Memorandum by the Council of Mortgage
Lenders (UWP 78)
THE PROPOSED URBAN WHITE PAPER
INTRODUCTION
1. The Council of Mortgage Lenders (CML)
is the representative trade association for the mortgage industry.
Its 119 members comprise banks, building societies, insurance
companies and other specialist residential mortgage lenders, which
together represent around 98 per cent of the assets of the mortgage
market.
2. The CML believes that urban decline and
renewal are important issues that need to be dealt with in a strategic
and sensitive manner. The Urban White Paper is the first opportunity
in the current Parliament for both a comprehensive review and
formulation of the policies that are needed to maintain and improve
the economic, environmental, social and physical conditions in
Britain's towns and cities. The Urban Task Force report published
in 1999 focused upon England but it must be recognised that many
of the same problems arise in Northern Ireland, Scotland and Wales.
3. The CML welcomes the opportunity to contribute
to the Environment, Transport and Regional Affairs inquiry into
the proposed Urban White Paper. The Committee will recognise that
lenders are important stakeholders in urban areas, providing mortgage
finance to home owners and funding investment in new and existing
social and private housing. The industry is also a major participant
in the growing urban institutional PFI market. In all cases this
investment is ultimately underpinned by the efficient and effective
management of urban environments and economies by both central
and local government.
4. More than 90 per cent of the UK population
live in urban areas. Even in those towns and cities where there
is a decline in the population, for every five people leaving
those metropolitan areas, there are four re-entering, according
to migration statistics (Champion, 1999).
5. It is important not to under-estimate
the need for new and imaginative policy responses to solve some
of the serious economic, environmental and social problems of
urban areas in the United Kingdom. The CML would argue that as
far as the housing market in general and investment in private
and social housing in particular are concerned, the economic and
social policies set out in the White Paper must be based on a
long term perspective and address all the issues of economic,
physical and environmental decline experienced in urban areas.
They should address not simply the recovery of the most damaged
urban neighbourhoods, but also how to secure and stabilise many
other areas which are now beginning to decline.
6. In the final analysis all areas of a
town or city are interconnected and decline in one area impacts
upon the others. The health of local housing and mortgage markets
is affected by the health of the urban area as a whole, even though
an individual lender's loan securities are typically spread across
areas (including types of areas). As a consequence, lenders have
a strong interest in seeing that any urban decline is halted and
reversed. At the same time it must be recognised that in some
areas the home ownership market is dominated by outright owners
and that there may be limited direct lender interest.
THE RESPONSE
7. In this response the CML focuses on three
of the topics set out in the Committee's Press Notice 02/1999-2000
1 December 1999. First, the recommendations of the Urban Task
Force relevant to the lending industry including the section on
fiscal incentives. Second, the future of urban areas experiencing
low demand for housing. Third, other Government policies which
will impact on urban regeneration policy.
THE RECOMMENDATIONS
OF THE
REPORT OF
THE URBAN
TASK FORCE
8. The Urban Task force report, Towards
an Urban Renaissance recommended a series of solutions to
bring people back into cities based on policies aimed at improving
planning and design and encouraging social inclusion and environmental
improvement. The Task Force did not consider the contribution
of local and regional economies to the regeneration of towns and
cities, something which the White Paper must examine in detail.
Moreover, as already noted the report was focused upon England.
It is vital that the Committee gives due attention to urban areas
in all parts of the UK.
9. The Urban Task Force concentrated on
the need for new urban development to revitalise areas and puts
forward a series of detailed recommendations. Importantly, from
a lender's perspective, the report also considered some broad
policies for sustaining that investment.
10. Towards an Urban Renaissance examined
in considerable detail how to encourage people back into urban
areas through new development. Its focus on new investment was
understandably directed by the need to encourage new development
onto previously used sites in urban areas, particularly in regions
like the South East, where pressure on housing land from household
growth is greatest.
11. However, urban policy will also need
to look at ways of reversing the decline in those areas exhibiting
low demand for housing as the Committee has recognised by its
terms of reference. This is particularly true of metropolitan
England but also in parts of Northern Ireland, Scotland and Wales,
eg, the South Wales valleys towns. In such cases the emphasis
will be both about sustaining investment, as well as attracting
new activity and developing fiscal policies that promote large
scale renewal and clearance, and encouraging home improvement.
In most urban housing markets it is the areas which are on the
verge of, rather than in actual, decline which dominate. While
the most depressed areas must be revitalised it is important that
policy does not neglect these other areas.
FISCAL INCENTIVES
FOR URBAN
HOUSING
12. The Urban Task Force commissioned KPMG
to look at the fiscal measures needed to stimulate investment
in urban areas. Fiscal Incentives for Urban Housing was
a valuable piece of research which gained little attention in
the Urban Task Force's main report, and has hardly been reported
elsewhere. While some of its recommendations fell short of the
types of options the lending industry believe should be explored,
the report raised a number of interesting issues which the CML
believes are worthy of further examination. These are considered
below.
OPTIONS FOR
OWNER-OCCUPIED
HOUSING
13. The KPMG report explored the options
for encouraging more housing market activity in urban areas. A
range of tax experts/economists considered measures for encouraging
owner occupation in urban housing markets and assessed the following
options for home-owners.
— Additional personal allowances for
brownfield areas. MITR would have been a vehicle, but for its
abolition.
— Stamp Duty should be removed for
sales of homes on brownfield sites.
— Tax relief for contents and buildings
insurance of properties purchased on brownfield sites.
— 100 per cent mortgages should be
available on brownfield homes backed by a Government guarantee.
14. The report recommended that personal
tax incentives for owner-occupiers, Stamp Duty removal and insurance
premium relief for urban homes would help stimulate increased
demand from owner-occupiers in brownfield areas.
15. As Fiscal Incentives for Urban Housing
acknowledged, any introduction of new fiscal measures would have
to reduce costs significantly to increase demand for brownfield
housing relative to greenfield markets. Interestingly, as far
as home-owners are concerned the report concluded that personal
tax relief incentives appeared to have greater impact on price
and demand. As of 1 April 2000, there will be no personal tax
incentives for home-ownership.
16. Significantly, from a lender's perspective,
one of the options the report rejected was the use of Government
backed mortgage guarantees. The report rejected this option because
of its implications for the Public Sector Borrowing Requirement.
However, the CML would argue there is some merit in examining
further the costs and benefits to the public purse of employing
this option, in particular the rate at which existing guarantees
have had to be called in when a borrower has defaulted on a loan.
There is a strong argument for examining their role in markets
where there is low and falling demand for housing and depressed
housing market values, alongside measures like clearance and renewal.
In the United States of America the government sponsored secondary
mortgage market insurers, Fannie Mae and Freddie Mac, play a key
role in underpinning weaker housing markets.
17. The KPMG report concluded that the fiscal
measures it described may have the potential to influence the
behaviour of key players in the housing market. However, the report
did not address the question of whether these measures were likely
to influence house-buyers' attitudes to purchasing in urban regeneration
areas. It is vital that proper attention be given to demand as
well as to supply related issues. The Government's concern to
increase densities in urban areas may have the effect of making
them less attractive to certain parts of the population. It was
unfortunate that KPMG did not consult with mortgage lenders about
the types of options that might stimulate, and more importantly,
sustain property values in urban areas.
OTHER MEASURES
18. Towards an Urban Renaissance
recommended establishing a national public and private fund for
encouraging private investment in area regeneration projects and
the introduction of a new financial instrument for attracting
institutional investment in to the private rented sector. It should
be understood that the financial risks are simply too great in
some areas to attract any significant funding at terms which would
make a development feasible. The lending industry is clear that
in such circumstances public funds must be applied first and,
as recovery gets underway and risks are reduced, the prospects
of debt based private finance will grow. The report also recommended
a series of tax incentives such as the removal of Stamp Duty and
reductions in VAT to incentivise private developers in relation
to development on brownfield sites.
HOUSING AND
URBAN REGENERATION
COMPANIES
19. The Task Force proposed establishing
Housing Regeneration Companies to deliver area based housing regeneration.
The Task Force suggested that Registered Social Landlord (RSLs)
might have a major role to play in improving the condition of
the private housing stock in urban areas. RSLs certainly have
the skills and in some cases the resources, to deliver renewal
programmes in both the public and the private sector housing stock.
However, not all RSLs are suitably qualified to engage in such
activities, and many would be in danger of risking their existing
investment. Certainly, RSLs should be considering the likely long
term demand for any stock it acquires and refurbishes and should
be discussing any diversification along these lines with their
funders and the relevant regulators. In particular, lenders will
be looking for evidence of long term demand for any private sector
housing acquired by RSLs. At the same time, the CML would agree
that an area based approach covering both public and private sectors
makes considerable sense and that efforts should now be made to
operationalise this concept.
20. Urban Regeneration Companies were also
proposed. These could have a major impact on delivering regeneration
projects which covered a range of needs and contributed to improving
run down urban areas. A regeneration company might undertake work
related to education, housing, retailing, transport and health
facilities in an area. It might also engage in employment related
initiatives. Again, such a concept makes considerable sense even
though there are serious practical obstacles. Not least of these
is how to overcome the financial and organisational barriers which
exist within central and local government, separating out resources
and responsibilities across a range of organisations. Drawing
together the range of organisations and funding which might sensibly
be involved in regenerating an area is a considerable challenge.
Individual lenders and the CML have had some experience of these
difficulties and so far it has proved very difficult to get any
coherent central and local government cooperation. The Committee
needs to address this issue and put forward recommendations as
to how it might be done.
THE FUTURE
OF URBAN
AREAS SUFFERING
LOW DEMAND
FOR HOUSING
AND SOCIAL
DECLINE
21. Typically, the highest demand for housing
has been in locations furthest away from urban areas. For example,
between 1981 and 1991 metropolitan areas lost 7.4 per cent of
their population whilst remote, rural areas saw their population
increase by 6.4 per cent. At the regional level, the South East
will see a 26 per cent growth in households between 1996 and 2021,
whilst the North East will only experience a growth of 8 per cent.
22. Population loss is one of the main reasons
for the growth in unpopular housing and low demand. The scale
of low demand has recently been estimated by the report of the
Policy Action Team on Unpopular Housing (PAT7). Local authorities
estimate they have 377,000 dwellings and RSLs around 89,500 homes
for which there is low demand. A lot of attention has rightly
been focussed on the problems of unpopular housing and low demand
affecting social housing estates both in inner urban areas and
on the outer edges of towns and cities. The problem is not confined
to the social housing sector and the report Unpopular Housing
estimated 461,500 properties in the private sector were in low
demand (DETR, 1999). Unpopular housing is largely a phenomena
of inner urban areas and though by no means confined to northern
England, the problem is less acute in southern England. No equivalent
studies have been undertaken in other parts of the UK.
23. In the private sector there is emerging
evidence of serious decline in much of the pre-1919 stock. In
Birmingham, for example, more than a third of private sector dwellings
were built before 1919. In certain metropolitan areas, owner-occupied
street properties without front gardens have seen their value
fall significantly, at a time when prices in the UK housing market
as a whole, are growing healthily, leaving the owners suffering
from negative equity. Many of these home-owners are facing negative
equity and in some cases are choosing to abandon their properties.
Understandably many urban and particularly metropolitan
authorities want to discourage home-owners from leaving their
areas.
24. This situation is likely to deteriorate
further in the absence of significant concerted intervention.
The options include wholesale renewal, such as currently being
contemplated in parts of Manchester and already pursued successfully
in Smethwick, Birmingham.
25. Authorities like Salford Metropolitan
Borough Council, in Seedley and Langworthy, are looking at using
their Single Regeneration Budget (SRB) funds and re-location grants
to encourage owners to move to new properties, without incurring
substantial losses. The CML believes that the White Paper should
enable local authorities to intervene in depressed housing markets
more effectively through their grant giving and repurchase powers.
The Urban White Paper should also consider the use of some of
the measures already discussed in this submission, such as mortgage
guarantees.
26. The messages about unpopular housing
have been distorted in both the popular and broadsheet press.
Much of this is outside of the control of the Government. Nevertheless,
Government departments and its agencies should be aware that insensitive
reporting of this phenomena could have potentially damaging consequences
for investors' appetite for funding new development in the areas
that need private finance as well as undermining confidence in
the existing housing market.
THE ROLE
OF LOCAL
AUTHORITIES
27. There are a number of local authorities
which have begun to tackle decline in their private sector housing
stock, as this submission has already noted, partly because of
their concerns for the erosion of their own local tax base. If
home-owners leave in significant numbers, this is likely to reduce
the numbers of economically active individuals, reducing spending
power in the local economy as well as reducing the council's local
tax base. Manchester and Birmingham are authorities that have
been in the vanguard of attempting to arrest population decline
and make their cities more attractive to home-owners.
28. However, many local authorities have
failed to recognise their own role as housing authorities in promoting
and sustaining home-ownership, which is the majority tenure and
the over-whelming tenure of choice amongst the UK population.
The CML's 1999 Annual Housing Finance Survey reports that approaching
80 per cent of households stated they would be home-owners within
the next 10 years. Clearly some local authorities need to recognise
that a successful urban housing policy has to be built on helping
existing home-owners maintain their property investment, particularly
in the more marginal housing markets. A combination of reduced
home improvement grant activity and a refocusing of housing association
activity on new build rather than refurbishment and regeneration
has meant that public funding flowing into many older urban areas
has declined. This has discouraged some home owners from investing
in their properties and the cycle of decline has intensified.
WHAT ADDED
VALUE A
GOVERNMENT WHITE
PAPER SHOULD
PROVIDE IN
ADDITION TO
OTHER GOVERNMENT
ANNOUNCEMENTS ON
URBAN POLICY
29. The CML already submitted its proposals
to the Government concerning the proposed Housing Green Paper.
Needless to say it is important that the measures forthcoming
from the Green Paper should compliment those of the Urban White
Paper. Moreover, it must be recognised that current taxation arrangements,
eg, VAT on home improvement, can have a particular impact upon
areas of decline. If the health of all urban areas is to be recovered
the Government will have to seriously address the need for joined
up thinking across departments and funding allocations.
CONTAMINATED LAND
30. The Government is in the process of
introducing a statutory contaminated land regime under the Environment
Protection Act 1990. The provisions within the regime could have
the potential to blight many existing urban housing markets, where
development has taken place on or adjacent to previously used
industrial land. Whilst the regime is based on the principle of
the polluter pays, there is concern amongst lenders that under
the regime home-owners will be liable for paying for the clean-up
costs of polluted land if their home is found to be built on a
contaminated site. There is the potential under the regime that
home-owners trying to sell their homes, in urban areas in particular,
could find themselves with clean-up bills that in many cases are
close to or exceed the value of their properties.
31. The Urban Task Force made some sensible
recommendations regarding bringing contaminated land back into
use but rather overlooks the need to address the potential problems
affecting owners of property in urban areas.
32. The way that local authorities implement
the regime and in particular collect and disseminate information
about contaminated sites in the conveyancing process will have
an important bearing on the way the housing market responds to
the real and perceived risks from contamination. If remediation
of contaminated sites is not carried out speedily, then this could
contribute to blighting the local market. In anticipation of the
regime, there is now at least one commercial organisation offering
environmental searches to home-buyers, which provide the purchaser
or their conveyancer with information about the historic use of
the site the property they are thinking of buying is built on,
although no information about the actual risk from contamination.
The CML is concerned that this information provides no reasonable
assessment of the risk of contamination, but is likely to have
the significant potential to blight some urban housing markets.
CONCLUSION
33. The Urban White Paper must set out a
coherent and comprehensive set of proposals capable of encouraging
new investment into run down areas and sustaining those areas
that appear to be on the verge of decline. The Urban Task Force
report put forward a series of interesting and imaginative measures
which may well encourage new development in urban areas. But the
White Paper and Government policy on towns and cities will need
to emphasise the importance of sustaining activity and investment
well beyond the initial phases of any urban regeneration programme.
34. The very nature of mortgaging over periods
up to 30 years means that lenders are one of the few actors taking
a long term view of investment. Like the households which urban
policy will attempt to attract back into the run down areas of
our towns and cities, lenders will continue to have an interest
in those areas long after the urban designers, architects and
developers have left. It is because of this long term interest
that lenders will be looking to the White Paper for measures that
will sustain demand for housing and the areas themselves both
over the lifetime of the investment and well beyond.
Shaun Stevens and Peter Williams
January 2000
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