they will go.

One site in the borough was owned by an RSL and had to be sold on because of financial difficulties. This resulted in the loss of 40 affordable housing units for both social rent and shared ownership.

Over the past six months, more developers have stepped forward arguing that they cannot provide the section 106 affordable housing quantum and this as been supported by the evidence of independent assessors. Three independent appraisals have clearly demonstrated on three separate sites that no affordable housing can be carried and the borough has had to accept this decision.

9
NoNot aware of any affordable housing schemes falling through

10
YesTwo mixed-use (commercial and residential) S106 Schemes have been mothballed:
    —  Scheme A: The Housing Corporation (HC) had provided funding for 32 affordable units (20 social rent and 12 s/o). The grant has now been withdrawn.
    —  Scheme B: A housing association was going to provide 48 affordable units (13 social rent and 35 s/o), but it did not apply for grant.

The borough has received one application to change some s/o units into social rent.

The borough is converting the 15 s/o units being provided in Scheme C into a fallback rent-now-buy-later scheme in case the RSL meets difficulty in marketing or selling any of these properties.

The borough has recently run into difficulty with the HC in funding high value, expensive Section 106 schemes.

    —  Scheme D: With a verified financial appraisal, the developer proposed providing 40% (62 units) of the residential habitable rooms as affordable housing with HC funding. However, the HC did not consider this as providing value for money when compared to obtaining 40% (40 units) without grant. This could place the scheme in jeopardy.
    —  The borough has a number of other schemes that are similarly threatened.
11YesOne scheme where the RSL has pulled out. This comprised 87 units of which 26 would have been affordable. The developer is now seeking to revise the scheme to deliver all affordable housing but has been unable to agree terms with an alternative RSL partner, to date.

12
NoNot aware of any casualties that could be attributed to the credit crunch

13
NoThere is no definitive evidence of developers formally advising the borough of their intention not to proceed with proposals either those currently under construction or planned.

14
YesScheme A: Approx 50-unit flatted development, developer was intending to fund CiL contribution through bank borrowing; however its funders have re-valued the scheme and are not able to forward any further funding. The borough has looked at bringing the affordable housing liability back on site; however the RSL is not impressed with the workmanship/quality/layout etc. and is not willing to take up the units. The borough is currently considering a deal on a neighbouring site.

Scheme B: A 24-unit scheme brought to the borough RSL1, the borough had agreed to support the scheme ; however RSL1 has recently taken the decision not to proceed with the scheme due to the current market conditions. The borough has since been contacted by RSL2 on the same scheme.

15
YesOne scheme where an RSL has pulled out of for explicitly "credit crunch" reasons:

    —  Scheme A: 57 units (27 social rent and 30 Shared Ownership). The RSL stated that it could no longer make the shared ownership work. Since the RSL pulled out, another RSL has talked to the borough about it.
Generally RSLs are not pulling out of schemes. What some are telling the borough is that they are not getting involved in new shared ownership that completes in the next two years. They just want to do small 100% social rent schemes.

Whereas a year or two ago applicants were prepared to meet the council's 35% affordable provision; in most cases they now say this is not feasible. They are bringing along new applications with financial appraisals to justify the provision of Housing Corporation grant-funding, which has previously been against borough policy.

The following schemes have been revised:

    —  Scheme B: The affordable housing provision has been reduced from 188 to 151 units, (the approved scheme was 159 intermediate plus 29 social rented units, the revised one is 116 intermediate, 35 social rented). The reason given is that the changing market means the proportion of affordable housing can no longer be supported.

    —  Scheme C: The affordable housing provision has been reduced from 28 to 18 units. Applicants explain that RSLs are in most cases not prepared to countenance shared ownership schemes because of the market uncertainty.
Discussions are still taking place in respect of:

    —  Scheme D: 12 affordable units comprising 8 affordable rent and 4 S/O (shared ownership) might become all rented.
    —  Scheme E: The affordable provision comprising 7 affordable rented and 3 S/O might become all rented.

November 2008







71   RICS Affordability Index, Q4 2007. Back

72   RICS Affordability Index, Q4 2007. Back

73   http://www.londonpropertywatch.co.uk/ as at 30 October 2008. Back

74   Land Registry House price Index September 2008. Back

75   Land Registry House price Index September 2008. Back

76   From Land Registry House price Index September 2008. Back

77   This figure has been arrived at with reference to the average lower quartile house price in London-£210,000. From www.communities.gov.uk, Table 583, Housing market: lower quartile house prices based on Land Registry data, by district, from 1996 (quarterly), figure given is for Q1 2008. Back

78   From www.justice.gov.uk Repossession orders granted in London courts were up 12% on Q2 2007. Back


 
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