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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1652-iv
House of COMMONS
TAKEN BEFORE the
Communities and Local Government Committee
Financing OF New Housing Supply
Monday 30 January 2012
Sean Oldfield, Graeme Moran, David Toplas and Peter Mahoney
Pat Ritchie and Richard Hill
Rt Hon Grant Shapps MP
Evidence heard in Public Questions 275 - 366
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Taken before the Communities and Local Government Committee
on Monday 30 January 2012
Mr Clive Betts (Chair)
Examination of Witnesses
Witnesses: Sean Oldfield, Chief Executive, Castle Trust, Graeme Moran, Managing Director (Portfolio & Acquisitions), Assettrust, David Toplas, Chief Executive, Mill Group, and Peter Mahoney, Chief Executive Officer, R55 Group, gave evidence.
Q275 Chair: Good afternoon. Welcome to the fourth and final session of our inquiry into the financing of new housing supply. Could I just begin by apologising for the fact we are a little bit sparse of Members of the Committee? There are other things happening in the House at which the Whips require attendance, and some of our colleagues have had to leave. They may or may not return at some point, depending on how well behaved they have been in the meantime. For the sake of our records, could you just say who you are and the organisation you represent?
Sean Oldfield: Sean Oldfield, Chief Executive, Castle Trust.
Graeme Moran: Graeme Moran, Managing Director, Assettrust.
David Toplas: David Toplas, Chief Executive and shareholder of Mill Group.
Peter Mahoney: Peter Mahoney, Chief Executive, R55 Group.
Q276 Chair: We are obviously trying to identify new sources of funding for improving the housing situation in this country and new ways of delivering housing in a variety of forms. We have, and have had over the years, many ideas about how this can be achieved, and probably far fewer successes. The models that you are proposing are different from each other in many respects. Why do you think your particular model is likely to work and why is it not working now?
Sean Oldfield: Our research on thousands of households indicates that 50% of those people looking to buy a home would like to use the Castle Trust product, a partnership mortgage. We think that is a very large target market because, when you exclude the people that we would not lend to, it ends up being about 1 million households that would like to use our product. 1 million households in the scheme of the UK mortgage market is a very large market; it is about 9% of the UK mortgage market. That is the sheer level of customer demand; they are trying to bridge the stark divide between renting and home ownership with a mortgage. I think some of the solutions here today are very much here to bridge that stark divide. I will leave it to you.
Graeme Moran: We have two products. The first one is a shared ownership version of right to buy, which is aimed at helping social rented tenants get on and meet their home ownership aspirations and purchase their existing social rented home. The reason we think that has potential is there are circa 4 million social rented households; of those, there are about 920,000 households who could afford to buy a share of their home with a discount as proposed under our scheme. If we were to see a 4% conversion rate of those 920,000, you could potentially release £3.2 billion to £3.5 billion of historic, locked-up grant and other capital out of the existing social housing sector to invest in new supply.
In terms of the number of stakeholders who are antithetical towards right to buy, we think our product is saying, "We are helping people meet their home ownership aspiration, but we are not losing social housing stock; we are actually adding to it." There is a one-for-one and a like-for-like replacement of a social rented tenancy. We think that certainly meets any gripes that someone like the Defend Council Housing lobby might have against it. In terms of the practical application for the customer, we think there is real potential there because we actually have a mortgage in place that can go up to 100% loan to value to support a customer on a low or moderate income to achieve that purchase. That is why we think it is realistic and realisable.
We have some traction; we have a number of partners on board that are already beginning to explore our product and rolling it out and piloting it. One of the barriers that we have had today is that many people who are providers within the social housing sector have probably been quite overwhelmed with the large series of changes to the social housing market and the consequences of welfare reform. Therefore, they just have not had the time and capacity to pay attention to new forms of interesting finance, although we have seen that change over the last few months.
David Toplas: Perhaps slightly briefer: coinvestment is seeking to bring longterm investment money to people so that they can buy homes through coinvestment in the mainstream housing market. We think that this new model will be able to generate anything up to £30 billion over the next five years, supported by mainstream, large institutions. It will provide a critical difference to homeowners, house builders and the Government, whilst creating a new investment asset class within residential. The principal issue in terms of its future is that it needs to actually start, so we are seeking a focus on support for innovation and for piloting.
Peter Mahoney: Our model is effectively in two parts. It is a funding solution and also a modular housing solution. The funding solution is very much a leasebacked funding solution where it is directly targeting housing associations and local authorities who are providing modular housing that is responding to local housing needs, but it also comes fully funded. Effectively, the housing association or local authority would provide us with land. We would work with them, understanding their housing needs and the needs of the Housing Department, and together a solution is developed. Then, depending on whether it is a low cost, for a low-income area and rents are challenged, effectively the lease then extends or shortens according to that.
A longer lease will allow a lower income to spread the costs a lot further and therefore allow the same quality to be achieved, rather than it being a low cost area and therefore a lower cost solution. It is effectively bringing a housing product together with a funding package. In terms of how that is funded, it is not debt funded, it is not reliant upon social housing grant; it is purely funded by pension funds and life insurance funds that are looking for longterm, stable, low-risk solutions. Social housing and Government-backed housing benefit support and so on are ideally matched to that.
Q277 Chair: Just before I pass it on, I have just a last point. Is this money in place? Have you actually raised money for other schemes before as an organisation or are you really starting off at first base on this?
Peter Mahoney: In this space, we have not raised funds. The reason we have not is there is an abundance of funds out there in pension funds allocated. Aviva, for example, did the Derwent deal. They have £240 billion of funds under management, £8.5 billion of their own, which they are looking to allocate to this sector. That is a similar kind of leasebased structure, so we will work with them on the development side. In terms of whether we have raised funds before, we have not raised funds as such; we have historically targeted urban regeneration companies such as in Derby, Leicester and Stoke. There we have used funds from private banks, so it was straightforward development funding. Generally in higher risk areas we would derisk it, and then prepare it more for the traditional debt funding to come in afterwards.
Q278 Bill Esterson: I understood what you said, Peter, and I understood what was written about your organisation. I am afraid I cannot say the same about the other three organisations, and that is a concern for me. I heard terms like "interesting finance" models and "innovation". There is not necessarily anything wrong in those, but we are just coming through a financial crisis, where the increasing risk in complex financial products was one of the big causes of concern and possibly even the cause itself. Why should these products be a success when they are untested at the moment?
Sean Oldfield: Being longestablished does not necessarily mean something is the best solution, and I think the financial crisis in fact points towards that being the case. What three of us here are offering, I believe, is something that provides customers with a real choice in the spectrum between renting and ownership with a mortgage. Ownership with a mortgage is a very risky thing to do; most people do not appreciate that the risk attached to an individual house is a similar financial risk to that of the FTSE 100 index. When you then go and take a large mortgage against that, you are taking out a very large amount of financial risk on your own home. Being able to derisk your own home is a very important way in which to manage your financial future. Certainly, the partnership mortgage is a very simple product, and I would be very happy to explain it to you because it does not take very long at all.
Q279 Bill Esterson: Before you carry on, I suppose the point is that there are shared ownership products-if you want to use the word "products"-that have been around a long time, so it is not a new development. I think the idea is that the Government would stand behind these products. Is that right?
Sean Oldfield: Not the case, no.
Q280 Bill Esterson: So Government support is not needed for these?
Graeme Moran: Certainly, our intention is we are going to be applying a standard shared ownership lease, which has been approved and regulated for many years, and that is what we will be offering to the customer to buy into. I think the track record of shared ownership, certainly on repossession rates and default rates, compares very favourably with ordinary sales on the open market to first-time buyers. What we are offering the customer is to buy in through a very rigorous eligibility and assessment process, almost identical to what happens in the regulated sector, which is driving default rates of no more than 0.38% and, probably, people in mortgage arrears for more than three months of 0.49% or 0.42%, which is very good performance compared with traditional wellorganised mortgages. We are not in any way trying to serve a subprime sector. There will be very rigorous tenant eligibility and assessment criteria.
We do expect on our product that goes out that there would be a 25% discount offered outside of the equity that is already within a property, so there is some level of grant. What we are expecting that to do, though, is turn the average value of a social rented property on its existing use social housing value from £35,000 into £85,000, which means you could do a one-for-one and like-for-like replacement of social rented. Our view is that we are helping someone responsibly to buy a share of their home, so we are helping customers who can afford to buy a property, thereby releasing value that can be recycled to help people who are more needy on waiting lists; we think that is an efficient use of publicgrant funding in the future with historic grant.
Q281 Bill Esterson: Before we come to David, I think it was your organisation, Sean, in your submission, that made the point about Government support.
Sean Oldfield: Yes, Castle Trust requires no taxpayer support.
Q282 Bill Esterson: You said you believe the Government should make clear its strong support.
Sean Oldfield: For private sector solutions in the shared equity, shared ownership space. Such support, not the financial support, does provide a very real impetus to the ongoing growth of such solutions.
Bill Esterson: David.
David Toplas: Coinvestment is in fact a very simple joint purchase arrangement between a rich institution that has money and just seeks an income flow, and an individual who wants to own a home and has a modest amount of cash. Therefore, buying a property together makes a lot of sense without any other mortgages or anything of that sort being involved. That is the essence of our arrangement. We have done a considerable amount of market research and demonstrated from that that consumers get it; they can see how it will work very well for them to facilitate their move away from the rented sector, its uncertainties and inability to personalise your home, towards a longterm arrangement in coinvestment or, indeed, if they wished, to go and purchase out in due course.
You asked about Government support, and we do not see that this model requires Government support in the longterm sense. What we are saying is that innovation, particularly at these times, is a tough thing to achieve, and that Government has been asking for innovation to come out to the housing market and for new models to come forward, yet has done precious little, if not anything, to actually encourage those to flourish and be seen through the critical pilot stage. Ultimately, each of our businesses here is constrained by an inability to demonstrate that they have actually got off the ground. That is a role we see as quite important for Government to focus on: the market initiation and marketing support for innovation to come forward, in much the same way that Government has chosen to support mortgage lenders to encourage them to lend at higher loan to values through the new build indemnity scheme. Why does Government not come forward and help to encourage investors to come forward, perhaps just for the first pilots, and then let those models come forward, be assessed, and demonstrate their track record and so on through that?
Bill Esterson: Do you have anything to add?
Peter Mahoney: No. No comment.
Q283 Stephen Gilbert: Coming back to that then, do you see that support that the Government could offer, as declaratory support, as a statement? In your evidence, you said, "If cash is not available, the state can have a significant influence in gaining traction for new models by declaring publicly that it can see merit in the concept." I know the Housing Minister is very powerful, but do you think a statement from him would be sufficient to see more people come to these new models?
David Toplas: Absolutely. I think you underestimate the power of the politicians’ statements. We would welcome support for this whole area of coinvestment, whether coming through shared ownership or shared equity models, in preference perhaps to suggesting people should go on to buying houseboats.
Q284 Stephen Gilbert: Can I ask about individuals’ risk profiles when they use your products? Obviously, we have heard a lot over recent months and years about indebtedness. Using your product, what is the typical exposure against their home in terms of the percentage that they will be taking up? What is the range that your products work from?
David Toplas: We see coinvestment working in any balance between 0% and 100%, but typically starting off with a consumer putting perhaps 5% down and the institution funding the balance of that, again without mortgages. Of course, that has the fundamental benefit that we have two investments being made in one property and, therefore, the consumer is not at risk of negative equity. He is not responsible for the financial investment and a minimum sum, as he would be in a mortgage situation. Therefore, if property prices do fall, as could easily happen over the next few years, they will lose a little bit of money on the money they put in, just as the institution will lose the same percentage.
Graeme Moran: We would be anticipating most customers to be spending no more than 32% of their gross income on housing costs. The product is appraised, premarketed and sold very much in line with the affordability criteria assessment currently set by DCLG, and implemented and overseen by the Homes and Communities Agency and Tenant Services Authority. We think it is a very responsible product in that sense. The other main protection to really reinforce is that there is an assessment done by the registered provider, there is an assessment done by us and by the mortgage lender and, what is more, postsale that customer remains managed and looked after by a registered provider. In many ways we would argue that the asset is being sweated, turned over and worked for best efficiency, but the customer is not being sweated.
Sean Oldfield: A customer with a partnership mortgage needs a 20% deposit or more and that, combined with our shared equity, means that their risk of arrears or repossessions is reduced by about a third; their risk of negative equity is reduced by onehalf; and, obviously, it reduces the risk to rising interest rates by at least one quarter as well. The risk of negative equity, arrears and repossessions is something that I think is particularly appreciated by people here today who live outside London.
Peter Mahoney: Our model does not really deal directly with individual homeowners. It is very much funding for housing associations or local authorities in terms of bringing sites forward.
Q285 Stephen Gilbert: Can I just ask then what the catch is? What is the risk in your products? You are bringing in other coinvestment partners or institutions and sharing the risk; you are minimising the individual’s potential of default. There must be risk in the system somewhere, so where does it lie in each of the models?
Graeme Moran: I think the key risk under our model is where we are quite often asking a tenant to give up a lifetime tenancy and move into home ownership. That is the risk. You have to apply very responsible controls over that decision to buy, because people are giving up a huge amount of security in a lifetime tenancy, but we think we have managed that risk. The other risk probably for us in terms of how this product develops is probably for some of the social housing providers, because if it can release a sufficient amount of capital, the risk for them is they may be pushed to only being able to reinvest that in new supply and in line with the new affordable rent model. This does pose some different and perhaps increasing risk for associations, and, from our point of view, some of the feedback we have had from the registered provider partners we are working with is that they would like a bit more flexibility over what they can reinvest any assets that they manage into. This may include empty homes, regeneration schemes and some open market shared ownership schemes, which involve less sales risk.
Sean Oldfield: David Miles in his speech in Yorkshire last November talked about the benefits to households and society more generally of having households issue equity in essence to external parties. When a company issues equity, it becomes less risky; when a company issues debt, it becomes more risky, and if you think about a household, today it can only issue debt. There is a significant risk reduction in the system by issuing more equity and, of course, if you consider the options against whether you issue debt or equity as a household, if your house performs very well or the company performs very well, equity is more expensive. I think that is the very simple position after you have gone and issued equity in your own home.
David Toplas: For those seeking a home to live in on a longterm basis rather than a shortterm rental arrangement, we have already talked about the lack of negative equity, which is a very large difference. Equally, the cost of actual occupation we see very much falling between rental and servicing mortgage products-at, say, a 90% level-so it is marketdriven, and it would obviously change over time to reflect that. Enabling a consumer to plug into an arrangement over a long term actually protects them from arbitrary price rises-as landlords can impose as their tenancy is coming to an end-or, indeed, the uncertainties of interest rate rises, which must be coming down the line to us some time. Therefore, diving into the desire from institutions for longterm RPIlinked income flows would provide that solution.
There are other facets of risk, obviously, to which Graeme has alluded. You can get into a home ownership situation. There our coinvestment model actually provides another exit route of simply selling out to us, the investors-we represent the investors-as a very easy way of actually enabling somebody to move on to a different property as suits their needs, purchasing in the normal way with a mortgage and so on, whilst actually taking away their share of the capital gain, as we all hope it will be. There are a number of benefits coming forward into a package that makes a new proposition.
Graeme Moran: I think it is worth arguing that the affordable home ownership market seems to be developing quite strongly, not just as an initial sale but onward selling. You are buying into a product that does have a marketable resale value and opportunity because there is so much demand, because no one can get into the outright market.
Q286 Bill Esterson: I just wonder if there is a balance here between how people treat their home: whether they treat it as somewhere to live, as a home, or an asset to be traded and for money to be made out of it. I wonder what your views are on that analysis.
Sean Oldfield: When you just take on external debt you are actually treating it much more like an investment, because you are leveraged up and you are hoping very strongly that it rises. If it goes down just a little bit, your equity gets reduced by the leverage effect of having a mortgage. Having an equity buffer-be it shared equity, shared ownership, cotenancy or coinvestment-is a way to reduce your financial risk on your own home and reduce the investment part of the decision that you make when you buy a home. There is a place to live and there is an investment, and those two decisions are bundled together right now. We are helping people to have less exposure to their own home.
Graeme Moran: We do not necessarily anticipate or see any change in behaviour or attitudes towards the management of an asset of an existing tenant who has a lifetime tenancy and is converting into home ownership. We have had some anecdotal feedback that some people might prefer to get into home ownership now because, although there are attendant risks, there seems to be an increasing risk that lifetime tenancies may not be lifetime tenancies forever. So, maybe purchasing into a home ownership gives people the guarantee of security that they have always traditionally associated with social rented tenancy.
David Toplas: It is a very interesting question you raise, and the essence of the answer is that people buy and seek homes; they do not, day one, seek an investment in the property they happen to live in. If it happens that it goes up in value, that is great and nobody complains, but that is not the driver for the purchase. They are looking for the ability to personalise, to create their own space and to put down their own roots in a community, each of which coinvestment is focused on and typically are things that the private rented sector, whether in large-scale build to rent or the ordinary buy-to-let investor product, does not give people. That is one of the main reasons why the CML studies continue to underline a high level of desirability in the public to actually own their own property.
Peter Mahoney: Our model really concerns the social rented side, so we are not really concerned with shared ownership or shared equity, but in terms of what David says about opening up the market and giving people that choice, they are perfectly valid products. But as I say, our main focus is really on the funding of housing associations and local authorities in bringing land forward.
Q287 Bill Esterson: The other question is: how would you all do this on a larger scale?
Sean Oldfield: We are planning to do this on a relatively large scale; we have our investment secured already, and when we launch we will be operating with large commercial partners on the distribution of both the investment products and the mortgage.
Graeme Moran: I have probably already discussed the potential scalability of our scheme, so I do not think we are lacking in any ambition in that. I do not think we have necessarily overstated the potential. Clearly, we see there would be a slow move to the number of customers who would want to buy their own home, and that will take a period of marketing, but we think it could scale up to substantial scales and, as I say, a minimum probably of £3.5 billion released from the sector. That is obviously helping the customer, but more importantly the second benefit of our scheme is to release money to engineer new supply.
David Toplas: We see the potential for coinvestment rather larger than the sort of figures that have just been mentioned, in the sense that institutions currently invest a reasonable amount of money in the commercial property market. About £315 billion is invested in UK commercial property and only about £4 billion in residential today, despite the fact that the residential market in the UK is about eight times the size of the commercial property market. Just from that simple analysis, if institutions could find a way to invest and to actually get the attractive income flows that are available from the residential market, we are strongly convinced, and have had some discussions endorsed by investors, that that potential of about £30 billion over five years is realistic.
To access it, it has to start with a successful pilot that demonstrates that it works. We know there are consumers out there; we estimate that anything from 40,000 to 80,000 people per annum would be there; that is £10 billion to £20 billion per annum in terms of consumer demand. We think that investors will take some time to get up to that sort of scale. We do not think that house building in properties is a constraint on our model; we are talking perhaps 25,000 units per annum. That is within the capacity of the homebuilders to build, particularly as for every one they build to sell through coinvestment, they can build another one for open market sale. Clearly, coinvestment is also driven into the existing property market, existingbuilt properties, as consumers make their choices as to the sorts of properties they wish to live in. So, on each scale we think that is fine. In terms of deliverability of the proposition, we see this as a generic model that would adopted by others to offer large-scale activity. Each major institution may have their own coinvestment offering in due course.
Peter Mahoney: Our model is rapidly scalable and it does not really require just our organisation to do it. It is a traditional property lease that has been amended; it responds to the TSA and what you can do from a regulatory point of view; it brings together housing associations with the pension funds. Just as an example of the appetite for pension funds for this route, the Moat housing association bond that was issued some months back was 185% oversubscribed by investors, so there is a clear appetite for this kind of Governmentbacked housing association social housing income. On the housing association side, we just simply need a supply of land; bring the two together and it is pure, straightforward development funding like any other development funding.
Q288 Chair: Do you have any reassurance that, if you were to give the local authority a deal of this kind, it would not count as Government borrowing?
Peter Mahoney: It is a lease, so with respect to a housing association it is generally offbalancesheet funding and it is not really affecting current loan gearing ratios or anything like that. It is purely the local authority entering into a lease, like they would any other, so it is not technically borrowing. They are effectively entering into a landlord and tenant relationship.
Chair: Okay. Thank you very much indeed for coming to give evidence to us this afternoon and for the written evidence you have provided. That is really helpful to our deliberations.
Examination of Witnesses
Witnesses: Pat Ritchie, Chief Executive, and Richard Hill, Deputy Chief Executive, Homes and Communities Agency (HCA), gave evidence.
Q289 Chair: Good afternoon, and welcome, both of you, to our evidence session on the finance of new housing supply. Thank you for the evidence you have provided to us in writing. Just for the sake of our records, could you indicate who you are and the organisation that you represent?
Pat Ritchie: I am Pat Ritchie; I am Chief Executive of the HCA.
Richard Hill: I am Richard Hill; I am Deputy Chief Executive of the HCA.
Q290 Chair: Thank you very much indeed for coming. Clearly, your mission in life is to deliver the Affordable Homes Programme, the 150,000 homes, as it was. I think you have now just been volunteered, from the Minister’s statements, into providing 170,000. Are you absolutely certain that is deliverable? Are you having any problems or do you anticipate any problems?
Pat Ritchie: We are on track to do our contribution to the 170,000 homes that will be delivered across the Spending Review period. The contribution we will make will be through the Affordable Homes Programme and through our property and regeneration budget, and one or two other bits of investment, but the bulk of the work will be through the Affordable Homes Programme. We are confident that we have been able to agree a robust set of contracts with providers; we have 103 providers now in contract and we have committed, through those contracts, £1.6 billion of the £1.8 billion investment through the Affordable Homes Programme. We have yet to sign up local authorities, but that will be next year, once the housing revenue changes are in play. We are on track, as we expected to be, to deliver on 35,000 completions this year, and starts are on track in the new programme.
Q291 Chair: There have been a number of issues raised by various organisations, not least local authorities, regarding their concerns about some of the problems that might arise. I understand that some London boroughs, such as Hackney and Newham, have been arguing very strongly that at least a proportion of the properties should be at social rent levels, and that the affordable rents are just so high that they would exclude many people from being able to live in those properties. How are you going to deal with that particular issue?
Pat Ritchie: In London, as with other parts of the country, we have been working through to sign up associations on the contracted arrangements that I described. Within London we have looked at crosssubsidy from different parts of the programme to support rent levels that reflect the market across the city. We have also looked at working with associations to deliver a range of size of homes within London that reflects the housing need within the city.
Richard Hill: If you look at the rent levels in London that we have agreed in the contracts we have signed, they are about 60% of market rent. If you look in other regions, we get closer to the upto80% level that we had the flexibility to use. The reason for that is straightforwardly to make sure that we were able to provide homes, particularly threebedroom homes in London, that were affordable under the regime and did not hit any of the benefit cap restrictions that currently operate.
Q292 Chair: Have you resolved your differences with Hackney and Newham?
Pat Ritchie: We have contracts across most London boroughs. Some London boroughs have decided that they do not want to participate in the model, but my understanding is there will be investment going into Hackney and Newham through the contracts in London.
Q293 Chair: So the answer is no.
Pat Ritchie: No, we have resolved those issues through the contracted arrangements with providers.
Q294 Chair: So you bypassed the local authorities?
Pat Ritchie: The boroughs have been involved in the discussions on the contracts in London, and there has been consultation with each of the London boroughs to help prioritise those projects that are included in the fouryear contracts that we have signed up through the Programme.
Q295 Chair: I take it that you have signed up registered providers but the boroughs are probably not completely on board in some cases. I just want to go on to the other parts of the country before I ask colleagues to come in. There are parts of the country where the market rents are basically no different from social rents and, therefore, building properties and letting them at market rents does not bring any more money in. How do you make the Programme work in those areas?
Pat Ritchie: The Programme has a good spread across all parts of the country, so the investment is spread across each different local authority area. In some parts of the country where rents are lower, associations have worked closely with local authorities, for example, to put land into contracts and into projects in order to make sure that the overall contracts stack up. We have seen that across some of those areas where rents are lower and where the market is more challenged; there has been a greater degree of innovation and working locally to bring forward contracts. Build costs are also lower in some parts of the country, and that has been reflected in the way that the contracts have panned out across the whole of England.
Richard Hill: If you look at the proportion of the Programme in London, the old Programme was 27% and the new Programme is 27% of build in London. Also, if you look at the other regions, the percentages now are not that different from what we were doing in the 2008-11 Programme. What you have not seen is a shift from low-value areas to high-value areas, for exactly the reason Pat described in terms of people being willing to put land and other forms of financing in to make sure that they can keep developing.
Q296 Simon Danczuk: To what extent will the community infrastructure levy impact upon the delivery of housing through planning obligations, do you think?
Richard Hill: Section 106 has been a big driver of affordable housing over the last few years. I think in 2010-11 about 29,000 homes were delivered through Section 106. Clearly, any changes in the Section 106 regime have a potential to impact on delivery of affordable housing. The core question is the impact on viabilities, and clearly what has happened as the market has changed over the last three to four years is the number of affordable homes generated through Section 106 arrangements generally has moved up and down, so there is a potential impact. We have been doing a couple of things: we have been working nationally with HBF and NHBC and the Local Government Association to try to agree a framework looking at viability, both at a plan level and at a site level, to try to help people understand the context of that. Our local teams work with individual local authorities’ teams to make sure we can deliver viable schemes on Section 106 sites and that they deliver an affordable housing contribution.
Q297 Simon Danczuk: Have you done any modelling in terms of the impact of the changes to Section 106 and the introduction of the levy? What reduction do you think will occur?
Richard Hill: It is very difficult to say; it does depend on market movements. In the numbers Pat talked about at the start, towards the 170,000, we have looked at the risk that there is associated with Section 106 delivery on the new Programme, and there are some Section 106 delivered units in that new Programme, but we think they are at a level where that risk can be mitigated if levels fluctuate up and down.
Q298 Simon Danczuk: Have you made any predictions in terms of the impact?
Richard Hill: No, I think it is very difficult to predict, but we have looked at mitigating the risk where we can on Section 106 delivery as part of the new Programme.
Q299 Simon Danczuk: Reopening Section 106 agreements was something that the Government said should happen; why do you think that is?
Pat Ritchie: A number of Section 106 agreements that were negotiated before 2010 are now stalled-those sites are stalled. We have been working with local authorities to look at ways in which they can renegotiate those sites to still deliver housing on the ground but reflect the changes in the market. Our role has been to support those negotiations and that development at a local level through our enabling role, and really to help the local authorities work through to get a scheme that is viable and deliverable on the ground in the current market.
Q300 Simon Danczuk: Just for my understanding, these were negotiated when times were presumably thought to be good in terms of the commitments of Section 106 money. Now the Government are saying we should change that; why would you give that advantage to developers? Why would you allow them that? That is the market, isn’t it? If that is what they agreed at the time, why be so helpful to them when times are not so good? Is that not the risk they take?
Pat Ritchie: The alternative in a number of sites across the country is that they are just not delivered, because they cannot deliver some of the Section 106 requirements within the current market and because of the changes in the viability of each site.
Simon Danczuk: The profitability for the developer, you mean?
Pat Ritchie: Yes-the viability, I think, of the way in which this would stack up when sales may be slower and prices may be lower than anticipated. Therefore, we have looked at each individual scheme to try to support local authorities who still want to bring forward supply to look at the ways in which those individual projects can be renegotiated to reflect the market.
Q301 Simon Danczuk: But it is about ensuring the developer makes a profit, is it?
Pat Ritchie: It is about ensuring that they continue to invest in sites and that, at a local level, local authorities are able to bring forward stalled sites.
Q302 Stephen Gilbert: Staying on Section 106s, banks do not really understand them, do they? What kind of engagement do you have with the lending community? There are cases in Cornwall of perfectly brilliant homes being brought forward, but because there is a Section 106 on it, tying it to a local use, only two or so lenders will be in the market to offer those people funding. Is there a role for the Agency to be out there working with lenders to try to explain some of this?
Richard Hill: We talk to lenders quite a lot, particularly on shared ownership and shared equity because, clearly, one of the things that historically lenders have been concerned about-and it probably is an issue that came up in your last session-is the complexity of lease arrangements and whether they were willing to lend against shared ownership and shared equity. We have been in the market for shared ownership and shared equity for a long time, so I think we do understand those issues.
The issue with Section 106 is, if the local authority insists on arrangements within the Section 106 that the lenders think are too bespoke and too restrictive in terms of people who can access those properties, they become reluctant to lend on that development because they do not have what they see as a reasonable fallback position. I am not saying that this is something that is straightforward to resolve, but we have done some work in Cornwall and other places. We sat down with lenders and local authorities to try to agree something that looks like a standard set of terms that lenders can deal with and at the same time speaks to some of those local issues. What is very difficult to do is invent a new Section 106 arrangement each time and expect lenders to think it is mortgageable on each and every occasion.
Q303 David Heyes: The Tenant Services Authority ends in just a few weeks’ time, and their regulatory function will be taken into the HCA. We have looked at this previously and we understand that there are protocols in place to protect the independence of that role, but we still wonder, in the context we have been talking about today, whether there are still some risks in this. For example, is it appropriate that your Director of Regulation will be reporting to you, given the responsibilities that you have for investment in delivery of the Affordable Homes Programme?
Pat Ritchie: I am the Accounting Officer for all of the functions of the HCA and, when we take over regulation in April, I will be Accounting Officer responsible for regulation along with all of the other functions of the Agency. The way in which we manage regulation will be that any decisions about regulation are not made by the HCA Board but by the Regulation Committee. I will not be directly involved in any of those individual decisions in relation to regulation, but my role will be to make sure that regulation is properly managed, properly resourced, that any risks associated with regulation are managed, and that regulation is properly governed from an Accounting Officer point of view. We have done a lot of work in identifying, through the protocol that you mentioned, the role of the Accounting Officer, the role of the Board and the role of the Regulation Committee. I think that dual role of the Accounting Officer is manageable within the system that we have set up.
Q304 David Heyes: You mentioned getting the resourcing right, and the scale of the regulatory capacity is going to reduced compared with the capacity of the TSA. Is that wise at a time when housing association gearing ratios are going to substantially increase?
Pat Ritchie: The capacity in regulation will be focused on the redefined role of regulation, which is really around economic regulation. The focus of the HCA responsibility for regulation will be on making sure that associations are governed properly, that there is value for money in the way that they operate, and that they are financially viable in order to ensure that investors in the sector are able to invest in a properly regulated sector. The focus will be on economic regulation, with less of a role than the TSA had on tenant regulation. That will be a backstop role and only come into force where there is evidence of serious detriment.
Q305 David Heyes: The question is whether it is wise to reduce regulatory capacity at a time when the housing associations are getting into new areas, doing things in different ways and, potentially, risks are greater.
Pat Ritchie: The areas of capacity that have been protected in the changes that the TSA has gone through are those that are focused on that new role of economic regulation. The reductions in capacity reflect the lesser role in things like tenant regulation and some of the other broader roles that the TSA have. I am confident that the team that transferred over, who are geared towards that economic regulation role, have sufficient resources to be able to support the sector through the current economic climate.
Q306 Chair: On the affordable rent model that is now at the heart of your Programme, quite a lot of evidence is coming to us saying, "Okay, it might work for a time, but eventually if it is reliant upon converting more properties to affordable rent to generate the income, at some point it runs out of steam." Have you started to give any thought as to what might happen and what the driving policy might be post2015 to ensure that we are still building homes to rent?
Pat Ritchie: In the affordable rent model, we only funded a proportion of the bids that we had through the bidding process. Whilst for some organisations the affordable rent model pushes their gearing up quite high and they may not be able to repeat the contracts that they have now, there is evidence that, in some parts of the sector, there still remains a fair amount of capacity that could be used through a model similar to affordable rent that has Government investment alongside borrowing of the association in using its assets. There is some capacity around that model rolling forward.
In terms of giving some thought to the future models of investment, we have been doing some work with DCLG, whose real responsibility it is to look at the future funding of housing supply, to look at different ways in which you can look at blended finance-whether or not you can have a mixture of using assets and gearing alongside Government finance, which is at the heart of the affordable rent model. We think some of the ways in which associations have worked with strategic partners to bring land and to align other forms of investment, like Regional Growth Funds and Growing Places infrastructure funding, to bring forward investment are some of the ingredients of what a future funding regime should look like.
Q307 Chair: We went to the Netherlands as a Committee the other week and had a look at their funding arrangements. They certainly manage to build, on a per capita basis, quite a lot more social housing or rented housing than we do. Have you looked at the basically selffinancing model that their housing associations have, where there is no Government subsidy at all? Do you see that as the sort of arrangement that we might end up with in this country?
Richard Hill: My understanding of the Dutch model is not desperately full, but my understanding is that the Government agreed at one point to write off grant and effectively convert that to equity. My understanding is that there have been occasions where that has been revisited, partly because development has not been as fast as the Government in the Netherlands wanted. The issue in terms of doing that is if you convert grant to equity, you potentially loosen some of the gearing constraints that Pat was talking about in reference to what you might get to in 2015. Clearly, there are some organisations for which that would be an advantage, but gearing historically has not been a constraint on the sector; it has been cash to service debt that has been the key issue in making this work.
If you were to convert grant to equity, there are certainly three issues you would need to address. First, the Government make a return on grant invested in properties at the moment through the Recycled Capital Grant Fund-about £250 million a year flows back to the sector in terms of disposals. Secondly, investors would look for a return on that equity, and if that return was around 8%, you would have a financing issue to resolve. Thirdly, and most importantly, there is the issue of principle; you would be moving organisations from notforprofit status to potentially forprofit status, which I do not think is allowed for in the legislation at the moment. Regardless of that, I think it is a big question politically. Moving from grant to equity, I think does potentially relax the constraint on gearing, but it does run you up into a list of other quite fundamental questions that you would need to address before you made that choice.
Q308 Chair: Are you beginning to have that discussion and conversation about where we might be?
Richard Hill: It is raised in conversation with us by associations who have constraints on gearing on a reasonably regular basis, and we have that conversation with the Department as well.
Chair: We had better ask the Minister about that when he gives evidence.
Q309 James Morris: Just on the subject of public land, the Government have stated that they want to get as much public land released as possible for new house building and are trying to take a crossdepartmental view in trying to get departments to release it. I just wonder what your role is in terms of trying to make that happen and the extent to which you think central Government is being receptive to it and, equally, local authorities.
Pat Ritchie: For the first time, last year, we published our land disposal strategy for all HCA land, and we intend to revisit and publish the next version of that alongside the budget later on this year. We are leading the way in a number of ways in how you might structure land to bring forward housing supply. We have been doing work with Government departments to identify sites that they have and looking at ways in which they may then package up or derisk those sites. Really, we are providing technical advice and viability support on prioritising sites and on their disposal. We have supported a number of different departments to bring forward sites-for example, the MOD site in Aldershot, where it has recently been agreed that Grainger would bring forward investment there.
Q310 James Morris: When you say "support", what do you mean?
Pat Ritchie: We provide technical advice and we provide support to tender. For example, developers can use our Delivery Partner Panel, which has already been procured, to bring forward investment in sites, but we do not have direct responsibility for delivery of those sites and bringing them to market. That rests with each of the individual departments. Our role is technical advice.
Q311 James Morris: Can you make suggestions to departments?
Pat Ritchie: Yes.
Q312 James Morris: As in, "We think this is a site which you ought to be considering for disposal." Can you be that proactive?
Pat Ritchie: Yes, we have been very proactive in working with departments to look at their portfolio-which projects they should bring forward, which are viable, what sort of investment might be required-or to bring forward land for development, alongside our own. That is overseen by a Cabinet committee, and each of the departmental leads for each of the sites is responsible to that committee for progress on their strategy, which each of the departments has published.
Q313 James Morris: Just on that, you also have a custodianship role around the disposal of Regional Development Agency assets. Does that open up any possibility for additional public land for housing in the assessment you have made of those assets under your stewardship?
Pat Ritchie: Some of the sites in the former RDA portfolio are mixed use and housing was already planned for those sites, and we are working through the stewardship model to bring those forward for development. Some, however, have had investment and are particularly geared for employment use, and there would need to be a change of use. There are issues around European investment and other issues that would need to be taken into account in some of those that are particularly geared for employment use.
Q314 James Morris: Generally speaking, do you think Government departments and local authorities are receptive to the message that we should be releasing more public land for housing?
Pat Ritchie: Yes.
Q315 James Morris: Or is it patchy? Is it variable across Government?
Pat Ritchie: I think local authorities, by and large, are reasonably receptive; there may be some variation across the country. Each of the major departments that we have been working with is now publishing their own land disposal strategy, and we are moving on to work with some of the smaller departments like the Home Office, Ministry of Justice, Crown Estates and others to look at how they may bring forward land for development for housing.
Q316 Simon Danczuk: Since the Private Rental Sector Initiative- PRSI-was dropped, what steps has the HCA taken to encourage large financial institutions to invest in housing?
Richard Hill: In terms of the private rental sector specifically, we have seen our role as to do three things. Firstly, through the PRSI, we spent quite a lot of time talking to large, institutional investors, such as Aviva and Barclays Capital, and also developers like Grainger about the barriers to entry into the private rental sector. What that did do was encourage a conversation with Government about some of the barriers like SDLT on bulk purchases. I think you have heard evidence from Grainger and others in the course of this inquiry about where they now are on investment in the PRS. Secondly, we made our own equity investment in the private rental sector with Berkeley Homes as part of the Kickstart programme. That covers 13 sites across London and the South East for about 500 units, and that was an example of how you could get PRS investment to move and is clearly an investment we will carry forward with the GLA postApril.
The third role we have is to use public sector land where possible to encourage a variety of outcomes, one of which is build for PRS development. We have a number of sites that will be in our land disposal in March where we will specifically market to the PRS. We have one currently out in the market at the moment, which is Spencer’s Park in Hemel Hempstead. We will still be looking to achieve value on that site, but we are saying we will be prepared to defer the return for a longer period, take some of the rental during that period, and look for capital return further down the line. It does give you value on a discounted cash flow basis, but it gives people the opportunity for a PRS investment on public land. Those are the three things that we are doing to support PRS investment.
Q317 Simon Danczuk: Then, just briefly: David Toplas said earlier that commercial property investment was £315 billion and residential was £4 billion. What is your estimate of the sort of private financial institutional investment that we are going to see over the next 12 months to two years?
Richard Hill: In the private rental sector? It is very difficult to know. I think the main constraint, and Nick Jopling of Grainger talked about this when he gave evidence earlier in the Committee’s inquiry, is now perhaps not yields, as it has been for a period of time, but just the availability of property portfolios in which people can buy into the market. That is unlikely to shift.
Q318 Simon Danczuk: Are you doing anything to stimulate or encourage that?
Richard Hill: We are around the use of land and other things that I just talked about.
Q319 Simon Danczuk: You are not making any predictions or anything?
Richard Hill: If you are asking for a figure over the next 12 months, I would be perhaps slightly less ambitious than those numbers you quoted to me.
Pat Ritchie: Just to add a little bit to what Richard said, we are working with a number of local authorities, such as Manchester and Leeds. In fact, in Manchester we have recently announced a fund using the Greater Manchester Pension Fund to support the development of private rented sector homes on both city council land and our other land as part of a joint deal. We have been having conversations with a number of other cities, because I think this has to be done at a reasonable critical mass to make it attractive to investment.
Chair: Thank you both very much indeed for coming to give evidence this afternoon.
Examination of Witness
Witness: Rt Hon Grant Shapps MP, Minister for Housing and Local Government, Department for Communities and Local Government, gave evidence.
Q320 Chair: Minister, you are most welcome, as always, to our Committee. It is the final evidence session of our inquiry into the financing of new housing supply. The supply of sufficient homes in this country has been a complete failure. Before you see that as a personal attack on you and your period in the job, I am talking about several decades; we simply have not built enough homes in this country to meet our needs.
If we assume that household formation runs at about 250,000 per year, that is the number of new homes we ought to be building. Over recent times, social house building for rent or affordable house building has been around 40,000 to 50,000, and the private sector has never built more than 150,000 homes on a regular basis, which only adds up 200,000. There is a gap then. How are we going to meet that gap to make sure we get enough homes built in the future?
Grant Shapps: First of all, thank you very much for having me here in person. I know when I provided written evidence to you it was before the Housing Strategy, so there were some things that have obviously become updated in the meantime. Secondly, I entirely agree with the premise of your question; I do not think we have been building enough homes in this country for a very long time and there has been a structural deficit in the number of homes built. There are many reasons for that, including allowing house prices to run wildly out of control-doubling in the space of 10 years and becoming six or seven times people’s average income, and more, in different parts of the country. This means that they are out of reach in many areas.
To answer your question as to how we meet that gap between the two, it is manifold, and the Housing Strategy lists over 100 different ways in which we intend to fix the gap. Perhaps I will not go into all of those in answer to your question, but let me just highlight four. First of all, we think that planning reform is a big, important slug of this. You cannot build more homes unless you have a planning system that reacts faster. Even if it was not making any different decisions, just being quicker would be a huge help to let the market, developers and communities know where they are. We hope to have it reformed both to be faster and also more efficient.
Secondly, plans like the right to buy will put another 100,000 homes in the hands of social tenants who want to own their council home, but critically we will be using that money to build another 100,000 homes. There are the 100,000 homes that we wish to build on Government land, which is a project that is moving along very fast, and perhaps we will talk about that later. I think that is very important in terms of releasing more land, and, of course, there is the mortgage indemnity scheme, with which we hope to help 100,000 people buy properties and make sure that, as well as building them, people can afford to buy them as well. The answer is there are 100 different ways. Those are just four of them, and I think by radically changing our approach, we can bridge this gap between housing demand and housing supply.
Q321 Chair: Unless the Government is prepared to see a rise in the building of social rent or affordable rented housing, the private sector building for home ownership is going to have to deliver significantly more than 150,000 homes per year. Is it simply that funding reforms alone are going to enable them to produce 200,000 homes? Historically they have failed even when house prices were a lot more affordable for people than they are now.
Grant Shapps: The gap might not be quite as big as you are suggesting. Last year, there were 60,000-plus affordable homes built in this country. By the way, I am just about to confirm numbers, but even on the provisional figures from December there were nearly 160,000 properties for which councils were given money for the New Homes Bonus for homes built. In the vast majority of those cases, apart from the smaller number that were empty homes being brought back into use, they were new homes being built. The statistics are interesting, but of course those are English numbers as well. You have to be really careful with this debate about housing numbers, because no one makes the distinction between whether they are talking about UK figures, English figures, England and Wales, or England and Northern Ireland. Actually, when you throw in housing starts, housing completions or the net difference between the two, these figures very quickly become confused.
To answer your question: yes, I think we need radical reform. Planning is a big part of that, but we are not sitting on our laurels. We have the Get Britain Building fund, which across the UK is nearly £500 million and in England alone £420 million; that is going to help unlock some of those sites. The Growing Places fund is another £500 million, which will help to unlock strategic sites that maybe need a bridge over a stream or something to build whatever it happens to be. I think the answer to your question is: no, it is not just planning reform; there are lots of other things we need to do, including not piling on costs to the developers, which I think had become a habit, if I may say so, that was completely counter-productive and led to the lowest house building since the 1920s. If you keep saying to developers, "Oh, and by the way, whilst you are building these homes, we also expect you to deliver X, Y, Z in addition," then unsurprisingly you get to the point where it is just unsustainable for them to build the homes. I have been trying to loosen the load on developers in order for them to get the homes built, and there is a commitment in the last Budget to make sure that we are not loading on new bureaucracy and red tape. Indeed, we are cutting it by 2015.
Q322 Chair: With the 100 measures on which you cannot go into detail, for obvious reasons-
Grant Shapps: I am happy to.
Chair: I believe you that they are there, but is the Strategy of itself, as it is now, sufficient to deliver the 250,000 new homes?
Grant Shapps: I will want to be keeping a very close eye on it, and I have not set the figure of 250,000 you have. The last study I saw suggested 232,000 a year was the correct figure. One thing we know about this is these predictions are hellishly difficult to make, always incorrect in the final analysis and much has changed. For example, this particular Government takes the view that we should be reducing net immigration figures from outside Europe-still 60% of immigration. I remember the previous Government issued a projection that by 2016, 70,000 homes a year would be being built for people who do not yet live in this country. If we are successful with policy A, limiting migration from outside Europe, then policy B, how many housing builds you need to make, will change your numbers even further.
Q323 Chair: We probably will not get tempted down the immigration road just at present.
Grant Shapps: It is an important part of the total, isn’t it? It just shows the unpredictability of projecting these things.
Chair: We will stick with affordable rents for the time being.
Q324 Simon Danczuk: Do you think that the affordable rent model in its current form has a limited lifespan?
Grant Shapps: Regardless of what happens and regardless of which Government is in power, I believe that we will never go back to the days-and here is my future prediction-of the oldfashioned model of only one offer in the socially rented sector, which will be the one that says you are either in a market house or you are in a house that is amazingly subsidised by everybody else. That is the oldfashioned way of building social housing. I do not think we will go back to those days; I think that there will always be a hybrid in between.
I cannot tell you, even if we were to win the next election, precisely how that would operate again subject to a 201520 spending review. The balance sheets of housing associations and what they can bear will obviously be an important part of this. What I can tell you is this: we said we would build 150,000 affordable rent homes, many of which were through the Affordable Rent programme rather than the old social one. We then upped it to 170,000 and have put the vast majority of those contracts in place; we are confident now of delivering 170,000. You have probably just had evidence from the HCA and quizzed them on this. We have seen that there is excess appetite from housing associations unfulfilled by that original programme of £1.8 billion, and the right-to-buy receipts being used for another 100,000 affordable rent homes is a direct response to the fact that we believe that, if we could fund enough for another 100,000 homes through affordable rent, the market is there to do it. I am pretty confident there is more of this to come; I cannot predict what will happen in the next Parliament.
Q325 Simon Danczuk: Just for my benefit, how will they be allocated? How will you determine who lives in the affordable rent properties?
Grant Shapps: It will still be under the normal allocation system; councils will still be running their own waiting lists.
Q326 Simon Danczuk: Those that are still living in social rented properties will be determined in the same way. Is there a need to build more social rented homes alongside the affordable rented homes then?
Grant Shapps: It is worth reminding the Committee that this does not affect anybody who is under an existing tenancy at all. The other thing to say is there is a very large social house build programme going on right now; it is costing £2.4 billion until 2015 and the Affordable Rent programme has received all the publicity, but we are actually still building social homes just as we always did. Again, you were asking what will happen in the future: I think there will always be a need for 100%-subsidised social house building in this country, but again I cannot quite predict what the model will be in another Parliament.
Q327 Simon Danczuk: Could I take a minute to paint a picture? This is my synopsis of the situation that we are moving towards in terms of housing. We have rich, wealthy people in private ownership; they have inherited wealth, inherited properties and everybody is welloff. We have what is fashionably called the squeezed middle: the middleclasses, mortgaged, owneroccupiers who are already on the ladder. Then we have other working people who cannot get on the housing ladder and people are not lending to them. They are in the affordable rented properties that you were talking about, or they will be; some of them are in the private rented sector. Then the final group that we have is the poorer people, and perhaps some might describe them as an underclass, who are living in the social rented sector or private rented sector that is not very attractive. That is the impression I get of the housing strategy that you were pushing: these different strata of people. The poorest are in that bottom class. Is that a fair characteristic of your model of homes?
Grant Shapps: Not at all. You have a vivid imagination and a view of housing in all its forms that is completely different from mine. I represent 9,000 or 10,000 council house tenants and then several thousand more in social accommodation through housing associations, and I absolutely do not recognise the description that you use. Frankly, I think referring to people who happen to be in social housing as an underclass would be offensive to them, and I know that would not be what you would intend. It is certainly not my view of the world either. What I see when I knock on their doors is a bunch of very hard-working people who are keen to strive and do the best by their family. Many of them, I am sure, would be attracted to buying their own home under the rejuvenated right to buy.
Q328 Simon Danczuk: The point I am making, Minister, is that your housing strategy is creating those different strata, where you have a differentiation between those in the social rented sector, those in affordable rented properties, and they fall into those broad sociological groups.
Grant Shapps: I would characterise it exactly the opposite way round. The system since the war has been that, if you are a social tenant, you will be paying a smaller percentage of a market rent. In my constituency, it is about 40% of the market rent. In many places in London it will be lower, and in the country as a whole it is about 65% of the market rent. In between that and the market rent there is precisely nothing. The definitions between being a social tenant and being a market tenant at the moment are enormous.
The way I characterise my housing policy changes is to create additional levels in here, where we have the affordable rent product at up to 80% of the market, which by the way averages at well below 80%-in London, it is 67% of the market, for example-and through that programme enable people not to be on these two distinct ends of the market but somewhere in between as well. I think that is great; it actually says there is more of a housing ladder-people like to talk about the housing ladder. This actually creates a proper housing ladder, and we are fools as a nation, both the working population-which includes people in social housing, who fund all of this stuff through their taxes-and the people who end up trapped in this system, to think that you can house everybody through a system that has seen the housing waiting list double over a 13-year period. That is unsustainable and that was with £13 billion of expenditure on social housing; it kind of proves that you could spend any amount and still not build enough of this social housing to satisfy demand.
Secondly, it is not fair on the taxpayers, who will come from all sectors of society, to pay for a system that subsidises housing at a level above what people require. Do you know what the average council rent is this year in the country? It is £67 a week, and there will be millions of people living at £67 a week rental on very nice properties paid for by their taxes, of course, but also everyone else’s. They will be rightly saying, "I am paying the market rent. Why am I subsidising the rent of someone who is in a very nice position and could afford a little bit more?" This gives us a product between the two.
Q329 Heather Wheeler: I am interested in the changes between Section 106 agreements and CILs and how that might affect the number of new social houses being built. I am also interested in whether in effect it has a real problem with Universal Credit and the potential for rent arrears to build up; I am setting the scene there. Do you actually think that the changes to CIL will have a big effect on Section 106 and will in effect maybe ask people to renegotiate previous Section 106s, so you will not actually get the number of affordable houses built?
Grant Shapps: There is a whole complex strand of different elements to your question, as you would acknowledge. The exact interaction between CIL, Section 106, the provision of social housing and the Universal Credit is, of course, something that we are very busily modelling.
CIL was introduced by the previous Government in the Housing and Regeneration Act 2008 as a way of giving a bit more certainty to developers about the manner in which they will be expected to contribute to local provision of local infrastructure. I actually think it is a very sensible idea; it was largely based on the experience in places like Milton Keynes, where they were using the roof tax, and I welcome the idea that a developer should be able to look up the price list and go, "Okay, if I am going to build in your patch, this is what I am going to pay." From that point of view, there is a bit of certainty that does not exist through the negotiation on Section 106. As you know, in the Housing Strategy now I have been pretty keen to make sure that Section 106s are realistic because I believe that, rather than having 40% of housing built in an imaginary nevertobebuilt development of 200 homes, it would be better to have 20% social housing built in a real development that actually goes ahead. If these changes to Section 106 and CIL help to deliver that, that is great.
As regards the Universal Credit, as you know we are very carefully and cautiously modelling the impact of a number of different things. I know Universal Credit meets with some crossparty support; everyone believes that it is important to be able to allow people to not get trapped into benefits and work their way back into a job or to more hours if they are already in a job. One of the great criticisms is the cliff edge that you reach, where it just does not pay to work, and it is not the person on welfare’s fault-this is the fault of the system and we must fix it.
If I accept that, then despite my own concerns, which are very real, about making sure that landlords know that they are going to get the income in order to have the security of projecting their 30year rent, I think I have to and do-and I have spoken to the Committee about this before-genuinely believe, and believe in, the concept that we need to pay that money direct to the tenants so that they can manage their own finances, and it feels like a pay cheque and they can work back into a job more easily. There is that whole side of the Universal Credit interacting with these things. Yours is a very big question and I am not sure that I have done it justice, but suffice to say on the Universal Credit side we are very carefully setting up trials. I think you have met with Lord Freud on this subject. Have you spoken to him? Have you had some evidence?
Heather Wheeler: Yes, some time ago we did.
Grant Shapps: Some time ago, okay. I am treating that very carefully indeed and making sure the whole thing fits together in the end.
Q330 David Heyes: A number of the witnesses to this inquiry have raised with us the issue of the potential benefits of a writeoff of the historic housing association grant debt; it is a huge amount. There has been a lot of speculation about your intentions in this respect. It is maybe a chance today for you to clear it up for us.
Grant Shapps: Sure. There is nothing immediate that I am about to spring on you, for the first thing, not today or over the next few days. There is a lot of talk about whether the historic debt could be written off to registered landlords, but we work here in the context of national budgets that are all about reducing debts or deficits. If you just say, "We’ll write this off and not worry about it," then that money will not come into the coffers one day when it is due back, and we use that money all the time. Within the Department, we fund more house building because that money comes back in. The argument that is made is: if you left it with the bodies that are there and they could take it off their balance sheets, they could then leverage their balance sheets and build more.
I have to say, we have tested this several times over in different ways and put those arguments through the balance sheets, and I have had my officials work on it. I am not entirely satisfied that would be the upshot. There is a definite issue to negotiate with the wider deficit in the Treasury. To put you out of your misery, there is nothing immediate you are about to hear from me on this front.
Q331 David Heyes: So that is not a yes, but it is not a no.
Grant Shapps: Who can rule things out forever? I am a great fan of innovation in housing finance. You are about to see a historic settlement on the housing revenue account for example, so I do not want to rule things out forever but I am not yet there.
Q332 David Heyes: We have been looking at the situation in the Netherlands, and quite a few years ago, they faced this same issue. The result was that their accumulated debt was written off and housing associations are now completely financially independent of Government. Could you envisage that ever happening?
Grant Shapps: Everything is possible, but right now-and the Committee might welcome this-we have had the Localism Act 2011, with all of those housing measures; the Housing Strategy, outlining my 100-plus ideas; and I am very shortly going to make some further announcements on progress. You won’t have to wait very long for that-in fact a matter of hours, just to tantalise you.
David Heyes: You big tease.
Grant Shapps: I do try. I do not want to then get on to things that we have not even worked through yet. I am being upfront in saying we have not.
Q333 David Heyes: What about the possibility of a housing investment fund run by housing associations?
Grant Shapps: I am all in favour. I know you have had evidence about people saying there should be a national housing bank, and people suggest that sometimes. I am not convinced by that argument at all. I think the banking system in this country needs to work for all industries and sectors. Then there is separately the idea of a national housing investment group, which I am very attracted to, and my officials have and will work with organisations who want to bring those types of things about. I have no objection to people pooling their resources.
Q334 David Heyes: The Government is pretty fond of pilot projects. Do you think this is a potential candidate for a pilot?
Grant Shapps: I do not have a pilot that I am about to announce. I think that all of these ideas are good and we will look at them closely. My typical meeting with a third party on this will go something along the lines of, "We’ve got this great new idea; we’d like to come and talk to you about it." They will come and talk to me about it, and I will say, "What is it that we can do as a Government? What do you need to make this work?" and they will say, "Nothing. That’s the brilliant thing about the plan," and I will say, "Great. Why are you here? Go and do it." Actually, most of the time there is not really a blockage. If there is and there is something Government could do, are not doing, and it does not cost us a fortune, then come and talk to me, but most of the time my message out there to housing associations and to councils is, "We are giving you all these flexibilities. Go and use them."
Q335 Chair: Coming back to the Netherlands, which David referred to, it is interesting there that they have had the historic writeoff of the grant to housing associations. When we asked the HCA about the affordable rent model running out of steam after 2015, the synopsis of what they said was that they did not see it completely running out of steam, but they saw some housing associations begin to run out of the ability to leverage in more finance. Those associations would now start to raise the issue of grant writeoff as a possible way forward to give them that capacity. Isn’t that going to increasingly become the case over the years, and isn’t this going to become a more and more real challenge that Government is going to have to address at some point?
Grant Shapps: You are absolutely right to say that, after 2015 and probably before that, we need to give them an indication of where they will be headed, but you are tempting me into trying to write policy that is not written, budgets that are not written and spending reviews that just have not been created yet. If the lesson of the last couple of years or more shows us anything, it is to expect the completely unexpected. The truth is that we have budgets and plans in place up until 2015, and even those are quite difficult to predict, so I am rather hesitant at trying to give you a housing budget for 2015 to 2020 today.
Q336 Chair: Of course. Nevertheless, Governments have limited lives; they do have to look ahead. Just coming back to the Netherlands, what was interesting in the point that David made was that you have a situation there that they do not think is perfect, but where you have no subsidy at all going into the provision of social, affordable rented accommodation, but ultimately the Government stand behind all the borrowing associations do. It does not count as Government borrowing-they stand behind it-and it reduces the cost of the borrowing so that they are able to make an affordable housing programme work. I just wondered if there is any look across to our other neighbours to see whether there are lessons that can be learnt from them.
Grant Shapps: I am sure there are. I have been to places where they have no concept of a social house at all; it just does not exist. Hammarby, I think, was one of the examples of where I asked, "Which of these homes are being built as social?" and they just do not know what you are talking about. What they do is just pay people’s rent or assist people in paying the rent-effectively housing benefit-and build homes normally. I really admire this Committee’s enthusiasm for the next tranche of housing reform. There was I thinking we had delivered quite a lot of it in the last couple of years and were indicating quite a lot ahead through the Housing Strategy and that side of things. I am afraid I cannot provide any more light on the next round; it is something that I will now start to turn my attention to. I will always be happy to come back to the Committee in the next year or two to talk to you about our plans going forward. I hope I will have an opportunity to do that.
Q337 Chair: Just back to the here and now and some of the issues that are around, there is the very welcome reform of the HRA, which I think has widespread crossparty support and major support in local government. It is going to be a big step forward to reforming housing finance in this country. The only slight downside was drawn to our attention by the chair of housing in Birmingham, a Conservative authority that actually is building council houses at present. What they were saying to us when we paid a visit there was, "Well, if we had the prudential rules in for housing as we do for other aspects of borrowing in local government, we could carry on building council housing, but the extra cap the Government have brought in at a lower level means that we only just have enough ability to carry on with the future maintenance programmes we need and, effectively, our new house building is going to have to come to an end." Is that not rather disappointing and should we be having another look at that situation?
Grant Shapps: First of all, on the Housing Revenue Account, it is a £19 billion settlement of debt, and I want to pay tribute to the many former Housing Ministers whom I shadowed, who got this process under way, in particular the last one, John Healey, who did a lot to push this along. I am very pleased that we are nearly at the point of settlement on that, and I think it will be an enormous benefit to councils and particularly to their tenants, who have suffered from this tenant tax for far too long. The predictability with which their authorities will be able to manage their affairs over the next 30 years will be hugely welcome.
Part of that is that every authority will have on average 15% headroom to do as they like. Authorities are in different positions, and this will of course be reflected by the amount of debt that they will take on. Some may just say, "Well, we are just going to improve the homes. Where they are already of a decent standard, we are going to go even further." Others will say, "Actually, we can use some of this headroom to build," and I can foresee a significant amount of either council house building or council house building in partnership, where they put their land in, which happens in some places, and work with a registered provider.
To cut to your question in detail, again it is a bit like the writing off of historic debt. In essence, this is a plea for more borrowing, and more borrowing means more debt. As we know from our neighbours to the west and the east-in Ireland, France and many other countries besides-if you get your debt to an unsustainable level, the markets spot it and you get hammered for it. We are very hesitant lest we lose sight of the big national goal of getting the deficit under control and having a convincing plan in place to do that.
The answer is no, for the time being, but I will keep this under review. It is not that I am unsympathetic to the concept. Fortunately, at the moment there is something else that a local authority can do, and a large authority like Birmingham, of course, has a large amount of land that for various reasons it sits on. I have mentioned public sector land before-the 100,000 that we are releasing from the various different Government departments. That does not include the huge amount of land that local authorities will have from various different previous enterprises that they can bring into use. They can involve the housing associations and/or the private sector to do that.
Q338 Bob Blackman: I apologise if you answered this before I came in, but there are large numbers of local authorities, particularly in London-the authority, not the housing association-that have historic housing debt dating back from the 1960s or 1970s. They are paying off not only interest and capital on those, but often the properties have either transferred to alternative providers or they have been demolished and replaced but the debt still remains with the local authority. I have heard the suggestion that large elements of this debt will be written off for those local authorities.
Grant Shapps: On the HRA?
Bob Blackman: On the HRA debt and, indeed, possibly on their general fund as well, if the general fund was bearing this debt. Can you just clarify what is the exact position?
Grant Shapps: The HRA settlement, as most people know, is a horrendously complex piece of work, which was why I have put on record my gratefulness to my predecessors who started to tackle this issue. The simple answer is I will need to write back to you with detail in terms of how much historic debt has been written off in different places, and what the deal was in each individual location. I just do not have that off the top of my head.
Q339 Bob Blackman: I understand if you do not have that, but it would also be very helpful for this Committee to know what constraints there will be on what those authorities can then do. Do they have to use that money for development of housing? I think that will be very welcome because it will mean that there will be house building where there probably has not been. Alternatively, of course, if they have complete freedom to do with that money what they wish, some unexpected things could happen.
Grant Shapps: I can confirm it is not part of the general fund, so the housing account stays separate, unlike in almost all other areas of local government. We have previously discussed the unringfencing; this is not the case in the housing accounts. They need to carry on spending that on their stock.
Q340 Chair: Two other possible ways forward have been put to us. One is that local authorities will have different positions in terms of their headroom; some may have more headroom than they need or want to use, and others may not have enough. Is it possible that there could be pooling arrangements or swap arrangements between local authorities to use each other’s borrowing capacity? Would that be the sort of thing the Government would be minded to support?
Grant Shapps: No, not in that sense. I do not rule out more innovation and creative ways of their working together. I think that would be welcome, particularly where there is a geographic alliance. This is a settlement that has taken many years and a piece of primary legislation to work out. I have looked through all the figures and the percentages available to each authority, and although there is movement-you will have 16% at the top and 12% headroom at the bottom or something-it is not that some authorities only have 2% headroom and some have 25% or something. There is not that much of a range in there. I think the average is 15% headroom. I am satisfied that authorities can work within those means to make sure that they provide the best possible service to their tenants.
Of course there are further possibilities, and I should say, in answer to the kind of flexibility questions I was getting earlier, I have not ruled out the possibility of future stock transfers. The HRA does not bring to an end future transfers taking place. We have seen many in years gone past, but they have to be demonstrated to be good value for money for the taxpayer and, obviously, they have to be voted on by the tenants, so most importantly, they have to be satisfied that that would make sense for them.
The last thing I should say on this subject is that the individual authorities are able to borrow from the Public Works Loan Board at an unbelievably brilliant interest rate-Government lending, basically; it is a fantastic interest rate. Some of them, when they thought that was not going to be the case, were going out to the private sector, and I know when my local authority discovered they did not need to do that and could borrow from the PWLB, the saving was probably £2 million-plus a year in interest.
Q341 Chair: Finally, to see if we can find one way forward that might allow a bit of flexibility, the National Federation of ALMOs has produced some models for how ALMOs might be turned into either ownership co-operatives, with no more than onethird local authority stakeholding, involving workers and tenants, importantly, in their ownership, or a management cooperative, where there would be a long-term management agreement for that ALMO to manage the properties and its finances. I know discussions have been taking place with your officials and others about this model working and perhaps not being constrained by the cap, because it will be outside a wholly local authority ownership. Is that something you would be interested in exploring?
Grant Shapps: This could be the socalled CoCo model in particular. Again, actually, I like all this innovation. Colleagues in the House sometimes come to me with a chief executive or housing boards and put these ideas to me. I am always keen to explore them. Some of them stack up and some of them do not. They all have the same test, which is: number one, is it good value for the public purse; and number two, are the tenants going to be better off? Are they going to get better quality housing and more say over their housing? I am very keen to promote the interests, or allow tenants to, on all of these things. They are always subject to tenants being happy and voting on it, and I think it is absolutely right it should be that way.
Q342 Simon Danczuk: Another policy resurrected from the 1980s is the right to buy. I just wanted to explore the difference between one-for-one replacement against like-for-like. The Government is talking about one-for-one replacement. There is a difference between that and like-for-like, isn’t there?
Grant Shapps: Yes. Let’s be completely up front: one is an affordable rent home and one is a social rent home.
Q343 Simon Danczuk: So we will be creating more affordable rent homes, and the stock of social rented properties will be going down. Is that right?
Grant Shapps: Yes. Let’s get these figures in proportion. There are 2.5 million homes to which this policy will apply. 1.9 million of them are council; 0.6 million of them are those with reserved right to buy but are now held through large-scale voluntary transfers by RSLs. Of those 2.5 million homes, this policy looks to take 100,000 of them over a period of time and undertake the right to buy. This is unlikely to decimate the stock of social housing. By the way, as I mentioned earlier, we are building quite a lot of social houses, landlord houses for rent, in the old traditional way, right now. The stock right now is actually increasing not decreasing.
Q344 Simon Danczuk: In terms of the right to buy, has any modelling been done around the impact it will have on the availability of mortgage finance?
Grant Shapps: I have been talking to the mortgage lenders on this, as obviously a key part of right to buy is making sure that there is a market there for the mortgagers. Because we are looking to increase discounts and caps fairly dramatically, value for money is there for the tenant and it also makes it a good prospect, by and large, for the lender, because immediately they have equity in the home of the likes that they could probably only dream of with a very large deposit from a buyer in other cases. I think this has been broadly welcomed and, of course, until we issue the details, they will not confirm that, and that is to be expected.
Q345 Simon Danczuk: Do they think it will affect the availability of mortgages to other people?
Grant Shapps: I hope that is not the case. Again, predicting the future is really tough, but I noticed, looking at some figures last week, that a year ago, there were only 2,500 mortgage products out there, in rough numbers; this time this year there are 3,160, I think. It says to me that the market has loosened a little bit. With what is going on in Europe and the instability in the global economy, who knows? In a year’s time, I could be sitting here saying it is the opposite, but right now I think there is a realistic projection that says 100,000 extra mortgages under right to buy should not knock out a market that, after all, is several hundreds of thousands of mortgages overall.
Q346 Simon Danczuk: Would you further the extension of right to buy to housing associations?
Grant Shapps: I would love to do it, if I am blunt. The trouble is, again back to Government debt, if we were to do that, these are housing associations who have gone out, borrowed the money or taken some subsidy from us and built the things, have a 30year income projection, and would quite rightly turn around to the Minister and say, "We are happy to sell this house. Now you need to pay us per home that is sold for the privilege." Guess what? We do not have the money.
Q347 James Morris: One of the challenges, which you will no doubt grant, is that we need to stimulate more supply in the private rented sector. As affordability for homes becomes more stretched, it looks like more people are considering private rented accommodation as an option. To what extent do you see institutional investors playing more of a role? I think we have a very low amount of our private rented stock held by institutional investors compared with other European countries. What kind of role do you see for institutional investors in trying to stimulate supply in this important sector?
Grant Shapps: I think it is an important role and you are absolutely right about the numbers. Something like 71% of the private rented sector are, essentially, private individuals who have from a bedroom up to a few properties but often not more. These are not, generally speaking, institutional investors. The numbers vary, but I have seen estimates as low as 1% institutional investment. There is a whole range of problems. A surprising amount of it just seems to be what happens in this country and nothing more. There is almost an institutional, institutional noninvestment policy; it is just not the way the housing market works here. We are trying to break down those barriers, so in last year’s Budget the Chancellor made changes to the way that stamp duty is handled to mean that you are not at a disadvantage as an institutional investor when you make purchases. At the same time, we have also signalled technical changes to Real Estate Investment Trusts-REITs-and the way they are handled. I think the deadline to deliver on those technical changes is this year’s Budget.
I have appointed Sir Adrian Montague, who is there to work out what else needs to be done to move the institutions into this field. I think there have been some early signs of progress, actually, with some of the potential private institutions, such as the likes of Aviva, starting to register their interest in a way that we have never seen before. There has been a real rush to do that. I am hopeful, but I do not want to overegg the chances of half of the supply coming from institutional investors in five years’ time. I think it is going to be a more gradual process than that.
Q348 James Morris: What do you think are some of the key barriers, though, to achieving this?
Grant Shapps: Honestly, there is a belief among institutions when you talk to them that property is difficult and complex: "Management is traditionally 10% of the rent, so we are not sure about this as well. It is just not an area we are in." Conversely, they are completely into the commercial property side, which is odd. I just hope they are starting to realise-and, as I say, there are some early signs in the registrations that have been going on to take part in this-that actually there is a great, very stable market here that the registered providers have understood, because they know they get a brilliant, potential, steady income over a period of time. I think we need to convince them of all those things, but I stand by what I said before: I think there is an institutional belief against institutional investment in this country, and that is what I am trying to break.
Q349 James Morris: When do you expect Adrian to come back with his report?
Grant Shapps: He is going to call for evidence in the next month or so. He will report back to me by the summer.
Q350 Mark Pawsey: Minster, I had a question about REITs, which you have just referred to, so I wonder if I might ask you a broader question about the structure of our housing market more generally. We currently have 66% owner occupation, 16% private rented sector and 18% in the affordable residential sector. Is that desirable? Is it the right mix? Does that meet people’s aspiration? Does it give sufficient mobility on a market? That is the first question. Secondly, what do you think is the effect of the Government’s current policies and changing that mix over time? You have said it is difficult to predict the future, but there must be an impact on the measures that are being brought forward.
Grant Shapps: I would go further. It is almost impossible to predict the future. I do not think, as a Government and as a Housing Minister, it is my job to have a model in mind of precisely how many homes should fall into these different categories. I do not think there is any need for us to do that, and I do not have a percentage for the private rented sector, or affordable rent or whatever. What I do think is it is very important to support people’s aspirations. Even after a deep recession, which we now know is deeper than we had thought it was-and the economy is struggling in common with all of those across Europe and many around the world-the amazing thing is that we still see a huge appetite to own your own home. The surveys still indicate that is where people want to be.
The responsibility of the Housing Minister is to try to meet the aspirations of the population. I want to put people in a position where they can afford their housing, and I would turn to what I mentioned right at the beginning in response to the Chairman’s opening question, which is if you live in a world where house prices continuously go up faster than people’s earnings, it stands to reason that eventually you make it impossible for people to reach those aspirations. It is dangerously close to making it impossible for people to be able to rent their homes either, let alone purchase them. This is a dangerous situation that I have constantly warned against-not without some risk, because every time you say it someone says, "This is outrageous; you are trying to suppress the nation’s assets, its housing." My answer is we have to be able to house the next generation and this generation.
I have been happy to see not too much happening by way of house price movements since I have been Housing Minister, and for a little while before that as well, because it means that affordability starts to come back into line. Without any fuss or bother, Halifax have been publishing their monthly surveys. I caught the last one, which said that mortgage affordability is at its best level for 14 years. That has come about because house prices have not moved too much. It means that more people can afford a mortgage, because the percentage that you pay on your mortgage is now lower than it was at the height of the house price boom in 2007. That is a good thing.
To answer your question, I believe in supporting mobility at every different level, from things like HomeSwap Direct-which I am immensely proud of, as for the very first time in this country social tenants can swap their homes across the entire sector and see every single available swap, which is fantastic for mobility-through to, for example, foot-on-ladder schemes, right-to-buy schemes, bridging the gap with the affordable rent model, up to 80% of the market. People are able to save to buy through things like Firstbuy market housing. I just want the whole thing to be as flexible as possible.
Q351 Mark Pawsey: And owner occupiers? Do accept that the stalling in the market means that many people may wish to move but currently cannot?
Grant Shapps: That is true too, although stability in the marketplace is quite helpful to people. What would cause real problems in today’s market is a massive drop in house prices. Some people say, "House prices doubled in 10 years; just let them drop in a year. That would sort it out." It would not. A lot of people would be in negative equity; people would be unable to move. People who have borrowed on their house to start businesses would potentially be in trouble. I do not think that is the answer. On the other hand, I do not want to see rampant house price inflation putting homes out of reach of people in their twenties and thirties, which caused this problem in the first place. Stability is the absolute key. The mortgage indemnity scheme will enable 100,000 people to get mortgages with only a 5% deposit. That means that rather than saving, say, on average, a £40,000 deposit, you will have to save £10,000. That is going to help a lot of people get that foot on the ladder as well. It is a question of working at all these different levels.
Q352 Chair: One very specific point on REITs: it is certainly clearly an idea that everyone enthusiastically says is a good thing in principle but has never really worked. The draft proposals for the 2012 Finance Bill are being considered, which generally have received a welcome from the industry, but the British Property Federation has drawn two specific problems to our attention: first, the investment trading issue, which constrains what a REIT can do; and secondly, the fact that it has to be listed, which might stop the creation of some smaller RIETs. I wondered whether the Government were listening to those concerns and might want to give some consideration to them with a view to getting this thing up and running.
Grant Shapps: First of all, I read the transcript from the BPF, so I was aware of their concerns and their evidence to the Committee. Secondly, because this is a subject of the 2012 Budget, I fear that it is probably more in the Chancellor’s domain than mine, and he will not thank me for speculating about it.
Q353 Chair: Right, but no doubt you will have a word with him to draw his attention to the concerns raised?
Grant Shapps: I am sure his officials are already all over it.
Q354 Stephen Gilbert: Minister, I think you tried to talk about the public land disposal a couple of times already. I just wondered if you could give us an overview of where we are at the moment.
Grant Shapps: The Prime Minster announced his ambition to see 100,000 properties built on public sector land. The Government owns huge amounts of land that it does not use. That was back in the spring; I worked on it over the summer. I held a Star Chamber with Francis Maude when we came back in September, and made very good progress there and widened it to more departments. The upshot is we are getting quite close: we are perhaps at 80,000 or so at the moment, and there is still much more work to do. I suppose I would describe it as being ahead of where we thought it might be by this stage.
Q355 Stephen Gilbert: Ahead of the curve-with announcements imminently on sites?
Grant Shapps: I shall endeavour to keep you posted on all of this. Yes, part of the transparency agenda is to let people know what the Government are doing. I will want to issue some sort of list to show people where we have got to as soon as we are there.
Q356 Stephen Gilbert: Can you talk us through the Build Now, Pay Later model of how it is going to be financed? Obviously, some of the land that the Ministry of Defence might have will have been in the CSR for disposal by the Department at best value. Quite clearly, if it is going to now be used for housing instead, is there a loss to revenue over the CSR period?
Grant Shapps: The point about Build Now, Pay Later is if you have still sites that are going nowhere, and a developer-several developers-saying, "We can build this site out, and we can give you the receipt when the houses are sold," it seems to me to be an obvious one. The Prime Minister and I are very enthusiastic about Build Now, Pay Later. It has the common-sense element to it: the department is not going to be able to get a receipt at all because nothing is going to happen on that land in any case up till 2015. If it is a question of reprofiling, of course we should be alert to that. It will not always be possible, but it is certainly something we should look at. I am very keen on it. There is a first example of Build Now, Pay Later happening right now in Hemel Hempstead. I am pleased to say it is not just a policy announcement, but one happening as well.
Q357 Stephen Gilbert: That is the market value for the land that the developer would pay after the completion of the building project?
Grant Shapps: Yes, and you can sometimes get good value through things like Build Now, Pay Later, because, as you can imagine, this is popular with developers strapped for cash or cash flow. You can potentially build up quite a degree of interest from developers who may not have otherwise put their name into the hat for that piece of land, because of the ability to do Build Now, Pay Later; in doing so, you can enhance the value of the land for the public purse. It is just one of these winwinwins.
Q358 Stephen Gilbert: Local authorities have a huge amount of land of their own. Is the Department of Housing cajoling them to release it?
Grant Shapps: Yes, and thank you for giving me the opportunity to say to local authorities that there is not that much benefit in hanging on to the land. I have been very, very clear with, for example, the Homes and Communities Agency since I have been Housing Minister that Her Majesty holds no stock in how much HM land we have in this country. We would rather have the nation housed than stockpiles of land that are not required for any immediate purpose and will not be for 20 years, but we just keep it there. There has been a horrible hoarding of this land. I have been very clear with the HCA: "Get the land disposed." Oftentimes that means disposing it to the local authority, sometimes with an endowment, sometimes with a promise that they will sell it. I pass the message on to the local authorities: "Use the land productively; let’s get people housed on it."
Q359 Mark Pawsey: Minister, you referred earlier to the New Build Indemnity Scheme as meeting the aspirations of those who want to get on to the housing ladder. This is a scheme where the builder puts in 3.5%. Valuation is not an exact science: you can look at two or three properties and get different valuations. What is to prevent the builder just bunging 3.5% on to the sale price of the property and using that as his guarantee?
Grant Shapps: Very clever people in my Department and the Treasury try to model these things all the time. There is always an argument about whether you have somehow diverted the market from what it was going to do in the first place and so on and so forth. We are satisfied because it is still a competitive market out there, number one. There is a report out today, by the way, that says in most of the country-although this excludes London-it is actually a buyers’ market right now: seven out of 10 people said it was a buyers’ market. With those points in mind, we do not think that the market will be particularly distorted by this. Let us not forget you still require a deposit: these are not 100% or 120% mortgages or some craziness. The house builder has to put in the 3.5%; the Government then backs our percentage of it. Everyone is kind of in this together and we will have to make it work together. I do not see a big bubble in homes that are offered under this particular mortgage product.
A final comment on this: traditionally, there was a premium on new-build houses and flats. That premium disappeared in the recession and has not come back. I am not sure there should be a premium-I do not know; it is up to the market-but I would have thought that a new build is not necessarily worth less than a previously enjoyed property, which it is at the moment. If there were a distortion, it might just be to correct a market perception about new builds, which is that they are somehow worse than secondhand homes.
Q360 Mark Pawsey: This is a Government guarantee backing the scheme. That then takes away some risk from the lender. We received some evidence from one of our witnesses that, where such a scheme had applied elsewhere, it encouraged lenders to be rather more risky than they might otherwise have been. How do you counter that?
Grant Shapps: Since the housing crash, we have not seen an appetite for risky lending at all in this market. Quite the opposite: the problem is the pendulum has swung too far. It was mad that we ever had 100% and 120% mortgages; it is also crazy that we had 75% lending for a long time and it was very hard to get past that. It has ebbed higher now, but the pendulum swung too far. There is a very lending-averse atmosphere out there at the moment.
Secondly, the Financial Services Authority are shortly to launch their Mortgage Market Review, or rather they have done the review. While that review will not come in immediately, the upshot is it makes very clear the direction of restriction. At the earlier stages of this, before they amended some of the things, I spoke out quite strongly to say I was concerned about some of their proposed measures, because it would have restricted further lending in an already incredibly restricted marketplace. They moderated their proposals and came up with a set that look reasonable. The truth is, it is very restricted out there. On top of the Mortgage Market Review, there is also EU stuff coming down the line. The chances of this becoming a risky, uncontrolled marketplace again are negligible, but can I repeat my own advice never to predict too much into the future?
Q361 Mark Pawsey: We can agree that there is not enough lending taking place, and presumably your Department measures the amount of lending that is taking place. Do you think there is any value in having a target for that?
Grant Shapps: No; especially in a market like mortgage lending, you need to let the market get on with it. We are obviously keen with regard to people who want to borrow, and who have perfectly good incomes. Some people have wrongly suggested that the mortgage indemnity scheme will somehow encourage people who cannot afford mortgages to get on the housing ladder. That will not happen, in my view, simply for the reason that the criteria for lending are the same strict criteria that are here now, plus possibly in the future with the MMR on top of it, and it is a very risk-averse market. All we are saying is people who have perfectly good incomes that can service the level of monthly repayment still are not necessarily people who can save up an entire year’s after-tax salary in order to get on the housing ladder. We are trying to bridge that gap rather than stoke the market or create some false target for mortgage lending.
Q362 Heather Wheeler: That brings me very neatly on to what I want to ask you about, low-cost home ownership. We have heard and received information about very novel ways of private equity coming into shared ownership, and there have been Government schemes, but it has never taken up more than about 100,000 properties in the country, rolling, because people then go on to sell them or what have you. In Scotland they have a very keen model on it. I was wondering whether you thought that there was a marketplace for the Government to up the ante about how much it might put into low-cost home ownership-sharing ownership-or whether this is the time for private equity to come along?
Grant Shapps: I really like shared equity and shared ownership products. I am forever going to building sites where I am proudly shown the shared ownership models in operation. They certainly do exist and can be quite popular. The downside is they can be quite complicated for the consumer, in as much as you still end up paying a rent for the bit that you do not own, but then that rent can often be equivalent to paying the whole mortgage, especially when we have particularly historically low mortgage rates. These products suffer a little bit through complexity, but as a generic approach I like the idea of people being able to staircase up and down out of the level of ownership that they have, et cetera.
We have to face the fact that in this country we have a particular desire to own the home we live in. Even if the mortgage company really owns them, we are still quite happy with that situation as a national mentality towards it. However, I welcome all the schemes; there is a lot of innovation and I am sure there is more space. Again, I read some of the evidence you have had, and there are some very interesting ideas coming down the track that I will back to the hilt, assuming they do not require taxpayer subsidy.
Q363 Heather Wheeler: On the basis of taxpayer subsidy, though, do you think you can up grant levels?
Grant Shapps: I do not have anything up my sleeve right now in terms of investment. We have put £4.5 billion into affordable housing: all different types of schemes, which included social house building, some of which will have included shared equity schemes as well. It is not that we are not backing it; I just do not have any more money to back it any further right now.
Q364 Chair: Just to come full circle, we talked at the beginning about how we increase substantially the number of homes we build in this country. We are trying to look at ways that probably are not traditional ways of doing that, as a Committee. There are ideas around, like the community land trust, co-operatives, that might add something. Last week, we went to the Netherlands and we went to what was called a self-build scheme. I have to say, before I went I expected to see people get out of their office suits, put their wellies on and start laying bricks. But it was not: it was a scheme where local authorities laid out quite a large area of public land and put it into plots. It was then put in at a price, and individuals came along and said, "We will buy that plot at that price." They then actually contracted to build their own home: it could have been a flat pack off a transporter from Germany, which we saw, or it could be a local architect who designed one, or a local builder who came and built a standard property. We were told that was how they built several hundred houses on the site in Almere, at prices around €50,000 less than the same property in the commercial sector. I just wonder whether this is a big new idea, potentially, you might have a look at, and the Government might have a look at, and maybe you do not have to do a lot about it except indicate some level of interest and support.
Grant Shapps: Absolutely. I immediately knew you were talking about Almere, and I absolutely love this model. The Government has committed to this model in the housing strategy. The draft National Planning Policy Framework talks about this model. We either call it self-build or custom build. The reason I was keen to have two names is that self-build does exactly what you were pointing at: you imagine people coming along with their dungarees on and a toolkit. It is often that people just want to drive the project and have an architect, and what have you, which is why we added custom build to it as well-hopefully it will become memorable in time, once it gets going. Not only that, I have also found a fund of £30 million to put to custom build, self-build, in a circulating fund to help people get underway with this project as well.
With the Government land work that we have been talking about, and the councils as well, and through things like the National Policy Planning Framework, we are very keen and are driving this forward. We want to see that Dutch example all across the country. I will be saying more about this in the coming weeks and months.
I should also mention that at the beginning-January or February last year-I asked the National Self Build Association to do work on exactly this front and tell me where the blockages were. They set up four different work streams, which were things like housing, finance, planning and availability of land and so on. They reported back to me in spring/summer last year, and I have been undertaking fixing the problems that were preventing it from going ahead.
Finally, our self- or custom-build market is at a fraction of what it is in comparable countries, from Holland to France to Germany to America to Australia and many others-an absolute fraction-yet it accounted for 13,000 houses built last year, and it makes self-build, or custom build, the nation’s biggest builder. We want to double that marketplace in the next 10 years: that is the aspiration we have put in place. As you heard from that stream of consciousness and policy, we have been doing quite a lot, including putting some money behind it. Did I come across as enthusiastic about it, by the way? I just want to make sure you understand this is absolutely Government policy.
Q365 Bob Blackman: I was one of those also enthused by the idea; I think everyone on the Committee is probably enthused by it. However, immediately there are two barriers that struck me, because the whole basis works on the principle that you buy the land, put planning permission in, and get planning permission if you need it. You then engage an architect or builder. There are very few people who will be in a position to fund all of that out of savings. What they are likely to have to do is apply for a loan or a series of loans, because if you buy the land, it may take you two years to build your house. In the meantime, you have to live somewhere else. There are a lot of potential constraints here. The other consideration, when you look at what they are doing in Almere-which is an excellent initiative-is that this is a relatively large area of land where you can put up almost what you want, within certain small constraints. I can imagine local authority planners in this country tearing out what hair they have left on the basis of this.
Heather Wheeler: They would have a hissy fit.
Bob Blackman: I wonder if you have dealt with the two constraints of how such things could be financed and what could be done to ensure people are not artificially constrained through the planning system?
Grant Shapps: First of all, you are absolutely right on both these points. On the first point about that difficulty of the bridging loan or the finance, what is really interesting is, if you look at the percentage of default amongst self-builders, it is a fraction of the ordinary market. This is a good marketplace. You are right that there are complications in terms of landownership and the rest of it, which is precisely why I have set up this £30 million fund; that is exactly the point of it. You have just outlined it far better than I explained it earlier. I am on the case with that. It is a circulating fund: we will get the money back, but it means that we can help people realise these aspirations and overcome those problems where the market is not quite working right at the moment, and we want to see it pick up the gap in the longer term.
You are absolutely right on the planning front as well. It will not have gone unnoticed that this Government has been desperately trying to shift the approach of the planning system, sometimes even planning officers, through the NPPF document-uncontroversial it has not been-which is absolutely guided on the principle of just letting go a little bit, and allowing communities to develop as they want to. By the way, if you wanted a UK example of this-I know you probably prefer the overseas trip-in Bristol a piece of land has been taken and what I would describe as a community right to build has got under way. It is a community land trust. They have done a very similar thing there. I just want to release the innovation and desire we have in people to go out and do this. We have the community right to build; we will be setting up a hub to help promote it and help people do this. Oftentimes this can be anywhere: it can be rural or urban. If it is in a rural area, for example, the community might come together and decide to have a community right to build: that is the whole community coming together and saying, "We have this spot of land; we are going to buy it and set some development criteria". Those criteria might be, "You cannot build more than two or three storeys" or "It must be this"-but not too in-depth-as at Almere, so they will create the real innovation we are looking for through these partially serviced plots, because they will get together and do it. The beauty of the community right to build is that the area can go ahead and vote the planning permission themselves to build this new neighbourhood, essentially. It is a really exciting plan.
Of course, it is dangerous, as I have discovered in this job, to generalise about what everywhere is like. I can take you to all sorts of parts of the country-you have probably seen many of them yourself-where there are vast sections of land, sometimes, that people are desperate for you to come and develop. This is a very good model in those cases as well, and some of them are in urban areas. I have seen potential for some of these things in the middle of London.
Q366 Chair: Finally, Minister-we do not want to detain you any longer-this is an idea that I think everyone was surprised by initially, and then could see great benefit in. Clearly, it has not necessarily got into the consciousness of local authorities and other areas around the country where this potential exists. I just wondered what the Government could do to promote it and give people an indication of what might be achieved and what has been achieved in the name of it already.
Grant Shapps: We now have this huge opportunity, because we have passed the Localism Act, we have the National Planning Policy Framework, which will shortly become official, rather than draft, and we are going to make sure we are making a very big play of these aspects. I hope the message goes out through Committees like yours. I am sure planning officers around the country will be avidly reading the transcript from your Committees, and they will be instructed by that. As I mentioned, with things like community right to build-which could be custom build in some cases-there will be things like a hub that will come from the Localism Act legislation; there is the £30 million that, as you say, is out there but people do not know about yet, but that is because we have not launched the fund. There is a lot more that we are going to be doing. We will absolutely make sure we have people who are recognisable and known championing this whole concept of self-build or custom build as well. There is enormous potential. I am excited that you got to see it for yourself as well.
Chair: On that point of considerable agreement, perhaps we will end the session. Thank you very much indeed for coming, Minister.