Memorandum by the Building Societies Association
(CRED 57)
EXECUTIVE SUMMARY
— The Government should seek to allow
the housebuilding targets set out in the Barker Review to be realised.
— Encouraging lots of small scale development
may be more productive than large scale developments.
— Shared ownership schemes designed
to help aspirant first time buyers remain complex for both building
societies and borrowers, deterring both from participating in
the schemes.
— Adoption of standard section 106
agreements by local authorities and developers would facilitate
greater building society involvement in affordable housing schemes.
— Homeowners who have difficulties
repaying their mortgage need to be encouraged to contact their
lender as soon as possible.
THE BUILDING
SOCIETIES ASSOCIATION
1. The Building Societies Association (BSA)
welcomes the opportunity to contribute to the Committee's inquiry.
2. The BSA represents all 59 building societies
in the United Kingdom. Building societies have total assets of
over £360 billion and, together with their subsidiaries,
hold residential mortgages of £250 billion, more than 20%
of the total outstanding in the UK. Societies hold about £235
billion of retail deposits, accounting for more than 20% of all
such deposits in the UK. Building societies also account for about
37% of all cash ISA balances. Building societies employ over 51,500
full and part-time staff and operate through more than 2,000 branches.
HOUSEBUILDING TARGETS
3. The Government is proposing that 75,000
more homes will be built in areas of "high demand from Northumberland
to Cornwall" while a further 20 new growth points have also
been identified.
4. We welcome recognition from the Government
of the need to build more houses. We agree with the findings of
the Barker Review that the major contributor to the very high
levels of house price inflation that have characterised the economy
until recently has been the imbalance between supply and demand
for housing, with the increase in the housing stock not keeping
up with the demand for housing. As such, it is no surprise that
house price inflation has been so high.
5. But despite the fall in house prices
that is currently taking place, we believe that the underlying
supply and demand imbalance remains (and, in view of the low levels
of building currently taking place, could be worsening). As such,
once buyers start to return to the market prices are likely to
start rising again, albeit at slower rates than before.
6. Even in the unlikely event of this not
happening, as a consequence of how high property prices have become,
despite these recent price falls, property will remain unaffordable
for many.
7. As such, it is vital that the Government
continues to facilitate the building of property where there is
need and a demand for that property. We believe that the new building
levels identified in the Barker Review should be viewed as a minimum,
and that new build properties should be of a design and type that
will meet local demands.
8. We note that many of the Government's
planned new developments have attracted considerable local opposition.
We do not pretend that these are easy decisions to make but, if
we are serious about addressing affordability issues then development
will have to be allowed to take place in such areas.
9. To ensure that such development takes
place with minimal environmental impact and with the support of
local people, it should be done on a small scale. Some of the
large developments that have taken place in rural areas in the
past have alienated local communities simply because of their
size—a two property development is going to attract a lot
more support than a 200 property development in a small village.
10. It is also important to note that opposition
to further development is often not as a consequence of the new
development itself but because of the impact of the people who
will live in the new properties on local services and infrastructure.
As such, any increases in development should be accompanied by
a proportionate increase in the provision of local services.
HELP FOR
PROSPECTIVE HOMEOWNERS
11. We note that the Government is proposing
a scheme that would allow eligible households earning less than
£60,000 to rent a home at 80% of the market rent for two
to three years and then be able to buy a part share in the property.
12. Potential first time buyers often view the problem
of saving for a deposit as being one of the major barriers to
getting on the housing ladder. As a consequence of prices being
so high, aspirant buyers can often be faced with having to save
£20,000-£30,000 just for a deposit. And with these high
property prices leading to high rents, the prospect of saving
for a deposit that is often larger than an average annual salary
can prove daunting for a potential buyer.
13. So giving potential buyers the opportunity
to pay a reduced rent for a period to save up for a deposit may
help.
14. However, in practice, we doubt that
the scheme will have the impact that the Government hopes. Take
up of the established shared ownership schemes has been low, amongst
both lenders and borrowers. This is due to a number of factors,
but not least the complexity of the schemes (don't forget that
they are targeted at people who usually have very little understanding
of how both the housing and mortgage markets work) which serves
to prevent many potential applicants from going ahead with their
plans.
15. The already complex system is further
confused by the role of Homebuy Agents, who represent a further
level of administrative burden and possible confusion for participants,
especially as many of the friends and family members advising
first time buyers will not be familiar with the role of Homebuy
Agents.
16. Although the proposed scheme will be
welcomed by aspirant first time buyers, for it to be successful,
the scheme will have to be as simple as possible, from both a
borrowers and lender's perspective. This will be especially critical
as the introduction of the rental period would suggest the possibility
that this new scheme could be even more complex than the existing
schemes.
17. From a lender's perspective, there are
two main issues that have made them reluctant to enter the low
cost homeownership market, both via the Government schemes and
through ones they have sought to develop unilaterally. Resolution
of these issues would represent a major boost to building society
participation in affordable homeownership schemes.
18. Firstly, they report that many housing
association and local authority staff involved in low cost housing
initiatives are not conversant with lender practices and processes,
and how the mortgage application process works. This leads to
unnecessary delays and difficulties, increasing costs for building
societies and frustration to prospective buyers.
19. They also report that the use of widely
differing section 106 (section 106) agreements also causes problems.
While we recognise the benefits that section 106 requirements
can bring, different local authorities and housing associations
have different agreements. As such, societies have to devote considerable
resource to investigating the implications for them of each one,
which increases the cost and which can further dissuade societies
from participating in the schemes.
20. This is all the more unfortunate as
the Housing Corporation has developed standard section 106 agreements
and clauses that meet lenders requirements, and we believe that
local authorities would have much greater success with affordable
housing projects if they utilised those standard agreements.
HELP FOR
EXISTING HOMEOWNERS
21. The number of homes being repossessed
has gradually been increasing over the last 12 months. And while
forecasts for the numbers of property repossessions suggest that
the number of repossessions will rise, we expect them to remain
well below the levels experienced during the last housing market
slowdown.
22. This is a combination of building societies
ensuring that they only lend to people who can afford the mortgage
in the first place, and the systems that they have developed for
helping people who encounter problems paying their mortgage and
ensuring that they can stay in their homes.
23. Societies have found that the key to
ensuring that a homeowner can stay in their property when they
have repayment difficulties is that the borrower contacts them
as soon as possible to arrange alternative repayment plans. This
may include a rescheduling of the mortgage, a repayment holiday
or help dealing with other debts.
24. However, if the borrower doesn't seek
help with the mortgage repayments as soon as possible, then problems
soon start to escalate, and the borrower can find themselves in
a rapidly deteriorating situation that can then be difficult to
get out of.
25. So it is critically important that mortgage
borrowers who are facing difficulties contact their lender as
soon as possible. And any help that Government can give, through
local authorities or through other agencies, to encourage borrowers
with problems to contact their lenders at an early stage is to
be welcomed.
26. Likewise, the changes to the Income
Support for Mortgage Interest (ISMI) system will in turn help
homeowners by allowing them to claim the benefit sooner and to
claim for larger amounts. This will in turn make it easier for
societies to help homeowners in difficulty.
27. We view the proposals to allow local
authorities the opportunity to help homeowners with mortgage problems
with interest. Clearly any scheme that would avoid repossession
is to be welcomed. However, as noted above, the key to allowing
someone the opportunity to stay in their home is that the borrower
contacts the lender as soon as they identify potential problems.
If they do this, then a solution to the problem can usually be
found.
28. We are concerned that the establishment
of a well publicised local authority safety net could discourage
borrowers contacting their lender at the earliest opportunity
to seek to sort out a solution to their problems, and that this
could, in practice, make it very difficult for the problems to
be resolved because they had left seeking help too late.
29. It is the borrowers who do not do this
who find themselves with problems. Not contacting the lender early
enough sees them running up so much debt by the time that they
seek to resolve their problem that it can be difficult for a solution
to be found that meets the needs of both the borrower and the
lender.
November 2008
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