Select Committee on Transport, Local Government and the Regions Memoranda

Memorandum by Council of Mortgage Lenders (AFH 56)


  1.  The Council of Mortgage Lenders welcomes this inquiry. The industry is concerned about current housing market pressures and the continued low level of the supply of new housing. Although affordability indicators suggest that overall access to home-ownership has been sustained there are clearly some problems for some groups of buyers. However, the housing market is cyclical and current problems are likely to abate in the future as the market adjusts. Lenders have managed the tension between the need for larger loans to cope with growing affordability problems and placing home buyers at risk in the event of future interest rate increases.

  2.  The Council of Mortgage Lenders (CML) is the representative trade body of the residential mortgage lending industry, its 145 members currently hold over 98 per cent of the assets of the UK mortgage market.

  3.  Given constraints on space this response takes up the major issues outlined in the Press Notice. All tables and charts are appended at the back of the submission, as is a detailed article on affordability. The response has been prepared by the CML Secretariat.


  4.  The UK housing market is highly cyclical (Garratt, 2000) and the UK housing market is experiencing its strongest cyclical upswing since mid/late 1980s (in terms of house prices; turnover is actually currently much lower). It is normal for the housing market to show regional differences, with London and the South East tending to "lead" the rest of the country. Until recently, these markets had been experiencing the strongest growth in house prices and most significant affordability pressures. However, there is a danger that affordability is seen to be a problem only in those areas. There are a number of areas in the North of England, eg, N Yorkshire, North Leeds, York and Trafford to name but a few. Moreover, there are problems of very low incomes in areas of high demand such as the Lake District.

  5.  In terms of defining affordability, in the private home-ownership context the concept has at least two dimensions (see Garratt, 2000 for more details):

    —  the ability of households to sustain mortgage payments/home-ownership. Historically low interest rates mean that mortgage debt service payments are modest relative to income—14 per cent of pre-tax income compared with 25 per cent at the peak of the last housing boom. In that sense affordability is very good; and

    —  the initial ability to purchase a property. Most of the affordability pressures currently are in relation to households' initial ability to purchase a property. Chart 1 shows volatility of UK house prices relative to earnings.

  6.  Different data sources tell different stories about whether this affordability measure is still some way below or very close to previous peak. House-buying budgets have been increasingly stretched since the mid-1990s, especially in the south of England. Income multiples have expanded in a controlled and modest way to record levels. But, as the housing market has recovered, average LTVs have fallen, especially for First Time Buyers (FTBs) and especially in London and South East. Typically, potential buyers have had to bring larger deposits in order to finance house purchases.

  7.  It should be noted that all of the preceding analysis relates to average figures. While this illustrates the underlying affordability problem, it also disguises some of the picture. So, in recent months, for example, Savills and other analysts have illustrated how increasing proportions of FTBs and key workers are being priced out of local markets. The general picture presented is correct, but it must not be forgotten that there are significant variations in housing markets between and within local neighbourhoods.

  8.  Taking London as an example, the latest HM Land Registry (Q1 2002) show that two thirds of the London Boroughs have average prices below the average for Greater London as a whole. Allowing for different property types also, we see that the average price of a terraced property in the cheapest borough—Barking & Dagenham—was only £72,348, one third of the average price of London property (£214,257). The London average is particularly subject to distortion given the extremely high prices in central London boroughs.

  9.  Clearly, "affordability" of housing is not the only issue affecting key workers and others but rather a whole array of factors—neighbourhood amenities, transport links, schools, socio-economic mix, preferences and crucially knowledge of and willingness to search the London market. It is important to bear in mind that an important aspirational aspect is connected to most people's description of "affordability".


  10.  In this section our response will focus upon current low cost home-ownership initiatives and the ways these might be improved. However, it is important to stress at the outset the industry's concern regarding the shortage of new housing supply, the potential threats to the continued expansion of the private rented sector via regulation of that sector and the possible negative impact of the new home improvement regime on household capacity to repair and improve homes. On this last point there is evidence of growing disrepair in the owner-occupied sector and this adds to affordability problems and the incidence of empty homes.

  11.  According to the Government's Housing Green Paper, approaching nine out of 10 households aspire to home-ownership. In a high demand, high price market like London and the South East, home-ownership can be less accessible for lower income households, certainly in specific locations. There is clearly some scope for the Housing Corporation and local government funded low cost home-ownership (LCHO) programmes to meet the home-ownership aspirations of lower to middle income households in such areas. For example, the recently published Tower Homes Review of 2001 says that they received 29,000 enquiries about LCHO in 2000-01 but were only able to help 500 first time buyers. An increased home-ownership programme has recently been agreed between the Government and the Housing Corporation but it is still less than 5,000 units.

  12.  The Government is giving local authorities a central role in delivering housing policy. However, in order to fulfil this vision, local authorities will have to intensify their efforts in assessing their local housing markets and developing coherent and comprehensive policies which tackle the problems identified. Research for the Chartered Institute of Housing and the CML points to serious deficiencies in local authority action (CIH/CML, 2000). There is a need for a "joined up" agenda locally, ie, the bringing together of central and local government policies and programmes and other partners involved in the provision of housing and the creation and maintenance of viable communities.

  13.  Getting the balance right between LCHO and rented programmes is one aspect of local authorities' strategic approach. Local authorities must understand their housing markets and the demand for home-ownership in agreeing their investment priorities.

  14.  The evidence to date, nationally, is that LCHO is losing out in local authority investment decisions. Despite the support given to the concept of LCHO, the Government has overseen a reduction in the low cost home-ownership programme since 1997. The CML welcomes the current review of the LCHO programme and hopes that this will result in a substantial restoration and enhancement of the scale of the programme. The Housing Corporation's home-ownership programme declined from 17,500 properties in 1994-95 to 3,300 in 2000-01 before rising again to around 5,000.

  15.  The impact of the small scale of the programme mean that only a small number of lenders are offering mortgages on shared ownership property. Lenders will not invest in product development and staff training while the number of mortgages they are likely to offer is so small.

  16.  The lending industry was concerned about the possible impact of the Starter Home initiative in terms of generating new demand in markets without increased supply. However, the relatively small scale of the programme, its spread over three years and the balance between new provision and equity loans have diminished some of those concerns. The industry was disappointed that it proved impossible to roll out the equity loan scheme via lenders since this was felt to be a more normal route for potential house buyers than housing associations. It is evident that had the Government sustained and indeed expanded its LCHO/Homebuy programme the case for a specific initiative of this sort would have been much reduced.

  17.  There are also concerns about recent press reports that key workers will be housed in prefabricated homes. With the encouragement of the Government developers are coming up with solutions to house key workers using innovative construction techniques. However, little thought has been given as to whether these properties will be mortgageable. The decision as to whether to offer a mortgage on a particular property is one for individual lenders and some lenders may have policies that preclude lending on certain types of property or the lending will be more restrictive, requiring a higher deposit and adding to affordability pressures. We are not aware that there has been any discussion with lenders on this scheme.

  18.  The wide range of home-ownership initiatives supported by public subsidy has been confusing to both buyers and mortgage lenders. Some of the schemes added extra complexity to the buying and selling process. Therefore, the introduction of Homebuy, an administratively much simpler scheme, in 1999-2000, was a welcome development.

  19.  Shared ownership in particular can confuse owners about where responsibility for maintaining and improving the property lies. Under the current arrangements, residents pay for maintaining and improving properties, and yet the lessee, the RSL, benefits from any improvement in value. In addition, the current legal action by lenders against the Solicitors Indemnity Fund where RSLs have refused to honour shared ownership leases, underlines how difficult it can be to operate a complex scheme like shared ownership.

  20.  In areas of high house prices, shared ownership may not be sustainable for consumers in the longer term. A 50 per cent share of a property in an area with average house prices of £160,000, would leave a typical shared owner paying approximately £270 a month in rent, on top of a mortgage. Whilst the mortgage is likely to diminish in real terms over the lifetime of the loan, the rent will increase at least in line with RPI, and in London rather more under the Government's reform of social sector rents. In these circumstances, shared ownership does not offer a purchaser good value in the longer term. An equity loan scheme, with a 30 per cent or 40 per cent equity share, would be far more affordable.

  21.  Homebuy is a simple and popular scheme where the Government provides a 25 per cent equity loan (in England). Despite its popularity this scheme is underfunded at present in relation to demand. And yet from a lender's perspective, out of all the LCHO schemes currently operating, the Homebuy scheme is the most simple to understand and develop products for. Unlike traditional shared ownership, there is no lease, no management arrangements and no rent payments for the buyer, who can choose their own home.

  22.  Under the Homebuy scheme, home buyers received a 25 per cent interest free loan repayable on property sale and the loan is administered by RSLs. In high value housing markets like London and the South East, there is a strong argument for giving a larger equity loan than 25 per cent. In Wales the stake is 30 per cent (and 50 per cent in defined rural areas) and it may need to be as high as 40 per cent in some housing markets in London.

  23.  Homebuy could be improved in two ways. First, as already discussed, the size of the interest free loan element could be adjusted according to market conditions and household circumstances. Second, the scheme could be "sold" direct by lenders rather than through housing associations/RSLs.


  24.  Planning can clearly have a role in providing affordable housing. The Government has recently proposed a tariff system for affordable housing with local flexibility on the details of the implementation. This has the potential to increase affordable housing but will only be effective if local housing needs are properly assessed. We are aware of complaints about the quality of local housing needs surveys and these will need to be addressed if there is to be proper provision for affordable housing.

  25.  We are concerned that the emphasis in PPG3 on brownfield development can increase pressure on those sites in towns and make affordable housing provision more difficult. Whilst the emphasis on affordable housing is based around towns and cities affordability can be a real issue in rural communities where brownfield land is simply not available. Stopping greenfield development in these areas may not stop the imbalance between supply and demand.

  26.  We are also concerned that some planning obligations are over-restrictive in terms of provision of affordable housing. For example, Annex B to PPG3 on Providing for Rural Exception Housing says that "the inclusion of clauses in planning obligations which would enable lenders of private finance to dispose of the property open market as a last resort were to get into financial difficulties, are unacceptable in respect of housing schemes on exception sites". This is unnecessarily restrictive. In general, our view is that restrictive covenants should be used with care and preferably only where there is likely to be a strong and continuing market. If covenants are overly restrictive, the lender will bear in mind the position should they find themselves in possession and having to try to sell the property to recoup their money. If the property cannot ultimately be sold on the open market, they may be reluctant to lend, even on a shared ownership basis.


  27.  There have been considerable discussions about the benefits of socially mixed communities and efforts continue to achieve these. To date, little evidence has been systematically gathered to analyse the benefits they bring to their inhabitants. Moreover, the term appears to be a shorthand for raising questions about large mono tenure social housing estates. Though the viability of these estates may now be in question this may be as much to do with unemployment and low incomes as it is with tenure. Simply mixing tenure does not solve the problem of failing neighbourhoods although it may assist. It is also the case that areas are often more mixed than first appears through the renting out of property in dominantly owner occupied areas (and here Buy to Let has had an impact) and through the Right-to-Buy in social housing areas.

  28.  Although these is much to commend mixing as part of a wider social inclusion agenda it is important not to ignore some of the clear tensions this can create. A survey for the House Builders Federation suggested that home buyers did not like living in mixed tenure areas. Generally speaking, in considering their lending policies towards such communities, lenders would look to their valuers for information about the demand for housing in socially mixed communities from home-owners.


  29.  The weakness of planning guidance continues to be the lack of linkages to local housing strategies, the absence of tenure based forecasts of demand and the focus on new households rather than existing unmet demand. The work being undertaken by the Housing Corporation and the Government Offices in the regions has helped but we are still at an early stage in the process of creating comprehensive and coherent plans.

  30.  The target for decent homes currently applies only to social housing. The CML welcomes this target but it is evident that the Government will find it difficult to meet it if the stock transfer programme falters in any substantial way. The absence of a private sector target is a cause for great concern by lenders, especially given both rising disrepair in parts of the owner-occupied stock and the introduction of the new home improvement regime and the single capital pot which could result in less funding for improvement and repair.

  31.  The Government's statements regarding affordable housing like those of its predecessors, rather limited and of a generality which has little impact in reality. At the same time, given households' differential willingness and ability to spend on housing costs, there is little point in a defined affordability threshold which triggers government action. This is also borne out by experience in Canada.


  32.  While a buoyant housing market acts as a stimulus to the economy as a whole (Economist, 2002) affordability pressures give added impetus to wage demands, limit the supply of labour in those areas where there are significant affordability constraints and impact upon general consumption and economic activity as households redirect their general spending towards housing costs. Moreover, if this also means households occupy cheaper but substandard homes there are clear "knock on" consequences in terms of health, educational achievement and even crime. It is evident that for many years economic analysis has underestimated the cost of poor and/or expensive housing. If the UK is to be successful in competing globally good and affordable homes will be part of the process. In that sense the costs of the failure to provide adequate housing (however defined) are almost incalculable.


  33.  Whilst there is an undoubted issue in tight housing markets like London that rightly needs addressing, it is important not to overlook the longer-term sustainability issues affecting tenure choice, not least for lower income households entering home-ownership.

  34.  Although the majority of home-owners face few problems repaying their mortgages there are households which do face difficulties due to their changing circumstances. The Government has recognised the importance that once home buyers have accessed home-ownership, owners should be able to sustain the tenure. The Government put forward a number of proposals for improving the public/private safety net for out of work home-owners. The CML has welcomed the broad thrust of these measures but would like to see serious consideration being given to extending assistance to in work home-owners through the creation of a Housing Tax Credit. Such a development would enhance the flexibility and sustainability of the housing market and reduce the benefit traps and work disincentives that currently exist.

  35.  It is a paradox that that an unemployed home-owner, receiving help with their mortgage interest payments through income support, would have to change tenure and become a renter, before they could take up a low paid job and receive help with their housing costs (albeit there is now a one month "rollover" before a recipient of income support for mortgage interest loses that benefit on return to work).


  36.  As far as any initiative designed to help first time buyers, the CML believe it should be administratively simple and straightforward for borrowers and lenders to understand. The existing Homebuy scheme may offer the best option if it was made both more flexible and administered by lenders as well as housing associations.

  37.  It must be recognised that through choice or otherwise a proportion of households will never be owner-occupiers at any stage in their lifetime while others will wish or need to move out of the tenure at some point. It is vital that the Government ensures there is an adequate supply of private and social rented homes in order to meet these needs and demands and to ensure that the housing system is sufficiently flexible and adaptable to a changing economy and society. The lending industry has played a key role in funding the expansion of the housing association and private rented sectors. This will continue, subject to the framework for lending remaining favourable. It is evident that frequent changes in policy have heightened lenders' concerns and this in conjunction with reduced margins and perceived greater market and demand risk has resulted in some lenders leaving the sector and deterred others from entering.

  38.  In summary, the key points in this submission are as follows:

    —  affordability can be defined in a variety of ways. On some measures affordability remains very good;

    —  the use of average incomes and average house prices can be misleading in markets characterised by great diversity;

    —  what is considered affordable will vary from household to household reflecting preferences and a wide variety of other factors;

    —  the CML is concerned about the impact of a number of wider factors which may impact upon affordability including the low output of new homes in all sectors, potential regulatory controls in the private rented sector and the new home improvement regime;

    —  the CML would argue that more resources should be put into low cost home-ownership initiatives generally and Homebuy in particular; and

    —  getting households into home-ownership is only a starting point. Home-ownership must be sustainable and the CML along with insurers and the government has been encouraging the take up of private mortgage payment protection insurance. The CML continues to urge the Government to introduce a Housing Tax Credit to give greater support to low income home-owners.

  Please note that the tables referred to in Memorandum AFH 56 will be printed with the Appendices.

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