Select Committee on Transport, Local Government and the Regions Minutes of Evidence

Examination of Witnesses (Questions 380-399)




  380. But if there is actually a fairly limited number of valuers in quite a few neighbourhoods, therefore the valuers that are doing the valuing are doing it on behalf of a wide range of lenders, in a sense it is the prices that those valuers put on the property that have most impact. My guess is that in quite a few neighbourhoods there is a very small number of valuers who do a lot of valuations in that area.
  (Ms Bennett) That is possibly true but lenders use different valuers, lenders have their own panels of valuers.

  381. The panels tend to overlap, do they not?
  (Ms Bennett) It is true that they will work for a number of lenders but, as Peter has said, in almost all areas you will find a lender who will lend on a property.

  382. You would find somebody for the properties the Committee saw in Burnley, which looked pretty difficult to get rid of?
  (Mr Williams) That is exactly where we have got to on things like home swaps. The problem there we have is that there are now formally being demarcated by local authorities, central government and quangos, areas which are deemed very high risk, and it is clearly the case that a lender would be very foolish to consider lending in those areas without appropriate safeguards. Of that there is no doubt. Clearly lenders take advice from local valuers, their staff valuers, from market trends and from all the information they can get. It is not the case, Chairman, that, if you like, a single valuer controls an area. Different lenders, because it is a competitive market, will use a variety of people.

  383. They do not like to disagree with each other all that much.
  (Mr Williams) I think valuation is not a science but an art and, indeed, there are acute contradictions in terms of price. You will find that two valuers will often give very different prices.

Mrs Ellman

  384. What impacts would a major programme of demolition in a private sector area of low demand have on lending policies in the rest of the area?
  (Mr Williams) What is striking about those areas of low demand is that lending has already been going on in those areas. If I use examples of places I have visited in Salford, the issue there is that there are mortgages outstanding in those areas so lenders have been lending in those areas. One of the questions of demolition is how that will change it. Is the underlying issue over-supply? I fear in some of these cases it is not a question of over-supply but poor and failing local economies. The danger here is you have a policy response which is housing driven when the policy response should be economic driven. Clearance can help but it may not itself provide the sole solution.
  (Ms Bennett) It has to be part of a wider strategy and there has to be a clear purpose behind the clearance and a clear idea of what is going to happen after that. If it is part of a wider strategy that would give lenders confidence in that area.

  385. There is some evidence, certainly in Liverpool, and I am sure it applies in other areas, that people move house when they get better off and the economy is getting better. What should the lender do to prevent that?
  (Mr Williams) Should they prevent people moving to other areas?


  386. Your point was that it was the economic failure of the neighbourhood which led to failure in the housing market and the point Louise is making to you is the evidence in Liverpool is that the success at creating jobs in that area further damaged the housing market because people, better off, chose to move out and commute into Liverpool.
  (Mr Williams) In the hands of the lender, forgive me for not understanding the point, there is very little the lender can do. Clearly the issue turns on the attractiveness of the area relative to other places. People's own aspirations will drive those choices. Home ownership at the end of the day is primarily market driven by choice. There is very little lenders can be expected to do about that. At the same time, clearly, turnover in an area is a factor and that is, in a sense, something that local authorities would need to be concerned with. There is an issue for lenders about whether they should be engaged in wider regeneration in those areas and that is an issue we are beginning to explore with government departments.

Mrs Ellman

  387. What avenues is that discussion taking?
  (Mr Williams) Frustratingly, there are two competing initiatives operating within the Government at the moment; urban regeneration companies and housing regeneration companies. It is not clear to us exactly how they are progressing. Certainly neither concept has been discussed with the lending industry on their launch and neither has been discussed with the lending industry subsequently. We recognise that an area approach does have some prospects. We have regularly tried to ask that we be engaged in those discussions.

  388. What would you have added to those discussions?
  (Mr Williams) They are both interventions in housing markets and logically, as indeed this questioning is suggesting, those are markets in which private lenders and the private market is significant. What we typically are finding is that a lot of these initiatives are public sector led about the private market without any understanding in depth of the private market. To us that seems inadequate.

  389. So what is it then that you would have added to those discussions about the markets?
  (Mr Williams) We would have brought to that some understanding of the nature of the private market, the nature of choice, the nature of lender behaviour, the nature of lender reactions to initiatives that might support and sustain local markets.

  390. Are there any particular areas where you think the current policies are deficient in terms of housing companies or —
  (Mr Williams) As I say, I think the fact that in a sense they are making interventions about the private sector without understanding the private market and engaging the private market in what those interventions may mean is itself a great deficiency. There is a risk that local authorities and others will take steps which will make things worse (because they do not understand the market) rather than make it better.

  391. Could you give me examples of where you think they are going down the wrong track and you could have put them right?
  (Mr Williams) The example we gave earlier of clearance. There may be cases where clearance is being opted for as a strategy whereas in fact the issue may be wider than that. One of the problems lenders have is that there is a risk—for example new supply, we have got examples of where through government agencies there has been increased supply in some of these areas of new property when clearly there is a surplus of existing property. If they are not aware of that I think that is one of the things that discussions with market professionals would have made it clearer to them that was the position.

  392. What changes would you like to see in CPO policies?
  (Ms Bennett) I think there are proposals to make CPOs much clearer and easier to use for local authorities and I think they have been over-restrictive in the past and it has made it very difficult. What we would like to see is that used again as part of a wider strategy for the area. There must be a clear purpose to using the CPOs and a clear vision of what is going to happen to the area after those properties have been purchased.
  (Mr Williams) I think one of the problems of CPO legislation is in many ways it is very old-fashioned now. As you know, CPOs basically compensate the person for property. That was fine in the 19th Century sense when probably very few mortgages would exist in those areas. What we have now under CPO practice is that we instantly take the person into deep negative equity. The example of Salford is the obvious one; a person who under the CPO will receive £8,000 for their property, they might already have a mortgage outstanding on that property, for the sake of example, of £24,000. That negative equity is crystallised by the compulsory purchase order. CPO legislation now needs to reflect the fact that we are in a predominantly home-owned society where many people have mortgages and where the CPO can act and materially disadvantage that household outside of anything they themselves can do.

  393. Given the building society put a valuation on it, should the building society take the risk?
  (Ms Bennett) As they do, Chairman, in many circumstances. This one is a risk which is triggered by local authority action on the CPO and the collapse of those markets—and I take your point as a generality—has been so rapid and so dramatic in a sense, even under a normal risk-based approach, that most people have been caught out. I think that is a point you would agree with.

Chris Grayling

  394. In terms of your experience of the impact of demolition and clearance, where you have had a situation where an entire area has been cleared and been replaced with lower density houses, given a lot of the houses were small terraced properties in the past, have you had any experience of follow through in housing market terms? Have you created an entirely new paradigm for that area or have you just got the same problems in a new guise?
  (Mr Williams) I do not think we have any substantial experience to draw upon. Clearance has been so limited. We are now assuming houses last many thousands of years and the rate of clearance has been so slow. I think the figure is 2,000 properties cleared last year. Mass clearance in the sense you have described has not happened since the 1960s. There are examples certainly of where there has been relatively, in those terms, large scale clearance replaced by new units but within an existing envelope if you like, of deteriorated property. I think in some cases that has certainly not solved the problems. Indeed, sometimes shared ownership has been created there and many of those units themselves become untenable.
  (Ms Bennett) Again it comes back to the fact it is not necessarily just about housing, there have to be schools developed alongside that and other infrastructure put in place—transport, shops—in order for it to operate at normal rates again.

Mr Wiggin

  395. Could you tell us about the Home Swap scheme in Salford from the point of view of lenders and how the costs of the scheme are split between the owner, the lender and the local authority?
  (Mr Williams) On the last point we are literally finding that out now. We recognised some while ago that there is a serious issue of real disadvantage in terms of mortgage borrowers in some of these sites which was then going to inhibit local authority activity in those areas because they themselves recognised that there was a problem of pushing those people into deep negative equity from which they could never realistically recover. That raised questions of human rights and a whole variety of other issues. Over the last year we have been involved in long discussions and work with the Local Government Association, the three cities of Liverpool, Manchester Salford, and the Department for Transport, Local Government and the Regions, as it now is, in terms of what could be done in those areas. Where we have ended up with is this model of Home Swap where, in effect, the lender agrees that the mortgage should be transferred to a new property which is sold to the current owner in a slightly better area. So the example would be my property is now worth £8,000, the local authority buys it, clears it as part of the regeneration strategy, I am given a property worth £12,000 nearby and the lender moves the mortgage to that property. There are still substantial attendant risks to the lender in that. The household in the current property servicing their debt was unproblematic and in some cases that current owner was still wishing to remain there. Some of those current owners have been promised change over many years and it has not been delivered. They have been moved to another area with the promise that something will be materially better. There is a possibility, with an issue of duty of care for lenders here, that having agreed that move and supported the acquisition of this £12,000 property and the mortgage attached to it that, looking forward, that property itself could decline and that mortgage will still be exposed and the lender under their duty of care will have agreed to that and will themselves be exposed. Literally over this month the very first pilot of Home Swap is being developed in Salford. The legalities, not least in relation to District Audit questions and the vires of local authorities to do this, have only just been settled. They are literately going forward to look with ten selected households at their willingness to undertake Home Swap. We have taken 18 months to get to the point where we may have some individual families who can contemplate this choice. It is only at that point we will have any feedback from lenders as to the viability of that and the costs of that and the benefits of that. I am afraid part of my answer says I do not know because we have not quite got there.

  396. So the chance of a scheme like this being replicated anywhere else probably we need to wait and see?
  (Mr Williams) We have deliberately done this as a pilot because we hope we can find a model that can genuinely provide some way out of the deep difficulties faced by individuals and local authorities. Our aim if this is a successful pilot—and we have the commitment of a number of lenders and the Council of Mortgage Lenders itself—is to try and then roll this out as a programme across the country.


  397. Is that Salford example not a little bit of an exception? The amazing thing is that that land is within 300 yards of the whole of the Salford Quays complex, the Lowry Centre, what was a successful football team until fairly recently, all of that going for it and yet that housing market has collapsed and we have a collapse of a housing market so close to what appears to be successful economic regeneration.
  (Mr Williams) I agree with you, Chairman, this points up we have all got a great deal to learn and it does raise cautionary bells about the scale of this across England and other countries.

  398. Does it not also suggest that if the Home Swap works there it may be more to do with the fact that this should have been a good housing market than to do with the nature of the scheme?
  (Mr Williams) There is very little that lenders individually control about the housing markets. Markets are markets. The lenders are only part of that market. There is an issue of demand and supply underneath that which lenders are responding to. Lenders do not control housing markets, they are actors within housing markets.

Ms King

  399. You have talked about the potential of providing lending in low demand areas and one thing you mentioned was the possibility of using American-style "capitalised vehicles". Can you explain to us how they work and what their strengths and weaknesses are and which markets they would be most effective in and whether we could use them here in the UK?
  (Mr Williams) I can only give you a brief outline of this because it is a topic that I continue to develop my knowledge of all the time. In the United States of America basically you have a number of quasi government agencies, they are given some weird acronyms like Fannie Mae and Freddie Mac, which basically get —

  Chairman: We have a slight problem, we have got a record going down.

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