Memorandum by Council of Mortgage Lenders
1. This is a supplementary response prepared
by the CML, updating the previous submission made in May and responding
to the new issues set out in the Press Notice issued on 26th July.
2. The housing market has been very active
in recent months and it was felt important to analyse these market
developments in the context of the Inquiry. These are considered
in the Affordability section below. In the remainder of the submission
we cover the specific questions raised in the Press Notice, namely
(a) the impact of the Spending Review on
the Decent Homes Target;
(b) the balance between home-ownership and
social housing in any spending which might flow from the Review;
(c) the role of planning obligations in affordable
(d) the effectiveness of the Housing Market
Renewal Fund; and
(e) ensuring the quality of new affordable
housing and avoiding past mistakes on housebuilding programmes.
3. It is evident that the UK has been experiencing
a period of very rapid house price growth. There are a wide range
of views about the future direction of the market and what should
be done about it. In a recent detailed paper by the CML Head of
Research and Analysis, Bob Pannell, assessed where the market
is going (see Pannell, 2002). In summary he argues the following;
Income multiples have climbed to
record levels on the back of a strong economic background and
sharp reductions in interest rates. A recent acceleration of high
income multiple lending may indicate that affordability pressures
are beginning to bite.
Although first-time buyers and movers
are borrowing more and mortgage tax relief has been abolished,
lower interest rates mean that mortgage payments relative to incomes
are significantly lower than they were at the height of the late
There is a relatively modest comfort
zone for interest rates within which mortgage repayments are easily
affordable and sustainable. An increase in interest rates of as
little as 1 per cent could begin to reveal payment stress on the
part of some borrowers.
The UK economy is unlikely to be
as positive for the consumer sector and the housing market as
it has been.
Our transition to a low-interest
rate economy has provided a significant "windfall" effect
for the housing market. If we have already seen most of the adjustment
to this, then the housing market faces a prolonged period of much
more modest house price growth and sales.
4. His paper develops these arguments in
some detail. It does suggest that although there are risks perhaps
the worst of a price driven "affordability crisis" is
over and that the market will begin to adjust and most recent
evidence does support this. However there remain significant supply
questions that the Government had been slow to respond to, especially
in relation to high growth areas.
5. To assist the deliberations of the Committee
we have updated tables from our previous submission. Table 1 shows
the regional house price to income ratio for all buyers by "region".
This shows how the ratio continues to rise in all parts of the
UK and that in many areas it is high by historic standards (post
1969). Table 2 explores the ratio of interest payments to incomes
for all buyers by "region" and here the effect of lower
interest rates is obvious. The ratio has fallen back and is now
well below previous historic highs. This is true of all "regions".
6. Although press comment often suggests
lenders have been "stoking" price increases by lending
more this is not borne out by the average loan to value ratio
for all buyers data given in Table 3. As may be evident borrowing
power is increased by lower interest rates but this has not translated
into higher LTVs. As Table 4 suggests even first-time buyers are
currently enjoying, on average, lower LTVs than in previous periods.
The last table (Table 5) looks at income multiples for first-time
buyers over the period 1985 to 2002. This shows that relative
to income some first-time buyers are borrowing more in recent
years albeit that the vast majority, around 85 per cent are borrowing
with multiples of less than 3.5.
7. The CML expectation is that house price
increases will abate. The CML forecast for 2002-04 is given in
8. The impact of the spending review on
the Decent Homes target is a little difficult to estimate at present
because not all of the subsequent spending announcements have
been made. Clearly the extra resources were welcome. However,
the apparent shift away from local authority stock transfer as
the primary mechanism for levering in extra money to social housing
raises questions as to how achievable the target might be. Arms
length management companies or any new prudential borrowing regime
are so far untested in terms of their ability to deliver better
homes. At this stage stock transfer is the only known vehicle
(beyond direct investment) but there is no doubt many authorities
have been distracted, temporarily at least, by the apparent shift
in policy towards other vehicles for local authority housing.
9. It should also be noted that the standard
set in the Decent Homes target is still not high even though it
is a great advance. The Government should expect to increase the
standard and thus the spending in subsequent years.
10. It is clear that home-ownership is the
preferred tenure of the majority of households. Recent developments
in the housing market and the wider investment market have probably
re-inforced that desire. The move towards lower interest rates
and a more stable macro -economic framework may indeed mean that,
given an adequate housing supply, more households might both reasonably
aspire to home-ownership than in previous decades and be able
to translate that into reality. This has certainly been the case
in the United States of America.
11. Although there are still some significant
"regional" variations regarding incomes, unemployment
and tenure preferences it might be reasonable to assume that,
going forward, between 75 per cent and 80 per cent of the UK households
might become home-owners at some stage in their life cycle and
that at any time approaching 75 per cent of households would be
home-owners. There are a range of issues underneath this which
must be addressed including ensuring this level is sustainable
by building an adequate safety net for home-owners in difficulties,
easing the access of the rising number of single person households
into home-ownership and dealing with the consequences of rising
student debt and relationship breakdown.
12. Low cost home-ownership (LCHO) has been
a "cinderella" activity in housing policy and practice.
The commitment of central and local government, the Housing Corporation
and housing associations to this area of activity has been at
best lukewarm. Partly this stemmed from a view that the LCHO programme
was seen as a further unnecessary promotion of home-ownership
and this was best left to the market itself and second it was
seen as a distraction from the priority which should be given
to social rented housing. Many local authorities know so little
about their local housing markets they do not attempt to provide
for LCHO in their housing strategies. Now there is renewed interest.
LCHO is seen as giving stability and balance to areas which might
otherwise be dominated by social renting. It is seen as a way
of helping key workers and of facilitating housing market change.
13. However in going forward with LCHO it
is clear renewed attention has to be given to the way housing
associations and others have managed their programmes. The lack
of attention given to LCHO referred to above has been reflected
in the modest performance of some associations in the running
of LCHO. The recent ODPM and Housing Corporation reviews of LCHO
only partly dealt with these weaknesses and further work will
be necessary to ensure proper advice, guidance and assessment
is given to the client group entering home-ownership via LCHO.
This needs to be in line with the new regulated mortgage regime
being introduced in 2004.
14. LCHO can play a very valuable role and
lenders are very supportive of a major expansion of this programme.
They are particularly supportive of Homebuy which is regarded
as simple and more consumer-friendly than other forms of LCHO.
The industry would like to explore ways in which Homebuy might
be developed further in terms of both the nature of the product
and the ways it is made available. To date there has been no great
willingness within the public sector to engage with lenders as
to how this might be taken forward.
15. There is a case for suggesting that
all new publicly funded housing should be available for renting
and/or owning (subject to status/capacity) and that public investment
might be safeguarded by a first option to buy back principle.
Setting this idea aside, the industry would support a doubling
of the programme to restore it to levels seen in the mid 1990s
and for further expansion beyond this. To date the programme has
been seriously run down over successive years.
16. None of this is to suggest we should
not have buoyant private and social rented sectors as well. Both
are needed (and both are funded by lenders) for a number of reasons.
Accessible rented property (private and social) is necessary for
an ever more mobile society (though we should not ignore the continuing
improvements in the house buying/selling process with the result
that house purchase transactions are being completed more quickly)
with households needing to move at short notice reflecting flexible
labour markets, personal circumstances etc. At the start of a
working life private renting continues to make very good sense
just as it might after retirement. Much turns here on questions
of conditions, cost and security. The same is true of social housing
and there is no doubt that there is a continuing need and demand
for this type of housing.
17. The proportionate balance between the
different tenures will always be fluid, reflecting economic circumstances,
changing preferences and demographic change. There can be no fixed
proportion (numbers will tend to increase regardless of the proportion
reflecting the growth in the number of households/people). In
other countries with mature home-ownership markets there has tended
to be a decline in the proportion of home-owners (see Holmans,
2000). Given that at the margins there will be some fluidity in
and out of home-ownership there is much to commend the creation
of more flexible tenure arrangements in which households can move
between renting and owning without moving. Such arrangements are
still in their infancy but the lending industry is keen to see
more work done in this area.
18. Our comments in our response of 20th
May remain valid here. We have no new evidence to add.
19. The effectiveness of the Housing Market
Renewal Fund will largely depend on the robustness of the strategy
that is developed in each of the pathfinder areas. Any solutions
for the housing market must be supported by wider regeneration
activity and an understanding of the causes of the low demand
problem in the particular area. There is no point improving housing,
if there are no jobs or transport for people to get to work, failing
schools, high crime rates or no local shops. These issues need
to be addressed alongside improvements in the housing market to
ensure success and importantly to ensure that private finance
is levered in for developments and that lenders will continue
to lend to those wanting mortgages in these areas. It is important
that the pathfinders have a clear understanding of the housing
needs in their area too. A considerable amount of work needs to
be done to ensure that the housing is what people want and will
meet the needs of the population both now and in the future.
20. The effectiveness of the schemes will
also depend on the pathfinders sharing good practice. To ensure
efficient and effective intervention it will be necessary to develop
models and schemes nationally that can be applied locally. Particularly
where lenders are concerned they do not have the resources to
work with each pathfinder individually. However, if national protocols
and models are developed which are clear and well understood this
will help to ensure co-operation. Local authorities should also
be prepared to share information about initiatives or ideas that
have not worked as well so that others can learn from their mistakes.
This is where ODPM has a clear role to play. Whilst ODPM should
not dictate how the pathfinders should operate it would clearly
be sensible for them to co-ordinate good (and bad) practice and
develop any necessary models and protocols. The Market Restructuring
Unit that has been set up within ODPM has this role and it is
important that they receive sufficient funding to ensure that
they are able to fulfil this role to its full potential.
21. We are aware that some of the pathfinders
are exploring the potential for development of affordable housing
as part of market renewal. This includes offering home-owners
in properties that are going to be cleared the option of shared
ownership in a new property if they cannot afford to purchase
it. Again the success, or otherwise, of such initiatives needs
to be analysed and shared.
22. Our previous submission highlighted
concerns about the mortgageablility of new forms of construction
for affordable housing. It will be important to ensure that the
problems associated with non-traditional construction in the past
are avoided in the future. The CML has recently produced a report
"Non-traditional housing: A brief review". This
provides an overview of the history of non-traditional housing
and considers some of the issues that need to be addressed in
the future. A copy is enclosed for the Committee.
23. There are concerns about new types of
construction not just amongst lenders but also amongst other stakeholders,
not least consumers. One way to address these issues would be
to have a form of accreditation scheme for new types of building.
This could cover, for example, mortgageability, insurability,
consideration of potential faults and ease of maintenance. The
scheme could be developed by the Housing Forum who already have
a working group to consider offsite fabrication techniques, involving
the Building Research Establishment who have a wealth of experience
in non-traditional construction techniques. A form of kitemark
would provide reassurance to lenders, insurers and the public
Holmans, A. (2000), Home Ownership, House
Purchase and Mortgages: International Comparisons, CML Research,
Pannell, B. (2002). Affordabilityhow
much higher can UK house prices go?, Housing Finance 55, CML,