Memorandum by Council of Mortgage Lenders
1. The Council of Mortgage Lenders welcomes
this inquiry. The industry is concerned about current housing
market pressures and the continued low level of the supply of
new housing. Although affordability indicators suggest that overall
access to home-ownership has been sustained there are clearly
some problems for some groups of buyers. However, the housing
market is cyclical and current problems are likely to abate in
the future as the market adjusts. Lenders have managed the tension
between the need for larger loans to cope with growing affordability
problems and placing home buyers at risk in the event of future
interest rate increases.
2. The Council of Mortgage Lenders (CML)
is the representative trade body of the residential mortgage lending
industry, its 145 members currently hold over 98 per cent of the
assets of the UK mortgage market.
3. Given constraints on space this response
takes up the major issues outlined in the Press Notice. All tables
and charts are appended at the back of the submission, as is a
detailed article on affordability. The response has been prepared
by the CML Secretariat.
4. The UK housing market is highly cyclical
(Garratt, 2000) and the UK housing market is experiencing its
strongest cyclical upswing since mid/late 1980s (in terms of house
prices; turnover is actually currently much lower). It is normal
for the housing market to show regional differences, with London
and the South East tending to "lead" the rest of the
country. Until recently, these markets had been experiencing the
strongest growth in house prices and most significant affordability
pressures. However, there is a danger that affordability is seen
to be a problem only in those areas. There are a number of areas
in the North of England, eg, N Yorkshire, North Leeds, York and
Trafford to name but a few. Moreover, there are problems of very
low incomes in areas of high demand such as the Lake District.
5. In terms of defining affordability, in
the private home-ownership context the concept has at least two
dimensions (see Garratt, 2000 for more details):
the ability of households to sustain
mortgage payments/home-ownership. Historically low interest rates
mean that mortgage debt service payments are modest relative to
income14 per cent of pre-tax income compared with 25 per
cent at the peak of the last housing boom. In that sense affordability
is very good; and
the initial ability to purchase a
property. Most of the affordability pressures currently are in
relation to households' initial ability to purchase a property.
Chart 1 shows volatility of UK house prices relative to earnings.
6. Different data sources tell different
stories about whether this affordability measure is still some
way below or very close to previous peak. House-buying budgets
have been increasingly stretched since the mid-1990s, especially
in the south of England. Income multiples have expanded in a controlled
and modest way to record levels. But, as the housing market has
recovered, average LTVs have fallen, especially for First Time
Buyers (FTBs) and especially in London and South East. Typically,
potential buyers have had to bring larger deposits in order to
finance house purchases.
7. It should be noted that all of the preceding
analysis relates to average figures. While this illustrates the
underlying affordability problem, it also disguises some of the
picture. So, in recent months, for example, Savills and other
analysts have illustrated how increasing proportions of FTBs and
key workers are being priced out of local markets. The general
picture presented is correct, but it must not be forgotten that
there are significant variations in housing markets between and
within local neighbourhoods.
8. Taking London as an example, the latest
HM Land Registry (Q1 2002) show that two thirds of the London
Boroughs have average prices below the average for Greater London
as a whole. Allowing for different property types also, we see
that the average price of a terraced property in the cheapest
boroughBarking & Dagenhamwas only £72,348,
one third of the average price of London property (£214,257).
The London average is particularly subject to distortion given
the extremely high prices in central London boroughs.
9. Clearly, "affordability" of
housing is not the only issue affecting key workers and others
but rather a whole array of factorsneighbourhood amenities,
transport links, schools, socio-economic mix, preferences and
crucially knowledge of and willingness to search the London market.
It is important to bear in mind that an important aspirational
aspect is connected to most people's description of "affordability".
10. In this section our response will focus
upon current low cost home-ownership initiatives and the ways
these might be improved. However, it is important to stress at
the outset the industry's concern regarding the shortage of new
housing supply, the potential threats to the continued expansion
of the private rented sector via regulation of that sector and
the possible negative impact of the new home improvement regime
on household capacity to repair and improve homes. On this last
point there is evidence of growing disrepair in the owner-occupied
sector and this adds to affordability problems and the incidence
of empty homes.
11. According to the Government's Housing
Green Paper, approaching nine out of 10 households aspire to home-ownership.
In a high demand, high price market like London and the South
East, home-ownership can be less accessible for lower income households,
certainly in specific locations. There is clearly some scope for
the Housing Corporation and local government funded low cost home-ownership
(LCHO) programmes to meet the home-ownership aspirations of lower
to middle income households in such areas. For example, the recently
published Tower Homes Review of 2001 says that they received 29,000
enquiries about LCHO in 2000-01 but were only able to help 500
first time buyers. An increased home-ownership programme has recently
been agreed between the Government and the Housing Corporation
but it is still less than 5,000 units.
12. The Government is giving local authorities
a central role in delivering housing policy. However, in order
to fulfil this vision, local authorities will have to intensify
their efforts in assessing their local housing markets and developing
coherent and comprehensive policies which tackle the problems
identified. Research for the Chartered Institute of Housing and
the CML points to serious deficiencies in local authority action
(CIH/CML, 2000). There is a need for a "joined up" agenda
locally, ie, the bringing together of central and local government
policies and programmes and other partners involved in the provision
of housing and the creation and maintenance of viable communities.
13. Getting the balance right between LCHO
and rented programmes is one aspect of local authorities' strategic
approach. Local authorities must understand their housing markets
and the demand for home-ownership in agreeing their investment
14. The evidence to date, nationally, is
that LCHO is losing out in local authority investment decisions.
Despite the support given to the concept of LCHO, the Government
has overseen a reduction in the low cost home-ownership programme
since 1997. The CML welcomes the current review of the LCHO programme
and hopes that this will result in a substantial restoration and
enhancement of the scale of the programme. The Housing Corporation's
home-ownership programme declined from 17,500 properties in 1994-95
to 3,300 in 2000-01 before rising again to around 5,000.
15. The impact of the small scale of the
programme mean that only a small number of lenders are offering
mortgages on shared ownership property. Lenders will not invest
in product development and staff training while the number of
mortgages they are likely to offer is so small.
16. The lending industry was concerned about
the possible impact of the Starter Home initiative in terms of
generating new demand in markets without increased supply. However,
the relatively small scale of the programme, its spread over three
years and the balance between new provision and equity loans have
diminished some of those concerns. The industry was disappointed
that it proved impossible to roll out the equity loan scheme via
lenders since this was felt to be a more normal route for potential
house buyers than housing associations. It is evident that had
the Government sustained and indeed expanded its LCHO/Homebuy
programme the case for a specific initiative of this sort would
have been much reduced.
17. There are also concerns about recent
press reports that key workers will be housed in prefabricated
homes. With the encouragement of the Government developers are
coming up with solutions to house key workers using innovative
construction techniques. However, little thought has been given
as to whether these properties will be mortgageable. The decision
as to whether to offer a mortgage on a particular property is
one for individual lenders and some lenders may have policies
that preclude lending on certain types of property or the lending
will be more restrictive, requiring a higher deposit and adding
to affordability pressures. We are not aware that there has been
any discussion with lenders on this scheme.
18. The wide range of home-ownership initiatives
supported by public subsidy has been confusing to both buyers
and mortgage lenders. Some of the schemes added extra complexity
to the buying and selling process. Therefore, the introduction
of Homebuy, an administratively much simpler scheme, in 1999-2000,
was a welcome development.
19. Shared ownership in particular can confuse
owners about where responsibility for maintaining and improving
the property lies. Under the current arrangements, residents pay
for maintaining and improving properties, and yet the lessee,
the RSL, benefits from any improvement in value. In addition,
the current legal action by lenders against the Solicitors Indemnity
Fund where RSLs have refused to honour shared ownership leases,
underlines how difficult it can be to operate a complex scheme
like shared ownership.
20. In areas of high house prices, shared
ownership may not be sustainable for consumers in the longer term.
A 50 per cent share of a property in an area with average house
prices of £160,000, would leave a typical shared owner paying
approximately £270 a month in rent, on top of a mortgage.
Whilst the mortgage is likely to diminish in real terms over the
lifetime of the loan, the rent will increase at least in line
with RPI, and in London rather more under the Government's reform
of social sector rents. In these circumstances, shared ownership
does not offer a purchaser good value in the longer term. An equity
loan scheme, with a 30 per cent or 40 per cent equity share, would
be far more affordable.
21. Homebuy is a simple and popular scheme
where the Government provides a 25 per cent equity loan (in England).
Despite its popularity this scheme is underfunded at present in
relation to demand. And yet from a lender's perspective, out of
all the LCHO schemes currently operating, the Homebuy scheme is
the most simple to understand and develop products for. Unlike
traditional shared ownership, there is no lease, no management
arrangements and no rent payments for the buyer, who can choose
their own home.
22. Under the Homebuy scheme, home buyers
received a 25 per cent interest free loan repayable on property
sale and the loan is administered by RSLs. In high value housing
markets like London and the South East, there is a strong argument
for giving a larger equity loan than 25 per cent. In Wales the
stake is 30 per cent (and 50 per cent in defined rural areas)
and it may need to be as high as 40 per cent in some housing markets
23. Homebuy could be improved in two ways.
First, as already discussed, the size of the interest free loan
element could be adjusted according to market conditions and household
circumstances. Second, the scheme could be "sold" direct
by lenders rather than through housing associations/RSLs.
24. Planning can clearly have a role in
providing affordable housing. The Government has recently proposed
a tariff system for affordable housing with local flexibility
on the details of the implementation. This has the potential to
increase affordable housing but will only be effective if local
housing needs are properly assessed. We are aware of complaints
about the quality of local housing needs surveys and these will
need to be addressed if there is to be proper provision for affordable
25. We are concerned that the emphasis in
PPG3 on brownfield development can increase pressure on those
sites in towns and make affordable housing provision more difficult.
Whilst the emphasis on affordable housing is based around towns
and cities affordability can be a real issue in rural communities
where brownfield land is simply not available. Stopping greenfield
development in these areas may not stop the imbalance between
supply and demand.
26. We are also concerned that some planning
obligations are over-restrictive in terms of provision of affordable
housing. For example, Annex B to PPG3 on Providing for Rural Exception
Housing says that "the inclusion of clauses in planning obligations
which would enable lenders of private finance to dispose of the
property open market as a last resort were to get into financial
difficulties, are unacceptable in respect of housing schemes on
exception sites". This is unnecessarily restrictive. In general,
our view is that restrictive covenants should be used with care
and preferably only where there is likely to be a strong and continuing
market. If covenants are overly restrictive, the lender will bear
in mind the position should they find themselves in possession
and having to try to sell the property to recoup their money.
If the property cannot ultimately be sold on the open market,
they may be reluctant to lend, even on a shared ownership basis.
27. There have been considerable discussions
about the benefits of socially mixed communities and efforts continue
to achieve these. To date, little evidence has been systematically
gathered to analyse the benefits they bring to their inhabitants.
Moreover, the term appears to be a shorthand for raising questions
about large mono tenure social housing estates. Though the viability
of these estates may now be in question this may be as much to
do with unemployment and low incomes as it is with tenure. Simply
mixing tenure does not solve the problem of failing neighbourhoods
although it may assist. It is also the case that areas are often
more mixed than first appears through the renting out of property
in dominantly owner occupied areas (and here Buy to Let has had
an impact) and through the Right-to-Buy in social housing areas.
28. Although these is much to commend mixing
as part of a wider social inclusion agenda it is important not
to ignore some of the clear tensions this can create. A survey
for the House Builders Federation suggested that home buyers did
not like living in mixed tenure areas. Generally speaking, in
considering their lending policies towards such communities, lenders
would look to their valuers for information about the demand for
housing in socially mixed communities from home-owners.
29. The weakness of planning guidance continues
to be the lack of linkages to local housing strategies, the absence
of tenure based forecasts of demand and the focus on new households
rather than existing unmet demand. The work being undertaken by
the Housing Corporation and the Government Offices in the regions
has helped but we are still at an early stage in the process of
creating comprehensive and coherent plans.
30. The target for decent homes currently
applies only to social housing. The CML welcomes this target but
it is evident that the Government will find it difficult to meet
it if the stock transfer programme falters in any substantial
way. The absence of a private sector target is a cause for great
concern by lenders, especially given both rising disrepair in
parts of the owner-occupied stock and the introduction of the
new home improvement regime and the single capital pot which could
result in less funding for improvement and repair.
31. The Government's statements regarding
affordable housing like those of its predecessors, rather limited
and of a generality which has little impact in reality. At the
same time, given households' differential willingness and ability
to spend on housing costs, there is little point in a defined
affordability threshold which triggers government action. This
is also borne out by experience in Canada.
32. While a buoyant housing market acts
as a stimulus to the economy as a whole (Economist, 2002)
affordability pressures give added impetus to wage demands, limit
the supply of labour in those areas where there are significant
affordability constraints and impact upon general consumption
and economic activity as households redirect their general spending
towards housing costs. Moreover, if this also means households
occupy cheaper but substandard homes there are clear "knock
on" consequences in terms of health, educational achievement
and even crime. It is evident that for many years economic analysis
has underestimated the cost of poor and/or expensive housing.
If the UK is to be successful in competing globally good and affordable
homes will be part of the process. In that sense the costs of
the failure to provide adequate housing (however defined) are
33. Whilst there is an undoubted issue in
tight housing markets like London that rightly needs addressing,
it is important not to overlook the longer-term sustainability
issues affecting tenure choice, not least for lower income households
34. Although the majority of home-owners
face few problems repaying their mortgages there are households
which do face difficulties due to their changing circumstances.
The Government has recognised the importance that once home buyers
have accessed home-ownership, owners should be able to sustain
the tenure. The Government put forward a number of proposals for
improving the public/private safety net for out of work home-owners.
The CML has welcomed the broad thrust of these measures but would
like to see serious consideration being given to extending assistance
to in work home-owners through the creation of a Housing Tax Credit.
Such a development would enhance the flexibility and sustainability
of the housing market and reduce the benefit traps and work disincentives
that currently exist.
35. It is a paradox that that an unemployed
home-owner, receiving help with their mortgage interest payments
through income support, would have to change tenure and become
a renter, before they could take up a low paid job and receive
help with their housing costs (albeit there is now a one month
"rollover" before a recipient of income support for
mortgage interest loses that benefit on return to work).
36. As far as any initiative designed to
help first time buyers, the CML believe it should be administratively
simple and straightforward for borrowers and lenders to understand.
The existing Homebuy scheme may offer the best option if it was
made both more flexible and administered by lenders as well as
37. It must be recognised that through choice
or otherwise a proportion of households will never be owner-occupiers
at any stage in their lifetime while others will wish or need
to move out of the tenure at some point. It is vital that the
Government ensures there is an adequate supply of private and
social rented homes in order to meet these needs and demands and
to ensure that the housing system is sufficiently flexible and
adaptable to a changing economy and society. The lending industry
has played a key role in funding the expansion of the housing
association and private rented sectors. This will continue, subject
to the framework for lending remaining favourable. It is evident
that frequent changes in policy have heightened lenders' concerns
and this in conjunction with reduced margins and perceived greater
market and demand risk has resulted in some lenders leaving the
sector and deterred others from entering.
38. In summary, the key points in this submission
are as follows:
affordability can be defined in a
variety of ways. On some measures affordability remains very good;
the use of average incomes and average
house prices can be misleading in markets characterised by great
what is considered affordable will
vary from household to household reflecting preferences and a
wide variety of other factors;
the CML is concerned about the impact
of a number of wider factors which may impact upon affordability
including the low output of new homes in all sectors, potential
regulatory controls in the private rented sector and the new home
the CML would argue that more resources
should be put into low cost home-ownership initiatives generally
and Homebuy in particular; and
getting households into home-ownership
is only a starting point. Home-ownership must be sustainable and
the CML along with insurers and the government has been encouraging
the take up of private mortgage payment protection insurance.
The CML continues to urge the Government to introduce a Housing
Tax Credit to give greater support to low income home-owners.
Please note that the tables referred to
in Memorandum AFH 56 will be printed with the Appendices.