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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1652-i
House of COMMONS
TAKEN BEFORE the
Communities and Local Government Committee
Financing of new housing supply
Monday 21 November 2011
Andy Hull, Peter Williams, Jim Vine and Roger Harding
John Stewart, Councillor Clyde Loakes, Ian Fletcher and Abigail Davies
Evidence heard in Public Questions 1 - 97
USE OF THE TRANSCRIPT
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Taken before the Communities and Local Government Committee
on Monday 21 November 2011
Mr Clive Betts (Chair)
Examination of Witnesses
Witnesses: Andy Hull, Senior Research Fellow, Institute of Public Policy Research, Peter Williams, Director, Cambridge Centre for Housing and Planning Research, Jim Vine, Head of Programme, UK Housing Policy and Practice, Building and Social Housing Foundation, and Roger Harding, Head of Policy, Research and Public Affairs, Shelter, gave evidence.
Chair: Thank you very much for coming. Welcome to the first evidence session in our inquiry into the Financing of New Housing Supply. Thank you for the written evidence you have so far provided and for coming this afternoon and being early enough for us to start a little bit early, which is always helpful. Could you just begin by indicating who you are and the organisation that you represent?
Peter Williams: I am Peter Williams, director of the Cambridge Centre for Housing and Planning Research.
Jim Vine: I am Jim Vine, from the Building and Social Housing Foundation.
Andy Hull: I am Andy Hull, a senior research fellow at the Institute for Public Policy Research.
Roger Harding: I am Roger Harding, Head of Policy, Research and Public Affairs at Shelter, the homeless and housing charity.
Chair: If you do happen to agree with something somebody else has said, there is no need for all the rest of you to repeat it. We will make more progress and will cover more ground if that does not happen.
George Hollingbery: May I draw Members’ attention to my entry in the Register of Members’ Interests?
Q1 Chair: Myself and Bill Esterson also have items registered there and I draw attention to them for the public record.
How big a housing problem does the country face? Is it a hereandnow problem, is it created by the immediate economic problems that the country is facing, or is there a real long-term challenge that we need to address?
Peter Williams: There is a very, very, very substantial immediate problem and an ongoing problem in terms of scale, structure of the market and Government policy, so yes is the answer to all of the questions you have raised. There are serious issues confronting the UK, with huge implications for social mobility, economic development and opportunity.
Jim Vine: I would concur with that. As well as the economic and social issues, there is the undersupply of housing that we face, which also affects individual households. We must not forget that. I think it is probably to be welcomed that, in the strategy published today, the Government seems to be indicating that it acknowledges that housing undersupply is an issue.
Andy Hull: I think you will all know from your surgeries that there are some fairly acute, immediate short-term pressures on housing, but there is a chronic crisis underway as well. It affects all the different sectors. Social housing has been residualised; meanwhile, owner-occupation is becoming increasingly unaffordable unless you have access to the bank of mum and dad to get hold of the deposit, so people are being funnelled into a private rented sector that is, in large part, unprofessional and insecure and often indecent. Our calculations suggest that, all other things being equal, by 2025 we will be 750,000 homes short of what we need as a country.
Roger Harding: It is worth stating that, because this is a long-term problem that has in effect been potentially created by successive Governments, or at least successive Governments have dropped the ball on the issue of housing, the onus is on all parties to come together to start looking at solutions for the long term.
It is also important to state that one of the problems that we have with housing is that high demand and high prices have not fed through into supply in the way that you would tend to see in other markets. It is clear that something is fundamentally broken in the market. It is also clear that this problem was occurring before the credit crunch. It is important that we do not get caught up in some of the short-term pressures unnecessarily and feel that just by working on those we will address the longer-term problems, too.
Q2 Chair: As things stand at present, including the announcement today, how do you see the supply of new housing going up to the end of the Spending Review in 2015? Do you think the Government will hit its target of 170,000 affordable new homes in that period?
Peter Williams: It has a possibility of meeting that target of 170,000 new homes. The affordable rent regime will clearly have some impact. A number of the other initiatives announced today will lever in new supply of affordable housing. There is a major question about whether overall housing supply will ramp up as quickly as the Government imagines. Then, as Roger and others have touched on, there is a huge backlog that has yet to be dealt with. If we are talking of 230,000 households per annum, 170,000 affordable homes over that period is only a partial contribution to a long, substantial backlog and ongoing requirement. We are struggling to see how the numbers that are likely to come through will address some of the problems. That relates back to affordability in the home ownership sector, access to the expanded affordable rented sector as well as provision of social rented housing of a sufficient scale.
Andy Hull: We have said we need 250,000 new homes each year, moving forward to the next 15 years, to avoid that 750,000 gap I talked about. For the last 20 years the average has been 160,000 new homes each year, and last year it was 106,000-the lowest since World War Two-so it is not looking rosy; but even if planning reform works and even if you take into account public land release and so on, there is another side to this coin, which is about whether we can get the developers to develop the sort of housing we need in the places we need them. I think today’s housing strategy is something of a bonanza for those developers, with "Build Now, Pay Later" giving them land, Get Britain Building giving them money, and the mortgage indemnity scheme underwriting some of the house-buying borrowing that they rely on, but there are big question marks about whether they will be able to deal, or whether they are going to want to meet their side of the bargain.
Roger Harding: Although I will not make predictions about what will be built in the next few years, it is very clear that that will not meet the demand that we face, which is around the 250,000 mark per year. We are going to fall substantially below that; we are only building about 100,000 a year at the moment. Therefore, although today’s strategy is welcome in the profile that the Prime Minister and the Deputy Prime Minister have given the issue and some of the stimulus that they have brought forward in the short term, it is clear to us at Shelter that it is a not a long-term strategy for how we will get to the 240,000 to 250,000 homes per annum mark
It is important to consider in that that in this area there is a clear role for the state, in overall principle terms, because the private market has not delivered over the post-war period, particularly. Private construction has been remarkably stable and very consistent during the whole post-war period, despite widely differing financial arrangements and planning rules. The big difference has been state investment during that period, which ramped up the figure to more than 250,000. Clearly we are in different economic circumstances now, so some of the levers that we used before we may not be able to use now and in future; nonetheless, we need to look at how the state can intervene in this market to ensure that we can channel investment into supply, because it is clear that the market is not getting that through to supply at the moment.
On finance, because we are not going to get to that supply in this Parliament, we will have further pent-up demand, which will mean that many fewer people are becoming home owners-home ownership has been decreasing since 2003 and that is likely to continue. Social house building will not increase dramatically, so not too many people are going to end up there. That means that many more people are going to end up in the private rented sector. The number of families living in that sector has increased by 77% in the last two years, and it is not a sector that is well suited to young families: it is not a particularly stable foundation for their family home and, unfortunately, people face unpredictable rent rises. Although it is welcome that there is a chapter on the private rented sector in today’s strategy, it is not particularly welcome that there is not more of a discussion about how it can better be fixed to work for families.
Jim Vine: In your question you referred to the affordable housing target. It is notable that the Government will not lay out a target for housing building overall, which would be okay if the strategy that they presented had some sort of strategic vision against which house building or the supply of housing could be measured in broader terms. The closest the strategy gets to that is in referring to stability in the housing market, although I would be looking first for a bit more indication about what stability means. It is not precise about whether that means stable house prices or steady increase in house prices. If the Government set a target, "We won’t tell you how many homes will be built each year, but we do want to see house prices steady in the long run," that would be an acceptable alternative.
Peter Williams: The new constraint in all of what has been said is the shortfall that we will face in terms of mortgage finance. There is clearly a capacity constraint in the mortgage sector now and going forward for at least five years, and possibly longer, which really has a big implication for the shape of UK housing provision.
Q3 George Hollingbery: You just said, I think, this is about housing finance rather than anything else, but I think we need some context. If we are going to make real progress towards building the number of houses that we want, where does the problem lie? Is it finance? Can you split it between public and private? Are there other factors out there we need to understand before we can get on with the idea of raising finance for housing?
Roger Harding: Finance is clearly an important aspect, because in a typical free, well functioning market you would expect the rising prices and rising demand that we have seen to feed through into greater supply, and that has just not happened. We need to unpick that a lot further, so it is good that the Committee is looking at that. Other factors should be considered as well, such as the structure of the construction market and the land supply market.
Over the longer term, it is key that the Government set out how that finance will come on stream and consider the state’s facilitation of it, because the market has not delivered. It is clear that public financing will not get to the levels that are required over the next 10 years, unfortunately, but the state can do many things to facilitate private investment getting to the housing supply that we need. Those mechanisms are used in many other European countries- for example, many allow their local authorities to borrow on the back of potential capital or houses that they have to generate new supply. There are also examples in many European countries of national housing banks being used, treating housing as a very different asset class, because it provides both a capital unit and a very predictable long-term supply of revenue. It is something far more secure to base lending on the back of than just typical Government spending, so it is something that is treated differently in tax and accounting rules on the European level. We really need to consider that.
Chair: We will probably move on to some of these issues in later questions.
Peter Williams: Can I just add a point to that? We all struggle to understand why housing supply does not respond more effectively than it does. There is clearly a package of issues around that, but it is extraordinary how the private sector output has remained remarkably constant, all through the cycles, without responding to what normal markets would respond to.
Q4 Mark Pawsey: I should like to ask about the potential for bringing institutional investment into housing. The IPPR have drawn attention to the fact that there is a pot of money in the City on the one hand, going into all sorts of types of investment but not housing; and on the other hand, Mr Harding, you just referred to rising demand and rising prices. Why have institutions, historically, not put money into housing?
Andy Hull: Basically, they do not think that they can get the right yield and they think it is too high hassle, which is why in our report that we sent to this Committee we suggested that one source of institutional investment that might work would be local authority pension funds, because they have in excess of £150 billion worth of funds, because they can be quite patient to see the return over time and because they have councillors on their management boards who should understand, as MPs do through their monthly surgeries, what a crisis we are facing in terms of housing need.
Q5 Mark Pawsey: Should that be an altruistic objective for those pension funds, or should they consider it as a best investment return policy?
Andy Hull: I do not think altruism will work here; it needs to be hard-headed and it is right that it should be.
Q6 Mark Pawsey: If it is hard-headed for local authority pension funds, why should it not be hard-headed for others?
Andy Hull: It should be. There are ways around some of the problems that are often posed in terms of local authorities getting involved with their pension funds: people would often say, "You can’t afford to invest in your own back yard with your own pension fund," but there are examples in Manchester, for instance, of local authorities teaming up to spread some of that risk. We found, and detailed in the report, a few emerging precedents of local authorities beginning to look to invest their pension funds in new-build housing.
Peter Williams: We should not imagine that institutional investment is going to be the solution for the private rented sector. It will always be a sector dominated by small landlords, but it can be much more significant than it is-of course, historically, in the 1930s to the 1960s, it was quite significant. Institutional investment has its place and the issue now is partly about how we get there. It is unfortunate that the Government has announced yet another review. Institutional investors will wonder, "When does review cease and when does action actually take place?" There is a number of individual elements that investors and others in the Treasury review have asked for, which the Government really could respond to.
Q7 Mark Pawsey: What do you think the Government could do to encourage the institutions?
Peter Williams: There are loads of little detailed points. There is no single silver bullet.
Q8 Mark Pawsey: Give us a few.
Peter Williams: The trading requirement, for example, on institutional investment-you cannot sell more than 25% of the stock, I think. Some people who want to invest in that want the capacity to turn over the stock if they need to. These restrictions on businesses that are set up to do the job that people want them to do, but need the freedom to do it in the way that they choose, conflict with the view that if this private rented sector is providing homes for a large number of people, we have to control that tendency. The difference here is that institutional landlords, we hope, would behave in different ways than maybe landlords that are only there to trade.
Roger Harding: As Peter says, it is important to keep the potential scale of institutional investment in check. The Rugg review has commented on the private rented sector and a Treasury review also looked into this last year. Looking across Europe, even in countries that have managed to get a lot of private institutional investment on stream, those landlords still do not become majority landlords. Even in Germany, where a lot of institutional money has been channelled into the private rented sector using a lot of state incentives, still just over 60% of private landlords are individuals and couples.
Q9 Mark Pawsey: Are you suggesting that this is something that is not going to happen?
Roger Harding: It can be an important part of the mix, but we should not overlook the other chunk of the sector, which is individuals and couples. As Julie Rugg suggested, we should look at ways to enable them to increase their quite small portfolios into medium-sized portfolios. In Europe, there are often interesting tax breaks for landlords staying in the sector-for example, they can have depreciation allowances against the income they get from rent. They also get allowances whereby they do not have to pay capital gains tax provided they have had a single property in the sector for more than 15 years, which encourages landlords to take a long-term view and therefore tends to feed into landlords giving more of a stable tenancy to tenants.
Q10 Mark Pawsey: Shelter have reported that 70% of landlords only have one property. Would you like existing landlords to increase their portfolios and take it more seriously and become bigger holders of private rented property?
Roger Harding: Potentially, yes, absolutely. There is certainly no guarantee that a bigger landlord is a necessarily a better landlord-there are plenty of individuals who are landlords who are very good landlords indeed-but we would like to see a lot of landlords with small portfolios become more professional in their business dealings.
Q11 Mark Pawsey: You would like to see the accidental landlord become a deliberate landlord?
Roger Harding: Absolutely, yes. Or even if you do become an accidental landlord, you then very much consider yourself to be a landlord and to be a business and to run your operation as a business, which is not necessarily the case at the moment.
Jim Vine: Another recent review into this conducted by academics at the LSE, among others, identified one country-Switzerland, I believe-that did achieve the goal of having institutional investors as the largest sector in the PRS. I am happy to pass on a copy of that paper afterwards, if it helps. I think one of the factors there was legislation requiring single ownership of residential blocks, avoiding things like leasehold enfranchisement, because that makes management easier, but it also obviously favours larger-scale institutions taking on that lease.
Q12 George Hollingbery: It has mentioned that huge amounts of Government grant are capitalised in the property market-£40 billion or so. Could you enlarge on how that £40 billion could be used and leveraged to provide more housing?
Peter Williams: The £40 billion of grants? This is a complicated area, without doubt, and is an ongoing debate. It sits as a charge behind private sector lending and in theory Government has the right to reclaim it and, indeed, if you sell a property with grant, the grant returns to the housing association under the Recycled Capital Grant Fund and they have three years to spend it. For lenders, though, evidence of public sector funds sitting behind their loan to housing associations is quite important. Of course, the issue then of taking it away and converting it into equity does have implications about the mainstream lending-the debt lending-to the sector.
Conversion from grant to equity clearly has some momentum, but it carries with it certain pressures, not least of which is that you will probably need higher rents to ensure that there is a premium payment to the investor. Government could oversee higher rents through the affordable rent regime, with a premium payment to the Government as an equity investor, the question then is: as equity investor, what implications does that have for governance of the structure? Then the Government could sell its equity holding to the private sector, release the cash that is inside that equity investment and, in theory, put it back into the social rented sector to generate new development. That new development could then, of course, add to the capacity of the housing association, which would then itself underpin some of the private sector borrowing that has been made against this sector.
There is a virtuous circle here, in some degree, but it does require Government, ultimately, to pass the cash realised back to the sector as one of the options. That then raises the question: where would a private rented sector investor sit in the governance of the housing association and what long-term implications would a hybrid sector with public and private investors involved have for the shaping of the sector? It probably would begin to generate more competitive tensions and more normal plc-like behaviour, with mergers and takeovers, which many people would argue could be positive, But I think there is unknown territory here with regard to how the conversion of grant to equity could ultimately play out.
Q13 George Hollingbery: Can we just have a little bit more on that issue about the covenant-the reduction in the strength of the covenant of the borrower by equitisation of the value in housing?
Peter Williams: It is simply that there is something like £60 billion of private finance sitting behind housing association finance. It is worth reminding ourselves that that is where a lot of institutional investment in renting has already taken place. Something like £15 billion of that investment is from institutions into the social rented sector. Back on the previous question, if we divert lots of activity of institutions in the private rented sector, we do not want them extricating themselves from the social rented sector. That sets as a comfort, in two ways. Government has its own money in there, which shows that it is committed to the sector and in some senses it stops Government tinkering with the sector to the extent that it might threaten its own investments, so it is seen as reassurance to the lender, as well as the fact that the lender has first charge and Government has second charge.
Q14 George Hollingbery: As you were addressing the previous question, can I just ask other members of the panel about liquidity?
Roger Harding: It is sensible to look at all the options here, because a lot of RSLs are quite well leveraged at the moment. The signals coming from the sector seem to be that they cannot do another iteration of affordable rents; they could it for this one term, but the leveraging would tip them over an acceptable level in future. I would welcome a look at these kinds of options, but I am particularly nervous about the prospect of this potentially raising social rents to meet the return that equity investors would need. Some important safeguards would be needed, both on rents and the governance of RSLs, given the private sector involvement.
Q15 George Hollingbery: I am interested in the liquidity for the private investor. This is not like buying stocks and shares. Bricks and mortar is a much less liquid investment, is it not?
Peter Williams: It is a point that Andy and IPPR have made about institutional investment in the PRS; there are real issues about liquidity in the housing system. Typically, when you want to exit, the market is in a difficult position and there is not an easily tradeable position: it is not quoted daily in the markets and you are not necessarily easily able to liquidate it in the way you might a conventional investment.
Q16 George Hollingbery: Are all of you convinced that the governance are complex but surmountable, or are they going to produce real problems about how this asset is managed in the long term?
Andy Hull: Roger is right. Affordable rent is just that: an attempt to sweat the housing associations’ assets. The majority, but not all of them, are saying that they will have reached their gearing limit by 2015, so another iteration of that will be very difficult.
I want to flag up that behind some of these problems, there is tension between housing associations having a social purpose that is best delivered locally and housing associations merging, syndicating, collaborating and becoming big, quasi-private businesses. The two are sometimes in tension.
Roger Harding: Whether it is surmountable or not is very difficult to know. As Peter highlighted, this will be new territory in the UK, and it carries a lot of risks with it, so we would need a thorough assessment of it before we were comfortable with that being taken forward.
Q17 Chair: Something like it has happened in the Netherlands, hasn’t it?
Peter Williams: Yes.
Chair: Do we have information about how has it worked there?
Peter Williams: They effectively privatised the housing association regime and the grant was converted for housing association equity investment. I think the Government parked the equity with the housing associations; they did what people here would like them to do. There is ultimately an issue about the balance between the cost of equity and the cost of debt. Some associations would take the view that, at the moment, debt is cheaper than equity.
Q18 Bill Esterson: Between you, you have raised a number of issues already: affordability of rents; lack of surplus for landlords; difficulty in buying; reluctance to lend; and liquidity. Those all seem to be linked to the high prices and the high valuations, which again is linked to the fact that the housing market has become very, very high compared to incomes historically. I do not know which comes first: do we need to cut prices in order for supply to increase and for people to be able to buy or rent, or is it the other way round? Is that at the heart of this discussion?
Andy Hull: If you want to stabilise house prices, whatever stabilise might mean, we have to pull multiple levers simultaneously, and supply is certainly one of them. I do not think that you can discuss housing these days without mentioning increasing supply. There are also fiscal levers one could pull, and monetary levers too. The one that we flagged up most emphatically in a previous report was credit control. We think, and the OECD and the IMF agree, that loose lending was a primary driver of the trebling of house prices that we saw in a decade and that a return to loose lending is not what first-time buyers need. "Let them eat credit" is not the answer.
Roger Harding: It is not what first-time buyers want, either. We at Shelter surveyed them and they would far prefer prices to become more affordable than simply to be offered larger loans, frankly. Therefore it is really important that the Government commits to the Financial Services Authority’s mortgage market review on this, to keep that lending in check.
Q19 Bill Esterson: Neither of you sound keen on the 95% mortgages, even with all the support.
Andy Hull: We are not particularly keen on that, no.
Roger Harding: There have to be incredibly rigorous affordability checks in place. Also, it must be ensured that this money feeds through into supply. An awful lot of lending was flowing into the housing market in the boom years and that did not translate into supply. The Government needs to be really clear that when it is getting involved in the market and putting in place policy interventions, that will feed through into new supply, because the market has proved that it does not channel it itself particularly effectively.
It is important to note that the number of first-time buyers has been dropping for a couple of decades. A financing model based on residential mortgages channelled towards first-time buyers is very unlikely to get the kind of financing that we will need for new supply. While I can see why it might be politically important to talk about first-time buyers, in terms of getting housing built, indemnities and so on are not going to be particularly important in the scale of things, given the numbers involved.
Jim Vine: Ultimately, cheaper homes would be preferable to cheaper credit. Unfortunately, with the level of supply that we are talking about, even the 250,000 that Andy mentioned, the best econometric modelling that has been done of what housing supply does to house prices suggests that even at those levels we would still see increases in house prices. Those researchers did not put a number on how many homes you would need to build each year to constrain house price increases, but it was somewhere in excess of 250,000 a year-maybe 350,000 or 450,000-which is an awful lot if you are trying to constrain it through supply-side alone
Peter Williams: At the National Housing and Planning Advice Unit-long-lamented, perhaps-when we modelled the impact of housing supply on price we had to push up supply an enormous amount, well beyond the capacity of the industry’s historic record, to secure any noticeable mitigation in house price increases. This is the territory into which the Financial Policy Committee is planning to step forward. One of the issues here is that a new agenda is being set out by the Government and the authorities in terms of financial stability and price control in the housing market. How that will work through, what signals it will try and send to the market and how it will intervene, are important new components of the housing landscape going forward, which will be very demanding.
Andy Hull: Even after the onset of really loose lending in 2000-01-110% loan to values, self-certification and interest-only mortgages-the number of first-time buyers actually dropped; it did not go up. It was enabling people who had houses to trade up. I am a bit worried, given today’s announcement, about any talk of Government-backed sub-prime mortgages, because we have had that before.
Peter Williams: But 95% is not sub-prime; it is, historically, the mortgage product that supported the first-time buyer market in the UK.
Bill Esterson: It might be if prices fell.
Q20 Heidi Alexander: I have a question about how housing developers will behave, going forward. Obviously you are not soothsayers, but it is not in developers’ interest, is it, to flood the market with lots of new homes in order to reduce prices? What is your take on how you deal with some of that behaviour?
Andy Hull: Too often, the approach taken by the industry in this country has been to make large profits off small volumes-in fact, they have become land traders rather than house builders. We need to introduce some competitive pressures into the development industry.
Roger Harding: Regardless of their motivations and so on, the fact is that over the past 40 or 50 years, the private developer market or industry has not built enough homes, so clearly we will need other interventions within the market to get to the supply levels that we need. That will probably have to be state-facilitated. Another important area we can look to in order to generate some choice and competition would be to encourage more self-build and community self-build options, because some estimates suggest that self-build is already generating about 10% of the new supply that we bring forward in the UK, and in many other countries you can get that up to about 20%. Those smaller-level developments are classic Big Society in action, with the community coming together, generating the finance together, setting up their own plans and getting things built. It also gives people the choice to not pick the classic design of a private developer; they can pick and choose their own, and therefore we get a bit more diversity in design and size.
Q21 Bill Esterson: One way that you are proposing to do that is through a national investment bank. Will you tell us how that would work?
Roger Harding: Absolutely. It is a model that has been used in many other European countries, because housing is a different asset to many others, and we are now starting to use that model increasingly in the UK with regard to green technology and green investment. We have the Green Investment Bank and I do not see an argument against us extending that to housing as well, so using some public finance to leverage in more private finance off the back of it. The National Housing Bank could potentially intervene in areas where scale is needed for things to get off the ground, whether that be new towns or new industries, as with institutional investment in the PRS. A lot of institutions are nervous because it is an immature market and they need to start out.
Q22 Bill Esterson: Not just housing?
Roger Harding: It could cover more than housing. It could cover infrastructure and other things as well which bring on housing, but it could particularly help in areas where scale is needed from the off to get private investors interested.
Andy Hull: We at the IPPR are certainly arguing for a national investment bank from a number of different perspectives, not just a housing one, but we do draw attention in the paper we sent in to other national investment banks or their equivalents that are investing in new-build housing.
Q23 Bill Esterson: How would you fund it? How would you capitalise the bank to start with?
Roger Harding: You could start off with a typical grant-the affordable housing grant that you use typically. It is important to note that although the additional £400 million funding stream we have seen today is welcome, the overall grant funding was cut by over 60% just a year ago. If we brought more of that on stream, because that was a disproportionate cut to housing over many other issues, as has been done with the Green Investment Bank-we have a precedent set up here in the UK already-we could leverage private finance on the back of that, invest it in housing, recycle that public money back into the system and then potentially get some quite scaleable, interesting new products going.
Q24 Bill Esterson: There is a limited amount of debt available. I think Peter mentioned the balance between debt and equity earlier. Is there a risk that everybody is going to be drawing on the same resources and competing for the same money?
Peter Williams: This is where bringing in investors is important. The Government has significant assets in the housing sector. Shared equity loans, for example, could be liquidated and sold out to the market, and there is a number of pots of money sitting out there that potentially have capacity to replace Government funding with long-term institutional investment, which you might argue matches quite well with some of those products.
Jim Vine: I echo what Roger said about the diversity that you could bring into places. As well as self-build, that might be done through community land trust models or freeing things up more for small private sector builders. One model that we have discussed in terms of how a lot of small things might be brought together is through a local authority taking a lead on a joint vehicle. The output of that and where that ends up depends on whether they can parcel out the land and make certain proportions available to self-builders and to whichever models make sense in that local authority area.
That model has worked in various places across Europe. If we look back to our own history, although it probably works better on large-scale new developments, we have had examples of this happening both in the private and public sector-for example, the new towns and the original garden cities were developed privately and the Rowntree-type developments would have been private. Looking to Europe, there is an example of a large extension to the town of Amersfoort, called Vathorst, in the Netherlands, created using a hybrid model between public and private, where they brought together the council, the local authority-so ensuring there was a strong democratic mandate for that model-and five private sector operations. That model merits being looked at in this country. If the local authority is taking a title of the land, perhaps, or striking a deal with the land-holder that they are only going to take a moderate amount of the uplift that would come through granting planning permission and building the site out, we might see that that is able to generate the funding to put in the infrastructure and put in the roads, which all points to being able to parcel this out in a reasonable fashion.
Roger Harding: If there is a limited amount of debt, it is vitally important that we channel it towards new supply rather than just inflating the market that we have got and feeding through into unsustainable loans. That is a key role for the state.
Q25 David Heyes: To pick up from what Jim Vine was just saying, can these alternative models, some of which you have mentioned, ever make more than just a marginal contribution to boosting housing supply, or are you saying that this is a new way forward to make massive change?
Jim Vine: Given the right following winds, they certainly can. We have seen in the past the new towns delivered substantial amounts of housing. The example in the Netherlands that I have described extended a town by 40%-they had substantial housing need in that area and they managed to grow the town substantially. That does not mean it is trivial, of course. You need the right support to be put in place.
Q26 David Heyes: What does that need to be? What should the Government be doing to make sure that support is in place?
Andy Hull: The first thing I would say is that this solution will not necessarily work everywhere. Government should be supporting local areas that want and are capable of doing it. They might be able to do some things-if Government signalled to local authorities, or if Eric Pickles wrote a letter to every local authority saying, "I’d be minded to grant you the powers under the urban development corporation powers, or if you approach me with proposals I would be minded to do this." I do not think it is about central Government instructing local areas to be doing this.
Peter Williams: There is an issue here about leadership. In essence, one of the problems-the strategy document published today symbolises it perfectly in many ways-is that there are a large number of initiatives, but the Government has avoided, and said it has avoided, setting down the scale of the task. I think markets are informed by understanding the scale of the task. That is not an admission of failure; that is setting out some sense of what is required and saying, "We can do so much and other people should do a lot more." That is where Government at the moment is confusing leadership and responsibility. If it takes a leadership role in some of these areas, people assume that it will therefore own it. Actually, it does not have to own it, but it does have to lead it.
Andy Hull: I think we need to see some success stories as well. Community land trusts have been mentioned, and they have worked okay in rural settings in this country so far, but we have not really pulled one off in an urban setting. I think the work that London Citizens are doing on the St Clement’s Hospital site is an interesting test study, but it is notoriously difficult to upscale those sorts of models. Part of what we are exercised by here is scale.
Roger Harding: This is not an issue that will be dealt with by a silver bullet. We have quite a few options that could potentially, if done in unison, add up to an awful lot of finance and therefore an awful lot of supply. Ultimately, building on Peter’s point, we have to face up to the fact that this is a political choice as well. Certain issues have priority over others. Clearly, Shelter’s perspective is that housing should be given more of a priority. Some of the recognition today is welcome, because politically and at governmental level, people are starting to understand that housing is an important economic driver in itself in terms of construction and it is vitally important in terms of stimulating the economy and allowing people to live where the jobs are, which is a significant problem in certain parts of the country. The crisis is now getting to a state where it is really starting to bite down on higher-income groups in particular parts of the country. This really is a squeezed-middle issue. Many people who would understandably aspire to own will now not be able to own and now see themselves living in the private rented sector for 10 or 20 years. While political rhetoric has tended to focus around some of the older debates about home ownership and so on, the market is changing quite dramatically and it is important for all politicians to catch up with that and start focusing on a long-term plan.
Andy Hull: Part of the reason that owner-occupation has become a primary manifestation of aspiration in this country is that the alternatives have been so poor. The private rented sector has not offered a decent alternative
Jim Vine: Peter’s comment on leadership reminded me of something. One of the huge success factors in the Dutch example was a very strong local leader, a former alderman in the town council there, who was a fairly savvy political operator and was able to work around and build bridges between the different layers. In local government in this country there are excellent examples of authorities that have strong leadership, but others may not have so much experience of using a lot of these powers over recent years, so a bit of signalling from central Government that they can step up to the plate and take up that role would be welcome.
Q27 Heidi Alexander: Can I return to increasing the supply of social rented housing? We have already referred to the affordable rent model in our discussions. Of course, over the next three years Government grant going into the building of social rented accommodation will be £4 billion less than in the previous three years. In your view, how effective is the affordable rent model going to be at encouraging the new supply of social rented housing?
Roger Harding: One difficulty of this is that the affordable rent model would be okay and would be acceptable if it came as part of a package of new supply options-part of a portfolio that included social rented homes. The difficulty at the moment is that it is hard to see how, given that we are cutting back on capital investments and therefore paying out less per unit, we will not, in effect, end up paying for that in housing benefit in one form or another over the longer term and therefore continue the shift from reducing capital investment and putting it into revenue investment. Either these properties will go to people claiming housing benefit or who could claim it in future-because the rents are higher their housing benefit will be higher-or, alternatively, they will go to people who are not claiming housing benefit and are not on the waiting list and so on, and so therefore those who are will end up in the private rented sector where again rents are higher and we are therefore likely to be paying out more in housing benefit. In the short term this will give us more numbers, but in terms of finance over the long term we will again end up paying for it in housing benefit. The Government needs to look at many more options and not just have this one option that you can have if you take grant from a national level.
Peter Williams: It will clearly play out in different ways in different areas, because in some areas social rents are close to market rents already, so the concept of affordable rent squeezing between the two is quite difficult; in other areas, such as London, there is lots of capacity, so the capacity of landlords and housing associations to respond will vary hugely. Some will have a very short window of opportunity to supply the affordable rent requirement in that locality and that will be it, so the amount of extra cash that they will receive is limited. In others it could be played out over a long period of time. Clearly, of course, you are creating new assets that give you more borrowing capacity over the long term.
It is not absolutely clear yet how far lenders will recognise the uplift in value on affordable rents in terms of the borrowing power of an organisation because of the uncertainty about how the affordable rent regime will play out over the long term. Some of the benefit of that new regime is at the moment uncertain, because it will not necessarily give increased borrowing power in the way that people hoped.
There is an assumption in the Government’s own documentation that most of the people going into affordable renting will come from the private rented sector. That is not borne out by empirical evidence. Most social renting generates from within families. Therefore there are some discords in terms of how the regime is presented and how it might operate in practice. I think all of us probably-I am guessing here-would take the view that, yes, it is welcome and it may be useful, but it certainly is not a solution in itself and there is a question about the long term.
Andy Hull: Developing what Peter said, affordable rent does represent a decision to let housing benefit take the strain. That is not a decision that we at IPPR would make, because we think you need to be reversing the proportions of HB versus bricks and mortar back to where we were 20 years ago, when 85% of Government spend was on bricks and mortar, not on HB. Today it is 85% HB.
Jim Vine: I only have to have seen the headline to say that I am sure that over this Parliament it can deliver roughly the sort of numbers that they have talked about, but it is a different product to social renting and, like everybody else, I do not have much of a view that it would necessarily be able to deliver past this Parliament.
Q28 Heather Wheeler: I am very interested in the changes to the housing revenue account, because I am an anorak and I understand these things. With the changes, how do you think that councils are going to be able to build new houses? What support do you think the councils will physically have to build new council houses?
Peter Williams: There are question marks about how far the reformed system will feed large numbers of new homes in local authorities. There is already a debate going on about the level of rental uplift, about whether it is CPI or RPI, and whether the constraining of that will take away extra borrowing power that would have been generated.
The expectation in terms of the numbers of new homes that local authorities can support through increased borrowing power is quite limited; 5,000 would be a high number on an annual basis. Although it is a welcome step forward and it will evolve over time and become more powerful, much turns on how the rent-setting regimes around local authorities are conditioned. Also, do not forget that this goes into the general coffers of the local authority. There will be other demands on how the local authority spends its money and housing will only be one of those potential demands. I think there is a fairly sanguine view out there in terms of the likeliness of the new regime providing the new cavalry coming to the rescue of the housing undersupply problem.
Jim Vine: In terms of local authorities delivering on the back of this, if we look back 30 years one thing that stopped authorities delivering much housing was the right to buy. We have had recent announcements that the right to buy is likely to come back in a fairly substantial form. It will be interesting to see what the interaction of those two policies is.
The other thing that, broadly speaking, puts a damper on local authorities being able to supply housing is the treatment of their debt. In the UK we work on the public sector net cash requirement, similar to the old PSBR, where all the debts of local authorities are treated as public sector debt. Pretty much everywhere else in Europe they use the GGFD-general government financial deficit-model, which means that trading activities, such as housing, are viewed as off-balance sheet, off the national debt figures. It would be a relatively simple step to move to that, because in terms of the perception of our national debt on international markets, which like to compare like with like anyway, they are probably looking at our GGFD figures anyway. I cannot see our moving on to the same accounting system as is used across the rest of Europe causing too much of a problem.
Q29 Chair: You could reduce Government debt at a stroke.
Jim Vine: You would reduce the number. You would alter the treatments of some of it. It would be perfectly reasonable to say, "Well, we’re going to carry on publishing the old numbers in the interests of transparency. We’ll still show as a secondary measure what our other measure is." It is a perfectly reasonable treatment that a lot of other countries use.
Q30 Heather Wheeler: Would those controls be enough, just publishing the GGFD figures as a corollary to the national debt figures?
Jim Vine: There would always remain a requirement on all public sector bodies to borrow in a prudential fashion. If we can trust our housing associations to borrow and not go bust, would we be able to trust them? Maybe some Committee Members do not think that we can trust local authorities to borrow.
Roger Harding: Within this you can always importantly add checks and balances and certain caps on these things to keep things more prudential. On general support for local authorities, clearly a lot of local authorities understandably have lost their capacities and skills for development that they would have had previously, because they were no longer required. That is not necessarily a bad thing, because it will force a lot of them-if they are using funding under the HRA reform-to work in partnership and to use other developers to get a diversity of development going on in their area. I think that is very welcome.
There will need to be some support for councils that transferred their stock and therefore do not have an HRA to get development going in their area, because they will not have that financing.
Q31 Heather Wheeler: We are talking about 137 councils, aren’t we?
Roger Harding: Exactly. Finally, just to reiterate points that have been made already, we will need some kinds of safeguards on rents, which is important for affordability for tenants and also important to ensure that any changes here do not end up back on a housing benefit bill, meaning that we are paying for it in a revenue way again, rather than in a capital way.
Q32 Heather Wheeler: One of you did start to talk about the issue around right to buy and the amount of financing that that will give to local authorities, albeit that it might be reduced to 50% of the property value, or something. How much of a threat or a promise is this extra cash coming through? Will they really be able to push that through into building again, because that would be a priority, wouldn’t it?
Peter Williams: The idea that it will allow one-for-one replacement seems highly questionable. This seems to me to be a policy that has been advanced in advance of the evidence.
Q33 Heather Wheeler: It is a southern thing, compared with a northern thing?
Peter Williams: Maybe. There is a question mark about that replacement capacity, which is obviously an issue. Clearly, at 50% discount there is a risk that we take some people into home ownership who should not be there. Citizens Advice published a very important report in the previous period of right to buy called Set up to Fail, showing that people were lured into home ownership, not given proper financial advice and ended up with a backstreet loan at high interest rates, buying what might have been seen as a poor property in a poor location. It would be obscene if that was the outcome of the righttobuy programme.
Roger Harding: If I could just add to that from a consumer perspective, other research from Consumer Focus highlighted that righttobuy borrowers were twice as likely to get into mortgage difficulties as a typical borrower. We have to remember that the average household income of a social tenant is around £15,000. There are a lot of tenants in the social sector whose circumstances are not well suited to becoming a home owner, so it is vital that proper affordability checks are done to ensure that any change of right to buy does not become a failure for a lot of borrowers and consumers.
Finally, on an important related point, the Government is asking for righttobuy sales to ramp up significantly. Last year they were under 3,000. To get to the 100,000 figure, sales are going to have to go up ninefold very quickly if the Government is going to make its 100,000 target. That makes me concerned, from a consumer perspective, about whether the right decisions are being made in the interests of the consumer and their ability to sustain a loan.
Andy Hull: A number of us were at CLG this morning and heard that the reinvestment mechanism through right to buy was up for grabs, so it is not as simple as local authorities getting the cash and reinvesting it one-for-one.
Q34 James Morris: The Government has made quite a play of getting as much public sector land released as possible. On Friday I was talking to a local authority, part of which I represent, and they were expressing some frustration with central Government, specifically the Department for Education. They have a housing project that is ready to go and they have identified a site that was previously a school, which was knocked down three or four years ago, but that Department is still reluctant to release the land for housing development. I just use that as an illustration. I want to get a feel for the extent to which you think getting more public land supply would have an impact on the problem that we are addressing. Secondly, given the example that I have just given, how do we make sure there are incentives for central Government to release land, and how do we make that beneficial to taxpayers?
Andy Hull: Releasing public land has an important part to play, particularly where you can make it available in return for an equity stake that means you get public benefit for it, but in this discussion we need to bear in mind who has it: the answer is that 51% of the publicly held land that is fit for residential development is owned by local authorities, not by central Government. In fact, central Government Departments own 2% of it, and people like the NHS and maybe schools have some more. A good OFT report from 2008 breaks down who has that land. It is worth remembering that the vast majority sits with local authorities, not central Government.
Roger Harding: It is worth bearing in mind as well that, again, there will not be a silver bullet in this area. It can make an important contribution, but probably not a majority or a significant contribution over the longer term. There have been an awful lot of announcements about public land over the last few years-a significant number of them by different Housing Ministers-and we have not necessarily seen so much come on stream. Where it does, it is important, as Andy says, that local authorities, or others, take an equity stakes to make sure that value is retained. It is important to remember that schools and the NHS will be looking at that asset in the light of market value at the moment, and they also have incentives, in respect of the Government, to make sure that they realise that entire value. In that sense, they are no different from private holders of land. It therefore becomes a political decision.
Q35 James Morris: It is a particularly acute problem in areas of urban density. I take the point about local authorities owning a lot of land, but in areas where there might not be appropriate local authority assets to dispose of, it becomes particularly important that we find a model that incentivises central Government to release land.
Jim Vine: The word you have used there that is key to me is "appropriate", that "appropriate" land should be released, because ultimately I would hope we are all aiming to build homes in places where people want to live and where they can form sustainable communities. As we have heard, it should not be treated as a silver bullet that just because the state-the public sector-owns some land, that that will necessarily be in the right place to build new homes.
In terms of the specific question about incentivising people to divest themselves of this land, an idea that we have discussed-although it will certainly need further consideration-is to require public bodies to reflect in their accounts what is known as a shadow market rent: what the market rent on that land or asset would be. I am led to believe, although I was never able to find a reference for it, that the Treasury undertook this exercise on their own office space a few years back and, as a result, slimmed it down considerably, because they said, "We’re using a lot more office space than we ought to be." It is an idea worth investigating, although it is not one that we necessarily say is worth taking forward.
Q36 James Morris: Mr Vine, in your submissions you talked about a proposal to create local ventures for large-scale strategic sites. Will you elaborate a little bit on what you meant?
Jim Vine: This is the idea I was discussing earlier. We think that there is probably more of a role for a partnership approach to delivering large-scale sites than necessarily either the fully private models that we saw in some places in the past or the fully public models, such as the new towns. This would be, I think, reliant on having strong local leadership and these bodies potentially taking substantial powers, including the ability to take title to sites, to promote the sites, grant planning permission, put in the infrastructure, which is an important part, and then, if it appropriate, to parcel that out so that you get a range of different developers, potentially using a range of different models-whether that is community land trusts, small and big builders or self-builders-all working on one site.
Q37 James Morris: So the local authority is a facilitator in that? Are they the pivot around which that happens?
Jim Vine: I would not look to be too prescriptive about how to design this; it is about what suits the local situation, but yes, I would envisage a model where the local authorities play a very important role in that, alongside other actors as well.
Q38 Simon Danczuk: Can section 106 agreements continue to play a major role in supporting new affordable housing? What do you think of the Government’s proposal today to review or reconsider planning obligations that were made in this regard before April 2010?
Peter Williams: Section 106 has been very important: a significant volume of affordable housing has emerged from it and significant value has been extracted through section 106. The move to the CIL regime has overshadowed the future of section 106. I am afraid that I have not caught up with today’s announcement on 106.
There is a real concern. In a survey that we at Cambridge have done looking at CIL and 106, authorities are signalling that they plan to move to CIL, although the numbers are small at the moment, and 106 will increasingly be residualised, so an important steam of finance activity for affordable housing, in theory, is reduced and it is unlikely at the moment that large amounts of affordable housing will be built through CIL, because effectively it is an infrastructure investment fund. The assumption is that that will take most of the cake and what is left will be very small in terms of 106 contributions. We expect this route of extra investment, done through land and planning permission, to shrink.
Roger Harding: As Peter says, it is vital to consider, as you are doing, in the housing finance mix, because in effect it supplies about £2 billion worth of housing finance for affordable housing per year in kind. Importantly in addition to that it delivers affordable housing on site. When done well, it genuinely delivers good, affordable mixed communities, and councils are increasingly getting better at it, as well. It is becoming increasingly bedded down. Council officers, while not perfect in all areas-far from it-are getting better at negotiating this with developers.
One other potential threat to it is the definition of affordable housing within the NPPF. It will be vitally important that that is tightened up, so that the housing built through section 106 agreements is genuinely affordable for the people who live in the neighbouring area.
Jim Vine: Not to argue against the use of section 106, but to note one of its downsides, it is procyclical: as you see a downturn in building for the market, you are also losing construction in your social rented or affordable housing sector.
Q39 Simon Danczuk: Just a final quick question. Asking you to step outside your think-tanks for a moment, things are pretty tough out there. Homelessness is increasing, there is lots of overcrowding and people cannot get on the housing ladder. Do you not think that there is a sense among the public that there is something quite ugly about Government making more concessions to private house builders and throwing more of British taxpayers’ money at house builders in a desperate attempt to try to convince them to build houses? What do you think the public think about all this?
Andy Hull: I do think that. I think the public might say, "We bailed the bankers out without sufficient quid pro quo and there’s a danger we’re going to do the same with the builders."
Roger Harding: If I can add, not as a think-tank but as a service provider providing to homeless people at the moment, I am not going to be called on this Government’s work on that versus the last Government’s as well, because there is a danger of getting into a tit-for-tat on what this Government has done and what the last one did not do, when in fact both main political parties have dropped the ball on housing. Therefore, rather than us focusing on some of the downsides of specific policies, we really need now to develop a genuine consensus about a long-term vision for housing, which frankly has been lacking so far.
Another area where both parties could really come together, which was missing from the strategy and was only belatedly covered by the last Government is, as I have mentioned, the private rented sector. The public are aware that the market is changing, particularly in pressurised areas, such as London and the south-east, and are adjusting their aspirations accordingly-They now do not, for example, expect to become home owners. Therefore they are wondering-in fact they know-what the offer is for them in the private rented sector and they are not particularly happy with it and do not see it as the kind of place where they can spend the next 10 or 20 years and raise a family. All three main political parties have not really paid attention to that and they need to do so in future.
Jim Vine: BSHF is not necessarily what you would traditionally call a think-tank, either. It is a housing research charity.
Simon Danczuk: Just a good, simple answer I was looking for.
Jim Vine: We have not researched what public opinion on this is. Ultimately, we as an organisation would like to see more decent homes being built in places where people want to live. Then it becomes a case of using whichever tool sees that delivered in a way that is most effective for the public purse and for delivering the right outcomes at the end of the day.
Peter Williams: This Government has delivered a huge amount of support for the house-building sector. Reasonably, therefore, our expectations of what that sector should do, now and into the future, are massively increased. We look forward to seeing a new level of performance, competition and output from the house-building industry. If that is not achieved, the British public could rightly be angry.
Andy Hull: We are going to publish a report next month, which I am happy to send you, which is all about what sort of reform we need to see in that development industry. I will happily send it to you.
Q40 Heidi Alexander: Following on from Simon’s question, we discussed earlier the Government-backed mortgage schemes that have been announced today. Peter, you just said that the public will expect to see something back for that. How confident are you that that particular initiative would get the housing supply moving?
Peter Williams: It will clearly help, because there has been difficulty in the first-time buyer market and the resale market for getting 95% mortgages, and this will increase the incentive for lenders to provide them. Unfortunately, and rightly in a sense, it does not deal with the underlying problem, which is the shortage of mortgage finance. I would be concerned that although this will help propel more money into the 95% territory, which will help builders and first-time buyers, it will be netted off against an aggregate volume of mortgage finance, which is still very limited. Both this and the right to buy are new priorities, but actually it will mean less mortgage finance out there in the rest of the market to support other things. Expectations for 2012’s mortgage lending are no better than this year and are possibly down on this year, so this is netted off that total. So yes, it is a new priority, but it will have implications for the mortgage market more generally, which have not been resolved.
Q41 Heidi Alexander: How big an impact do you think the Government-backed mortgage scheme will have? How would you characterise the impact that you think it will have?
Peter Williams: I understand that the expectation is that 50,000 to 75,000 households will be helped through this programme over a period. We have talked about right to buy being up to 100,000, so that is 175,000 over, let us say, three to four years, which is 50,000 a year over a base of 200,000 first-time buyers. It is obviously quite a significant step forward, but it is 50,000 loans the market capacity to supply elsewhere is probably reduced.
Andy Hull: It is important to note that it is not just first-time buyers; they were very clear about that at CLG this morning. You have to ask who will benefit, not just how much.
Roger Harding: Absolutely. Finally, it is important to note that this protects the risk of the mortgage lender; it certainly does not protect the risk of the borrower. It will be vital for new and existing borrowers that proper affordability checks are made.
As was helpfully pointed out by a blogger this morning, in 2008 Mervyn King highlighted an important point about mortgage guarantees when talking about the experience in the US, saying that it reduces the risk for the lender and therefore could have the consequence of increasing the lender’s risk-taking behaviour, because it knows that certain parts of the risk will be picked up by the state.
Peter Williams: I am less concerned about that, in the sense that inside lenders there will be a real struggle about the risk profile of those borrowers and how this can be done in a proper and appropriate way. I am less worried about lenders chasing down the risk curve in terms of funding this, but clearly there are tensions around this that we will need to keep an eye on.
Q42 Chair: In terms of this guarantee, in the past there has been this problem, not merely about the whole of local authority borrowing for housing counting as Government debt, but actually any guarantee a local authority makes against borrowing by another party counts in totality as Government debt. Do we know how this guarantee will be treated by the Government?
Peter Williams: My understanding is that this is counted as 100% of the value of the guarantee, whereas my understanding of local authority mortgage guarantees is that it is the loss given default experience-in other words, it is the amount you have lost you have to set aside. Central Government counting may be therefore different in this sense. If it is the full value of the guarantee-I understand that it is CLG money backing this-that is a significant commitment by Government.
Q43 Chair: So it is not the amount that may be lost that eventually counts.
Peter Williams: It is the total value of the guarantee. That is my understanding, although I might be wrong.
Roger Harding: That Treasury rule has typically in the past blocked a discussion of another type of guarantee that can potentially be more beneficial, which is investment guarantees for large-scale projects, but again the risk has had to be qualified as 100% of the risk, rather than a reasonable calculation of it. It will be interesting for the Government and this Committee to consider further the idea of bigger investment guarantees, rather than placing our guarantees with a series of borrowers who are not protected by this guarantee.
Chair: Thank you all very much for covering so much ground for us.
Examination of Witnesses
Witnesses: John Stewart, Director of Economic Affairs, Home Builders Federation, Councillor Clyde Loakes, Vice Chair, Environment and Housing Board, Local Government Association, Ian Fletcher, Director of Policy (Real Estate), British Property Federation, and Abigail Davies, Assistant Director of Policy and Practice, Chartered Institute of Housing.
Chair: Good afternoon to you all. Thank you for coming and for the written evidence you have supplied so far, and for being our second panel in the first evidence session of the inquiry into the Financing of New Housing Supply. Could you say for the record who you are and the organisation you represent?
Ian Fletcher: I am Ian Fletcher, Director of Policy at the British Property Federation, which is the trade association for the property investment sector.
John Stewart: John Stewart, Director of Economic Affairs at the Home Builders Federation.
Abigail Davies: I am Abigail Davies, Assistant Director of Policy and Practice at the Chartered Institute of Housing.
Councillor Loakes : Councillor Clyde Loakes, representing the cross-party Local Government Association.
Q44 Chair: You are all welcome. As a general start, what do you think are the key barriers at present to increasing housing supply-presumably, you all agree that it ought to be increased-and what do you see as the general solutions to remove those barriers and get the housing supply moving upwards?
Ian Fletcher: From my perspective-I am in a slightly unusual position in that I am here for the broader housing sector-the major barrier is accessing debt finance. My members are trying to encourage equity finance into housing; they tend to be relatively low-geared-20% to 40%-and are trying to encourage large-scale institutional investors into the sector. If they can raise the equity, the debt will be there. For them, the challenges are, first, finding sufficient scale of opportunity for those institutions and, secondly, trying to encourage institutions that are unfamiliar with the housing sector to invest in that sector.
John Stewart: On the demand side, since 2007, the mortgage situation-the availability of mortgages, particularly high loan to value ones-has been a very serious constraint. On the supply side, the supply of permissioned land has been a very long-term problem. The regulatory burden, both from national Government and local government, is a significant issue. And the supply of development finance probably-it is difficult to pin that one down because there are no statistics-seems to be a constraint.
Abigail Davies: Finance, of course, and particularly lack of certainty about what is going to happen to finance going forward and changes in the financial markets; I suppose, Government preferences; also confidence, whether that is on the consumer side or the business provider and lender side. Those are the particular issues.
Councillor Loakes : It is certainly not planning or forming local partnerships; local government has a good track record when it comes to getting residential properties through the planning process and working with housing associations and the private sector to develop sites in partnership. It is primarily about giving a level playing field to local government to act as a house builder in the sector. The schemes that we have seen and the announcements that we have had today probably do not go far enough when it comes to enabling local government to have that level playing field, where debt is counted as national debt rather than under prudential borrowing systems that local government can already borrow under.
Q45 Chair: I saw John Stewart’s eyes light up when the word "planning" was mentioned. It is the major obstacle, isn’t it, when all the house builders tell us that?
John Stewart: It is a major obstacle; it is not just me saying that. Kate Barker carried out a landmark study in 2003-04, which was the most comprehensive study of housing supply, probably since the 1977 Green Paper. It was very clear that planning was a very serious constraint. I talk to house builders every day of the week and it is a very major issue, so, I am sorry, but I disagree with my colleague.
Q46 Chair: But if the planning regime was completely liberalised tomorrow, you would not build any more houses next year, would you? I mean, you are sat on so much land with planning permission now that you are not building on. This is the case, isn’t it?
John Stewart: No, that is not the case at all. The primary constraint at the moment is mortgage finance, as I said at the beginning. If we could miraculously wave a wand and tomorrow there was mortgage finance back, very quickly planning would become a constraint. House builders have land banks, of course. Housing is a very long-term activity; it takes many years to get planning permission and many years to build out a large site, so they have to have a degree of land, but there is no evidence they are sitting on permissioned land that could be developed. The OFT did a very comprehensive study in 2008-I would not call the OFT a friend of the industry-and it concluded that the industry certainly was not sitting on excess land with permission.
Councillor Loakes : There are 175,000 planning applications that have been granted for residential units in London alone. If that is not a bank waiting to be delivered, I do not know what is. Planning applications went up to 80% being granted last year-that is on major applications-and there was a significant increase on minor applications also. Local government is doing really well in helping developers, RSLs and housing associations put through applications at a pace that represents developers’ frustrations in many experiences, but unfortunately they are not getting through to being built.
Chair: There are two different views expressed there. We will come back to finance now, because that is really what the inquiry is about, and try to focus on how we can get the money into housing.
Q47 Mark Pawsey: We have heard that mortgage finance is the biggest issue, but what about the financial position of the people who deliver these houses? The Government has brought out today the £400 million Get Britain Building fund, which some have expressed anxieties about. Will that help get more houses delivered, given that a lot of developers, particular the smaller builders, cannot get finance to get developments underway? Will this do the job?
John Stewart: It will help them. Where there are smaller and medium-sized house builders who have land that they cannot develop because they cannot get development finance through the banking sector, assuming they can get access to this money-they will have to bid for it and be successful-yes, that should open up those sites. It is not a panacea. There are lots of reasons why sites do not get developed, but where development finance is the primary constraint this should help.
Q48 Mark Pawsey: Has this been a big issue for your members over the last year or two?
John Stewart: It is less of an issue than it was; back in 2008 it was certainly a very serious issue and the Kick Start scheme was aiming to address that, but it still is an issue.
Q49 Mark Pawsey: Do you think it will support many of the smaller builders, who are not operating at the moment? In some cases, smaller builders have gone bust. Will this prevent builders in the future going bust and will it keep builders there enabling additional housing to be delivered?
John Stewart: I think in combination with the mortgage initiative, which has been announced today, it will help. Whether it will keep those individual builders alive depends on their own individual financial circumstances, competence and so on, but in principle it should make it easier for companies to survive than if there were not development finance. If you bought a piece of land on the expectation that you were going to be able to develop it and then you cannot get development finance, you have a bit of a problem. If you now have development finance and if there is a possibility that you can get buyers, the situation is obviously radically improved.
Abigail Davies: There is also a need to consider what will happen to providers of affordable housing, often in the notforprofit sector, not so much at the moment, when most of them are fully financed and okay, but for the next couple of years-looking ahead to that turbulence on the financial markets, the risks that loans are going to be re-priced and the shortening of availability of long-term finance to be quite short to medium-term now. There is a question about whether those providers will be able to finance their developments and how much it will cost them to do that, going forwards.
Ian Fletcher: My members are larger-scale mixed-use developers, many of whom have recapitalised during the credit crunch with rights issues. They have raised capital and finance and therefore are in a far better position to be able to raise development finance than they were, say, two years ago. I cannot speak for the smaller builder, because I do not have much experience with them.
Q50 Mark Pawsey: Mr Fletcher, your organisation spoke about housing zones. How will housing zones stimulate particularly in the buytolet sector?
Ian Fletcher: That is a slightly tangential issue. One driver of the housing market over the last decade has been the smaller buytolet investor. I think about £300 billion has come through the buytolet sector into housing. Really, on the suggestion of housing zones, it is quite surprising that no Government has ever tried in any way to nudge that in the direction of particularly policy priorities. To some extent it supports development, because there is a wider pool of buyers out there for new-build products, but a lot more could be done to try to nudge some of that equity and debt finance. At the moment about 25% of mortgage loans are to buytolet investors, so there is continuing demand coming from that sector and it is being met by the lending institutions.
A lot of my members talk fondly about the previous recession and business expansion schemes and what that did for the housing sector. I know that was not widely supported in retrospect, in terms of proving to be very expensive, hence some of the restrictions we suggested for housing zones-that they would have to be approved by local authorities and by the Treasury so that costs did not run out of control-but in the current economic climate it would be a good way of stimulating the housing market, particularly in areas where there is great difficulty in terms of the housing economics. It would not involve costs now-you are looking at capital gains tax concessions, for example. That does not cost anything to Government now, but obviously it has a cost to Government revenues downstream.
Lastly, the other stimulus to that idea was that there is no differentiation in the tax system for investors between pure speculators and those putting in capital for 10 or 20 years. I think that is wrong. During the boom, whether you were investing for three months, purely leaving a property empty and making a return on that or a respectable landlord putting capital in for 20 years, the tax system did not differentiate between the two of you.
Q51 Mark Pawsey: So you would like to see a capital gains tax incentive?
Ian Fletcher: Yes.
Q52 Mark Pawsey: Councillor Loakes, what do you think about the £400 million Get Britain Building fund? In your view, will that stimulate new housing?
Councillor Loakes : It will make a start, maybe, but I think we have a long way to go. One of the key missing parts of today’s announcements was that there was very little in the way of ambition and dates.
Q53 Mark Pawsey: Targets?
Councillor Loakes : Targets, yes. Cards on the table: I am a fan of targets, especially when it comes to house building. We know that we have so much already ready to go in London; in the East Midlands, 85,000 are ready to go. You would have thought that there would have been a date that says, "Boomph. We want to get this money out the door, spades in the ground, foundations laid, by 1 April 2012," or whenever. That was not there; that was missing. My greatest fear is that we end up spending the next 12 months coming up with a complex way of getting that £400 million out the door, when actually we know there are some pretty easy ways of doing so.
Q54 Mark Pawsey: Do you think targets have previously been helpful in housing policy?
Councillor Loakes : Yes, I do., and they are a key component of going forward.
Q55 George Hollingbery: If the Chair could indulge me briefly: Mr Stewart, would you be happy, from the financial point of view of your members at least, if we allowed anyone to build anything anywhere, any time, as of tomorrow-if all requirements for planning permission were removed? Would that suit your members?
John Stewart: No, I do not think it would.
Simon Danczuk: They would never be happy, George, I think we have established that.
George Hollingbery: Let me go on to what I am supposed to be asking.
John Stewart: Can I answer you? I have worked in the industry for over 30 years and I have never made anyone make that claim, so I don’t think that is plausible.
Q56 George Hollingbery: On the role of large financial institutions in solving this problem-getting private finance into new housing-how will that work? Have they a role? Will it work?
Ian Fletcher: To some extent, institutions are investing in this sector at the moment. I set out some examples in our written evidence. An interesting phenomenon over the last year has been the breadth of different interventions: both policy interventions but also players in this market intervening in the sector. It is not just a case of looking at pure market renting now and what we call built to let, but is also about capital finding its way to affordable housing.
I think the conditions are all there for large-scale institutional investment in the sector. There is significant demand for renting. In terms of comparable assets, they compare favourably if you want to invest in residential property. We are getting the political support, as I said, that is required. It is now or never. Over the next year, we need to see that being significantly upscaled. The one thing that is probably holding it back, as I said earlier, is the scale of opportunity in terms of being able to find particular housing opportunities that the institutions want to invest in.
Q57 George Hollingbery: What about in the housing associations and public housing generally? We know there is £40 billion of outstanding grant out there, and some appetite in the private sector, in long-term pension funds, for leveraging that and equitising it. Any thoughts on that issue?
Abigail Davies: The discussion on this sort of finance feels like it has changed over the last six to eight months, from having been a, "This is nice, but we’ve been talking about it for 30 years," kind of discussion to within the last six months people starting to feel that it is becoming a real possibility.
There is quite a lot of that kind of finance in the social sector already. I think it is worth having a conversation about what role that sector could play, not just in having the money and spending it, but what role it could play more widely in enabling that sort of investment to come forwards. Obviously, there is a range of different types of potential investors for different interests, but for those who maybe do not want to get involved with development, there is a role for somebody else to develop it and then sell it to an investor; for those who are less comfortable about ongoing management, there is a role, for example, for associations to wait for a property to be built and then they could deal with letting and managing it. I think there is definitely merit in exploring the facilitation role that could be played in making the money flow more easily and overcoming some of those concerns about risks and exit strategies and reputation and so on, which have been talked about for a while.
Q58 George Hollingbery: Councillor Loakes, in your evidence you have some interesting ideas about local government schemes, in particular local government pension funds and local government-backed instruments. Will you tell us a little bit more about those?
Councillor Loakes : Housing finance is already complex. There has been a lot of talk lately about localism and I think that local government collectively, as individual councils, can help stimulate house building and housing growth. It can do that if it has a level playing field, but there seems to be this kind of pathological trust issue-a feeling that there is a need to have a cap on what local government can borrow. When you think that local government has access to land, that it potentially has access to use of pension funds and it already prudentially borrows to fund all sorts of different schemes, it seems a little bit weird that we cannot get in on this particular act.
At the end of day, it is local government that is there long after the developer has built and moved on and it is local councillors who are knocking on the residents’ doors, finding out what their issues and concerns are. They have a key stake in developing those sustainable communities and moving forward. They want to build houses, whether on their own or with partners in the private or public sector. Give us the tools and the trust to be able to go forward and do that. Again, one of the ambitions lacking today was that trust of localism and its ability to deliver on this agenda.
Q59 George Hollingbery: Have you had any conversations with the Government on this theme?
Councillor Loakes : Yes, it is a cross-party organisation; my colleagues have been doing that.
Q60 George Hollingbery: Can you reveal anything to us about the attitude?
Councillor Loakes : No.
George Hollingbery: Fair enough.
John Stewart: Could I just make a comment on institutional finance, although it is much more Ian’s patch than mine? I am slightly concerned because institutional finance is just one source of finance into housing. You often hear glib comments about, for example, making private rented sector schemes work by waiving affordable housing. One of my three constraints on the supply side was the regulatory burden. I am always rather concerned when there is talk about reducing the regulatory burden for one source of capital or one particular provider within one tenure. I am much more of a believer in a level playing field.
Ian Fletcher: Let me give my response to that, because we have sparred on this issue in the past. John’s members are investing capital for the best part of a year at most, sometimes; my members are investing in capital for 20 years; there is a greater cost to their doing that and they should be treated more favourably.
Q61 David Heyes: One way to get individuals’, rather than institutions’, investment into housing would be through real estate investment trusts. They have not been a great success in the residential investment field, but if the Government are promising to take action to make them more conducive to residential investment, what benefits do you think that might create?
Ian Fletcher: For the investor they address one of the big issues you were discussing in the previous session, which is liquidity. Housing is quite a difficult commodity to get into and to trade, so a REIT provides that benefit for the investing institutions and provides what is called tax transparency, so a pension fund investing through a REIT is getting the same tax advantages as if it was a pension fund.
There has been-we should acknowledge and welcome it-progress in terms of a consultation on liberalising some of the REIT regime. The original REIT regime was pretty much designed for commercial property investors rather than residential investors. Some of the changes that the Treasury is proposing are welcome. If you were to push me, I do not think they will lead to a significant amount of residential REITs. There are still outstanding issues that HM Treasury officials have red-lined, one of the most significant being the ability of a REIT to trade.
In the commercial sector REITs are very much constrained in terms of their trading, for good tax reasons, so officials’ cautiousness is understandable in this area; but in the residential sector, trading is a far more common thing, from the private rented sector, even through to the affordable housing sector. If you were selling up an affordable housing REIT, righttobuy sales or a shared ownership staging-out would all be included in the trading, and potentially you would lose your REIT status.
A dialogue still needs to be had between the Treasury and the industry. It should not be beyond the capability of policy makers to produce, for example, a white-list of activities that will allow those sorts of activities to take place that will only apply to the residential sector and not open us up to any particular tax abuses that might happen in the commercial sector. We are a long way along the road, but we are not quite there yet in terms of having a residential REIT regime that would be supportive of residential REITs.
Q62 David Heyes: Is that a shared view on the panel?
Abigail Davies: Yes, Ian is very much the expert. This is slightly a step away from REITs, but there is an issue about enabling access to assets for people who otherwise cannot. There has been a lot of talk today about helping first-time buyers, the right to buy, and so on, but there will always be that core of people who really cannot buy, and I think that that is going to grow. That gap between the asset haves and have-nots will grow, so some sort of unitised vehicle that enables the man in the street to have a stake in housing, and thus a return from it, is quite attractive. A REIT, I think, is not it, but that idea is worth having on the table.
Q63 David Heyes: Just going back to Mr Fletcher, for a follow-up on what you said: is timidity, perhaps, or over-caution, a way of interpreting the Treasury’s action on this? If it were less cautious, could this hold some real prospects for boosting housing supply? Is that a summary of what you said?
Ian Fletcher: Certainly, for the people who I am talking about getting into institutional investing in residential, REITs both provide them with a good vehicle for getting into the sector and allow them an exit strategy. Although I have said that our members invest for 20 years, at some point in future they will want to divest themselves of that investment and REITs are the ideal way of doing that as well.
I do not want to be too critical of Treasury officials, because there are some complex issues here and they are scared about opening up potential avenues to commercial property tax abuse. As a result, officials are tending to be perhaps overly cautious. The last round of consultation very much said that that issue was not up for discussion, which was a pity, because I think a discussion has to be had.
Q64 Chair: We are expecting a Government announcement on REITs at some point, aren’t we, maybe in the Autumn Statement?
Ian Fletcher: I believe so.
Q65 Chair: If we do get something before the end of our inquiry, would it be possible for Mr Fletcher, or indeed anyone else, to let us have a note on how you respond to that and what you think the new proposals may or may not do in terms of housing supply, and whether there are still barriers existing in those proposals that need to be removed to get REITs up and running and delivering?
Ian Fletcher: I will do.
Q66 James Morris: The Government makes quite a big play about trying to get public sector land released. Do you think it will make any significant contribution to the problem of housing supply that we are discussing today?
John Stewart: I think what this Government is doing is very significant. There has been talk for many years about releasing public sector land. The OFT report back in 2008 concluded that somewhere between a quarter and a third of all the land that was potentially suitable for housing was owned by the public sector, whether central Government or local government, and so on. We work quite closely with the HCA on the public land programme that is going forward now-we have quite close liaison with them to find out what is happening-and I think this Government is really committed to that, so I think it will make a difference. It will not solve the housing problem, because it is multidimensional, but it will make a difference, yes.
Abigail Davies: I think that there is a step further; it was presented to us this morning as phase 3 of the public sector land initiative. I think that is the point you are making, John: we seem to have been stuck in phase 1 for quite a long time.
Q67 James Morris: Why do you think we are stuck in phase 1?
Abigail Davies: That was because it was always the Department responsible for housing that looked at their own assets. There was always a comment to be made about local government, and then it was just, "What does the Department for Communities and Local Government, or whatever else is responsible for housing at that time, look at?" Since then we have gone beyond: we have looked at Health and Defence, and now we are going again to the agency level, asking what the police have got, and so on. That work to get a real, proper picture of what is out there and can be used has been quite helpful.
There are questions about what you do with the land, whether that is sold upfront or on the "buy now, pay later" kind of approach, or whether it is some kind of joint-venture model, which there has been effort on over the years, to enable the public sector to keep a stake in it and to benefit from the uplift in that value. That is important, because you can only sell a site once and can only build on it once. Something that enables some kind of funding for future generations is important, because all these things will make a contribution to housing supply but they are never going to solve the problem. Some potential to keep reusing that asset would be very valuable.
Q68 James Morris: Councillor Loakes, in the last session it was clear that local authorities are sitting on a lot of public sector land-I think somebody quoted 59%. What more could local authorities do to release their land for housing supply? What are some of the constraints that you see?
Councillor Loakes : To be fair to local government-I would say this, wouldn’t I?-they are doing a lot already. In the scenario where they cannot build because they cannot borrow the money, they are working in partnership with housing associations, private developers, adding their land to a piece of land that a private developer has got to create a better scheme. They are doing that and have been doing it for years and years.
Sometimes there is tension where a private developer comes along, buys a private piece of land and then starts eyeing up a council asset and the council may not be ready to, or may not want to, develop that asset but comes under some kind of developer mentality, attitude and pressure to move that particular piece of land forward. There is no resistance from local government per se to releasing land that it owns for housing development.
Q69 James Morris: What could Government do more to facilitate local authorities doing that?
Councillor Loakes : Well, it can give us the powers to move our assets forward ourselves, because that will start to take out a number of players and negotiations and move to us putting spades in the ground and foundations being laid, and moving forward a lot quicker than the current scenarios lend themselves to.
Q70 James Morris: In the Localism Bill there is a general power of competence, which effectively allows local authorities to do anything within the law. Do you think that could be applied to scenarios where we need to be kick-starting housing developments? If a local authority has an idea and wants to build a partnership and do things, and wants to borrow X, have not the Government given them power to do that?
Councillor Loakes : And it was doing that anyway. Don’t over-exaggerate the power of competence. There are still very many real restrictions in place that prevent local government and prevent trust in local government in moving forward and delivering these sites. The biggest one is that, for some reason, we are not allowed to borrow the same amount of money as an RSL can borrow, yet we are the councils that will be there knocking on doors and finding out what is wrong with particular housing schemes, if they go wrong. We can and do do lots, but actually the big blockages to us doing even more are around the fact that the financing field is not level, by any stretch.
John Stewart: You asked why things have changed recently. I think there is recognition that we have a very serious housing crisis, particularly post-2007, because numbers have fallen so much; last year had the lowest completion numbers since 1923. Also, there are the worries about the economy. House building can play a significant part in helping that recovery. The commitment from the Prime Minister and the Chancellor is extremely important-it was the Prime Minister who announced the housing strategy today-and their commitment to that will, I am sure, encourage the MOD and the NHS, and so on, to be a little more proactive in releasing land. Whether it works for local authorities, I am not sure
Ian Fletcher: The specific issue for my members is that they are trying to negotiate, what are often very complex issues: it is not £1 today, but £1.50 in 20 years’ time, and ground rent, and a joint venture and some sort of equity share. Particularly local authorities often get frustrated that that expertise is not there and it is not brought in at the start of the discussions; it is some way down the track before HCA is brought into those discussions. Although the best local authorities ensure that expertise is in there from the start, some do not and everybody gets frustrated as a result.
Q71 Mark Pawsey: Can I just press Councillor Loakes on the ability of councils to bring that forward? You said in your evidence that councillors "overwhelmingly take a proactive and positive attitude towards development locally", but we have just had a review on the NPPF when we have heard many communities saying, "We want a right to prevent development in our area." What evidence is there that councillors are willing to push for land to come forward for housing? Will that contravene the wishes of those people who have put them in their position?
Councillor Loakes : There have been tensions in that relationship for years and years and years, so what comes out of early deliberations about the NPPF are not new in that respect. Fundamentally, councillors want to see good development come forward-development that benefits their existing local communities as well as communities going forward. That is about sustainable local communities. Often that is where the tension comes in, because that is not what is put forward. Councillors are often therefore in a difficult position, where they are having to advocate maybe not for the best development but for one that is certainly a step in the right direction, although there is still conflict with existing local communities already.
Q72 Mark Pawsey: But they are not always interested in development in the neighbouring ward or the neighbouring authority.
Councillor Loakes : No.
Q73 Mark Pawsey: What can central Government do to change their attitude and to bring more land forward?
Councillor Loakes : I think that is slightly unfair. I have been involved in many planning committee decisions about complex schemes in my own ward that I have championed because I have felt that they were the best things for my neighbourhood at the time, and we have delivered and, actually, residents afterwards have welcomed the scheme. It is like anything: people often do not like change. That former garage forecourt being turned into a four-storey block of flats will be challenging to the residential terraced streets around it. It is about working with the local residents, taking them forward, engaging with them, bringing the developers to the table so the residents can have that conversation with them and put forward their challenges and concerns, and acting as an advocate and facilitator for those tricky negotiations. That is, by and large, what local councils have done and will continue to do.
Q74 Bob Blackman: With regard to a private developer coming along wanting to develop some private land and a local authority asset alongside, can you give us an example of where that has happened, or indeed why it would be that, given the circumstances of new homes bonus and lots of encouragement for local authorities to give up the land and develop housing-there is a housing crisis, as we said-a local authority not say, "Wonderful. We’ve got a great partnership going here"?
Councillor Loakes : Because it may not be the best scheme for that local place. It may just be about bricks and mortar. Local councils are ultimately about building good-quality accommodation that strengthens communities and does not isolate them and does not, in five years’ time, start causing lots of housing-related problems for that local council.
Q75 Bob Blackman: Can you give a prominent example of where that has happened?
Councillor Loakes : Not off the top of my head, but I can get officers to provide you with some examples.
Q76 Bob Blackman: That would be helpful, because one of the things that we are looking at today, with respect to all the announcements made today, is to encourage local authorities to come forward with land to encourage development, and if people are stopping that, we need to know why.
Councillor Loakes : I can also give examples of innovative approaches to building. We owned the freehold to the site of the football club in my own borough, Leyton Orient. We worked with the football club and the housing developer to put four small tower blocks in each of the corners, which helped make that football club sustainable going forward, with some of the challenges it has regarding the Olympics, but also created much needed social housing for local residents. It was an innovative scheme using the freehold of a site, and that is moving forward.
We are about breaking down barriers where we can, but I come back to the fundamental principle: give us that level playing field on how we can borrow money so we can build houses. Councils want to build houses. They have the capacity and the willingness to do it, but we should not just have to solely rely on developers and should not have to rely, in that example, on a football club.
Q77 Bob Blackman: You have raised that issue of borrowing, which is going to come up in a minute. Right across London, there are local authorities with billions of pounds of debt, which are created from the 1960s and 1970s developments, and they are millstones around the neck of any local authority that wants to develop housing. How would you deal with that issue?
Councillor Loakes : I think we have got quite a detailed paper on that response. It would be better that I give that to the Committee afterwards.
John Stewart: Perhaps I could make a comment on your question. You posed the example of a private site next to a council site. Councillor Loakes emed to imply that the council had no control over the scheme and resisted it being built because it was not appropriate for the local people. If the council is the owner of the land and also, ultimately, the planning authority, is not that an odd view of things?
Q78 Bob Blackman: Control.
John Stewart: Exactly. Surely the local authority should work with the developer and if the two sites combined make a critical mass and give a good scheme, the two of them together can come up with a good scheme that meets the needs of local people.
Councillor Loakes : I am pleased to say that is what tends to happen, but there are instances where you cannot necessarily bring the two sides to agreement.
Q79 Heidi Alexander: I would like to move on to the reform of the housing revenue account and how much in effect that would enable councils to increase the supply of new housing. Certainly from my own local authority’s perspective we have a very large Decent Homes backlog of work. One hope is that by reforming the HRA and bringing it down to that local level, more of that investment can go into doing the Decent Homes work. How realistic is it to think that this could be a really significant way of increasing supply?
Councillor Loakes : I do not think it is a going to be a significant way. There is the detail that sits behind the headline: the fact that an extra £1 billion of debt was added as a result of fixing the inflation rate figures in September was not particularly helpful. Until we can borrow on a level playing field-I will keep sticking to that point-we are not going to be able to realise our ambition and do as much as we could possibly do. The ambition may well simply be about maintaining the quality of existing housing stock, rather than necessarily being able to increase stock. There is of course the issue about the righttobuy announcements, which have implications for the HRA today.
Q80 Heidi Alexander: Before we discuss the right to buy and how that could result in more housing being built, are you not concerned in any way about excessive borrowing by local authorities should the cap be removed?
Councillor Loakes : No, very simply. It is about trust. We can borrow for other things; why should we not be able to borrow for what local authorities and their residents think are the priorities for them locally? If housing is a priority for a local council and a priority for local residents, they should be able to borrow to do that. That is what the whole localism agenda is about, surely. That is what trust is about. We are trusted to do many other things; why on earth are we not allowed to build houses?
Abigail Davies: I think the reform of the housing revenue account is absolutely one of the best things to happen to council housing for years and it is great to be so close to having it. We do know that having the cap on borrowing below the prudential borrowing limit means that there is headroom that cannot be used. That limits local authorities’ potential contributions, because although that prudential borrowing is there for a reason there is space underneath it and we know from looking in some detail at councils’ business plans that they could use that money. It would not be taking risk, but would be them sweating their assets on the basis of a sound understanding of their 30-year business. There is room to explore going a bit further.
We have asked repeatedly for reclassification of councils’ debt, which you spoke about in the previous evidence session, to be considered. The idea of harmonisation in how councils are treated-in line with Europe-would mean a whole load of money could be taken off the balance sheet and used in a better, more creative way in future. We understand the reasons why the Treasury pushes back against that, not least the idea of starting to move the goalposts just when it is advantageous to get your public debt down, but really that opportunity is there and merits consideration.
Q81 Heidi Alexander: On this enhanced righttobuy scheme that the Government is talking a lot about at the moment, how realistic is it that a property would be lost from the social housing sector when somebody chooses to exercise their right to buy it and replaced with the money that the local authority gets in? Do you think that is a realistic model?
Councillor Loakes : I think the devil will be in the detail of the consultation responses on the righttobuy models that they are announcing today. From the Local Government Association perspective, we want local councils to retain all the receipt and for none of it to go back to central Government; and we want local councils to be able to set their subsidy, if there is a subsidy, and to do that locally to suit their own needs. There are big questions. This will be different across the country, but in London, have all the good houses already gone, so that what we have left is very expensive stock to maintain and there is very little willingness to buy properties, so having that as a flagship means you do not get in the sort of money that is anticipated in other parts of the country?
Q82 Heidi Alexander: Ms Davies, do you think that all the receipts from right to buy should be retained locally?
Abigail Davies: We will have to have a fairly robust conversation about it. The reasons that the Councillor puts forward are completely valid. There is an issue about who replaces the houses that get sold, and how and where, because of course if you keep the money at local level, does that local authority have the headroom on its balance sheet to pay for a replacement? Maybe, is always going to be the answer. There will always be that tension between the localist agenda and the value or best-possible-return agenda.
It will be attractive to Government to pool all the money centrally and hand it out, I assume, to housing associations who would then be able to borrow to bring that up to a one-for-one replacement, or potentially it is more than one for one, because if you take the average value of a property-in London, say, about £100,000-and give a 50% discount, which is £50,000, and then pay off the debt that would leave about £30,000. Obviously, you cannot then just say, "Here’s £30,000 to build a house". It is, ‘Here’s £30,000 worth of grant which you would lever money against to pay for that total’. We are heading for some really tricky conversations. I am not, at this point, advocating any particular solution, because I think it could get quite heated without the detail.
There is one extra point that I wanted to make, which is about the sale of social homes to replace with affordable rent, because it will not be social rent we are going to get back. It is the new model of 80%, which will be politically quite a tricky issue, I suspect, for a number of councillors explaining it to their constituents, and also looking at what they want to provide in their local areas. That will be just as tricky as talking about where the money goes.
Councillor Loakes : Let me just add to that that research has just been published showing that in every region of the country it is cheaper for the local authority to build a new build than for a housing association to do it, so why on earth would you not give the local authorities the powers to maximise that opportunity? We can provide you with that evidence.
Chair: It would be helpful if you could.
Q83 Bob Blackman: Mr Stewart and Mr Fletcher, one issue that has not been raised this afternoon is the absolute level of rents and where they go in terms of funding the stream of affordable housing and indeed any form of private housing. Is it your members’ view that that rental purpose and rental stream always has to go up in a steady process? Does that encourage the investment? Or has the fact of it not necessarily being the case led to a drop in the investment?
Ian Fletcher: From our perspective, institutions are investing for yield, so it is not just the rent, but the price paid for that rent. It is not necessarily the level of the rent, but the security of that rent certainly does have a significant attraction. If you are trying to encourage pension funds to invest in this sector, vis-à-vis investing in other commercial property or government bonds, then the thing that both of those types of assets supply is that security of income. Things that are likely to affect it are the housing benefit reforms that the Government is pushing through.
Q84 Bob Blackman: Is there a fear that the rental return is going to drop as a result of benefit caps and other measures? We heard previously this afternoon that we seem to be moving to a regime whereby housing benefit will be picking up the strain on development of housing. Possibly investors may be thinking, "Rents are going to come down."
Ian Fletcher: The great thing about residential renting from the institutions’ perspective is that it does not look at the timeframe, apart from very recent timeframes. If you look back five, 10, 20, 50 years, it produces an income that is almost compatible with average earnings, so if you are trying to pay out a pension on the back of that income, that is a very attractive proposition. At the moment we are in a slightly odd situation in that rents are running ahead of average earnings, but so are a lot of other costs. In terms of real returns they are not actually that significant.
Q85 Bob Blackman: So it is not a barrier for people to invest at the moment?
Ian Fletcher: No. I would say that security of income is probably the critical thing, rather than some variations.
Abigail Davies: Changing benefits is causing concern around those organisations that already do have finance to provide housing, particularly social rented. The concern is that if income streams are not guaranteed, rates of lending will go up; thus, what you can do with the money is reduced. There are demonstration projects coming forward to test those out, which we are happy about and for which we asked, but that ongoing uncertainty for another 18 months just takes us a little bit further in that uncertain world, where people do not necessarily make firm decisions or the most advantageous decisions, because they are not quite sure what is coming. We have a housing strategy to take us to 2015, but some of the decisions that will be made are not coming for another year. That climate of uncertainty is still quite notable.
Q86 Chair: You raise the issue about the restrictions on local authority borrowing, but the same restrictions were there with the last Government and we had the same arguments with them-certainly, I engaged in those arguments at the time. The National Federation of ALMOs has now come out with a series of ideas in which local authorities still remain involved in the ownership of the properties, but the ownership may be diluted into some form of co-op, with a long-term management arrangement. That could set local authority housing managed by ALMOs into a context where they could borrow for the long term, like a housing association. How does the LGA view that sort of proposal?
Councillor Loakes : The LGA meets regularly and has a network of councils with ALMOs and it engages with them on the agenda. The bottom line for the Local Government Association is, whatever models are coming forward and whatever the intellectual thinking is around these complex housing finance issues is, we just really want to see spades in the ground, foundations laid and houses being built. We have all got waiting lists with residents on.
Q87 Chair: Do you think these proposals on ALMOs are a good idea, which the LGA ought to be selling among its members as a potential way to get some more money?
Councillor Loakes : For those councils that have ALMOs, yes, many are considering how to move their ALMOs forward. Many do not have ALMOs. Again, it is a complex landscape, with opportunities, but it is about maximising those opportunities and not settling simply with what is on the table at the current time.
Q88 Chair: In terms of these complex options, Ian Fletcher said quite reasonably a few comments ago that some of the larger authorities might be able to get their heads around these quite complicated deals, but smaller authorities will often struggle to put them together. How far does the LGA have a role in trying to disseminate good information and provide support, particularly to smaller councils, but also to larger councils so that they know what is going on elsewhere in the country and to replicate, rather than reinvent, the idea?
Councillor Loakes : It does that all the time, whether through member-led events or through its regional networks where it disseminates best practice. In London, we have London Councils. There are many different networks with opportunities for best practice being shared, where support is offered and where many councils bring in expertise from other councils, particularly in complex situations, to help them get the best for that local council and its residents. There are plenty of examples.
Q89 Chair: Have you a library of interesting ideas and innovations that are happening?
Councillor Loakes : We certainly do.
Q90 Chair: Can we have one or two examples?
Councillor Loakes : I am sure we can-yes we can, I have had the nod.
Q91 Simon Danczuk: Can you say a few words, Councillor, about how the place-based pot that the LGA has been talking about might help to stimulate the housing market?
Councillor Loakes : I will have to provide you with a separate note on that. That is not contained within my brief. I do not want to confuse matters.
Q92 Simon Danczuk: One final question, John. You and your members must be over the moon-delighted-about the announcements today. Are you happy with the announcements the Government have made?
John Stewart: That is a leading question. Yes, we are very pleased, because the brake on mortgage availability, or the brake that that causes on house building, is very serious. I think that this can have a significant impact on house building.
Q93 Simon Danczuk: Is there anything else that the Government could do that would make you and your members even happier?
John Stewart: Yes, there is. If the National Planning Policy Framework-I know we are not here to talk about planning, but everything comes back to planning-is diluted or if changes are made such that planning permissions will not be available, that would be a concern. If you have contributed to solving the demand issue with the schemes announced today, once that demand kicks in house builders will be able to gear up production, but if they cannot bring new sites on and cannot get new planning permissions, the whole thing will fizzle out. The planning system has to come in as well.
Q94 Chair: One point for John Stewart. There has been a traditional model of housing development in this country in the private house-building sector. Do you see your sector fundamentally changing if availability of mortgage supply does not come back to the pre-2008 levels or, of course, if the FSA regulates more strictly, or whatever, which is quite likely to happen to some degree?
John Stewart: When you say, "fundamentally changing", I am not sure what you mean. Do you mean the nature of the industry?
Q95 Chair: Would you simply build less of what you have always built, or would you look to build for different customers in different ways?
John Stewart: House builders will build for whomever comes along through the sales office door.
Q96 Chair: Are you planning for a change and a different way of doing things?
John Stewart: There is recognition that some of the less advisable, less desirable lending that went on in the peak of the boom will not come back and therefore the mortgage market will be more difficult permanently. Peter Williams commented in the earlier session that 95% used to be the norm-between 82% and 98%, and 95% was the median, give or take one percentage point-and that was the way the housing market worked. If we can get back to that, it would be good. Does anyone want to get back to 100% or 110%? No, of course they do not; that is an undesirable situation to be in. If we do get mortgage funding back-if we have 95% LTVs for first-time buyers in particular-I think that the situation will begin to calm down and we will get supply up.
Q97 Chair: Do you not see a long-term change, where the percentage of people in this country who own their own homes falls? Therefore if your industry is going to carry on building in increasing numbers, it is going to have to find different ways of building for different customers.
John Stewart: There is a longterm issue. I have thought a lot about this. In a sense, the question is in two parts. What sort of housing numbers do we need? The house builders will build for owner-occupiers, for buytolet investors, for institutional investors, for RSLs and for councils. House builders will build for customers it is profitable to put up houses for. It may well be that in the future the composition of that demand will shift compared with the past. It may be that, for example, there is a higher proportion of private rented than there was in the past. My real worry is that there will be constraints on mortgage availability that will constrain the number of people who can become owner-occupiers, but they will not be able to become tenants in another tenure, so there will be an absolute shortage of housing. The consequences of that for young people in particular are clearly very serious. That is a major long-term issue that we should all be worried about.
It relates to an earlier question about what the Government could do to solve the housing crisis, particularly in local communities. I have long felt that the key to this is that many people in this country are hostile to housing; I understand that. If there is a proposal in their community to build housing, they will be opposed to that. If people could be made to realise that that has consequences, probably for their children or grandchildren, and they begin to see that, they will realise that and will say, "Well, I’m not very happy about the housing here, but if we don’t build enough housing my son or daughter, or my grandchildren, will never have a home." There is a very serious long-term issue there.
Chair: There is probably a fair amount of agreement with that. We will finish there. Thank you very much indeed, all of you.