Memorandum by the Council of Mortgage
Lenders (CML) (SRH 35)
INTRODUCTION
1. The Council of Mortgage Lenders (CML)
welcomes the opportunity to contribute written evidence to the
inquiry into the supply of rented housing initiated by the Communities
and Local Government Committee. The CML will be pleased to attend
the Committee to provide oral evidence if called.
2. The CML is the representative trade body
for the residential mortgage lending industry. Its 156 members
currently hold over 98% of the UK mortgage market. CML members
lend across all tenures. In addition to lending for home ownership,
members have, across the UK, lent over £84 billion to the
private rented sector (PRS) via buy-to-let loans and over £39
billion to housing associations for new build, repair and improvement
to the social rented sector (SRS).
EXECUTIVE SUMMARY
— The private rented sector is expanding
without the need for government investment due to over £84
billion of private investment. By contrast, the social rented
sector is in long-term decline.
— The private rented sector has demonstrated
a strong track record of meeting housing needs, offering the flexible
accommodation that is required by many households. The sector
plays a key role in meeting the needs of specific groups such
as students and recent immigrants, whose numbers have grown strongly
in recent years.
— The private rented sector now faces
a considerable increase in the burden of regulation. While some
new regulations represent a welcome attempt to raise safety standards,
much is unnecessarily costly and was introduced without due regard
for capacity of small landlords to cope and without a proper cost
benefit analysis. New regulation runs the risk of choking off
the investment that will be needed to meet growing demand.
— Almost £40 billion of private
finance has been levered into the social rented sector via lending
to housing associations and through large scale voluntary stock
transfer. There is potential to develop private investment further.
— Decisions to invest in social renting
rather than low-cost home-ownership should be taken on the basis
of clearly ascertained housing needs and aspirations.
— Housing associations, but also some
Arms Length Management Organisations (ALMOs) will continue to
be the focus for investment in the social rented sector because
of their proven track record in delivering sound housing management
and greater tenant satisfaction than local authorities.
— Regardless of possible institutional
changes, the quality and independence of the regulation of housing
associations is crucial if private finance is to continue to be
secured on the advantageous terms currently available.
— In the social and private rented
sectors, housing benefit is important to secure homes for those
in need but planned introduction of the Local Housing Allowance
in the private rented sector could reduce its capacity to fulfil
this role.
A QUESTION OF
BALANCE
3. The CML welcomes the decision of the
Committee to focus on the rented sector and believes that it should
be seen in the context of a neutral approach to the balance of
housing tenures. Such an approach should reflect the choices and
aspirations of owners and tenants while working to ensure that
housing choices are sustainable.
4. In this context, it is perhaps surprising
that of the 10 issues set out by the Committee, only one deals
specifically with the PRS and five deal with the SRS. While it
is true that the SRS remains larger than the PRS (at 19.2% of
all tenures compared to 10.3%) there are sound reasons to focus
attention on the latter:
— The PRS is expanding in both relative
and absolute terms thanks in part to over £80 billion of
private investment via buy-to-let. The SRS by contrast is in long-term
decline despite substantial public and private investment. The
appendix provides supporting data.
— The PRS is more a tenure of choice
than the SRS, which still functions very much as a residual tenure.
— PRS landlords are (according to the
Survey of English Housing) delivering higher tenant satisfaction
than SRS landlords—whether housing association of local
authority.
— Because of its entrepreneurial nature
and the presence of smaller landlords, the PRS is in a position
to respond to rapidly changing needs in terms of supply—the
increase in immigration and student numbers are two examples.
5. With inevitable constraints on public
funding for social rented housing (in spite of the intent set
out in CSR 07) it may be that the PRS will be relatively more
important in meeting future demand than might often be envisaged,
even in relation to groups traditionally associated with the SRS.
Recent innovations in the temporary to permanent field for the
homeless offer a useful example.
SPECIFIC COMMENTS
The level of public funding required to meet social
housing needs
6. Given the inevitable limitations on public
funding a key question concerns the degree to which a given level
of grant can lever in private finance. Housing associations stand
outside public sector borrowing limitations and can therefore
maximise the potential here. In global terms almost £40 billion
of private finance has been levered into the sector via lending
to housing associations across the UK, with some £36 billion
of that invested in England. Government, via the Housing Corporation
(HC), is encouraging housing associations to sweat their assets
to maximise the degree to which they can secure new investment
and to ensure that historic grant does not stand idle in housing
association reserves but is re-invested or used as collateral
against new borrowing. There is clearly potential to carry the
process further and to explore the use of private finance without
grant. The use of private finance for new-build, repair and improvement
to social housing represents a highly successful public private
partnership.
The relative funding priority being given to social
rented housing as opposed to shared ownership and other forms
of below market housing
7. The 2006-08 National Affordable Housing
Programme (NAHP) represents a swing back towards the provision
of social rented housing (49,000 out of 84,000 new homes) and
away from low-cost home-ownership compared to the previous grant
period.
8. CML members lend into all housing tenures
and are, therefore, content that decisions about the relative
levels of investment in social renting or home ownership be decided
by objective appraisals of housing need balanced against the prevailing
aspirations towards home ownership as determined at local and
regional level.
9. A key issue here is sustainability. If
government is promoting home ownership amongst those with relatively
low incomes, it is important that it accepts its responsibility
in respect of a safety net so the home ownership for these groups
can be sustained over the economic cycle as well as the vicissitudes
of personal and family life.
The future role for local authorities as builders
and managers of social housing/the effectiveness of different
social housing models
10. Housing associations have been the focus
for investment in the SRS and have shown themselves able to manage
and develop their housing stock effectively. In this they have
been aided by their relative independence of the national and
local political process, and, crucially by their ability to lever
in private finance by standing outside the public borrowing restrictions.
In addition, they have governance structures that compare favourably
with those of local authorities. Surveys of tenants who have moved
from local authorities to housing associations via large scale
voluntary stock transfer show higher levels of tenant satisfaction
with their new landlord and comparative surveys of housing associations,
private landlords and local authorities show the latter to exhibit
the lowest levels of tenant satisfaction.
11. CML members lend to housing associations
and have also worked increasingly with ALMOs to develop finance
structures appropriate to organisations that do not own their
stock. There is no compelling reason to reverse the trend towards
ownership and/or management by housing associations and ALMOs.
In particular, the CML would not support the promotion of a "fourth
way" for local authorities wishing to meet the Decent Homes
Standard. Experience over the last 20 years does not support the
promotion of such an option and discussion of it has diverted
discussion from appraisal of the practical choices facing local
authorities if they are to meet tenants' legitimate desire for
better quality housing.
The role and effectiveness of private rented housing
in meeting housing needs
12. Deregulation has created an environment
that has attracted private investment into the PRS on an impressive
scale. Since the 1988 Housing Act introduced the Assured Shorthold
Tenancy (ACT), which gave landlords the right of repossession
of the property at the end of the tenancy, the long-term decline
in the size of the PRS has been reversed. In 1989, the year the
legislation came into force, there were an estimated 2,090,000
private rent properties in Great Britain, 9.0% of all dwellings.
This had risen to 2,663,000 by 2004, the latest year for which
figures are available, representing 10.3% of total dwellings.
13. We estimate that investment in the PRS
through the buy to let mortgage scheme alone has been in the order
of £110 billion since the scheme's launch in 1996, with £84
billion of loan finance advanced by mortgage lenders. Survey evidence
shows that the majority of this new investment is by landlords
who are committed to the sector for the long term. A CML survey
in 2004 showed that over 60% of landlords say they planned to
continue renting property for at least another 10 years. CML buy-to-let
arrears figures also show that the wave of landlords who have
entered the market have created stable businesses able to meet
their financial commitments. At the end of June 2006, three month
plus arrears on buy-to-let mortgages were, at 0.7%, lower than
the 0.96% recorded for the mortgage market as a whole.
14. The quality of the private rented stock
has also risen rapidly, as illustrated by the English House Condition
Survey produced by the Department for Communities and Local Government
(DCLG). This shows a large rise in the number of private rented
homes meeting the government's decency standard, with 752,000
meeting the standard in 1996, rising to 1,340,000 by 2004, an
increase of some 590,000. At the same time, the number failing
to meet the standard fell by over 250,000.
15. The level of satisfaction of private
sector tenants also surpasses that of the SRS by a considerable
margin. In DCLG's latest Housing in England for 2003/04, a survey
of tenant attitudes showed that 39% of private tenants were very
satisfied with their landlord compared with only 26% in the SRS
overall and only 22% of council tenants.
16. What the above helps to demonstrate
is that the PRS has generally proven more flexible in responding
to demand and meeting changing housing needs than the SRS. The
PRS is also able to meet the needs of people for whom neither
the SRS nor the owner-occupied sector are appropriate, in particular
those whose circumstances require flexibility of accommodation
(eg those expecting to move around the country for work related
reasons or those in transient relationships). The PRS has a particularly
important role to play in housing students and recent immigrants,
for whom the PRS is generally the default tenure. Large increases
in both student numbers, which rose from 1.8 million in 1998 to
2.3 million in 2004 and the number of immigrants, which rose from
around 300,000 in 1994 to over 500,000 in 2004, have been accommodated.
The PRS also plays a key role in meeting housing need after divorce
and other relationship breakdown.
17. The ability to meet changing individual
housing needs is a vital characteristic of the PRS and this function
is unlikely to diminish as it makes little sense for potentially
mobile households to commit to owner-occupation, given the high
cost of transactions and it is difficult for the SRS to meet their
needs appropriately.
18. Private landlords respond to incentives,
both positive and negative. Changes in policy that increase costs
or reduce the certainty of rental incomes streams, will act as
disincentives, choking off investment. Given that since deregulation,
over the past 18 years, the PRS has demonstrated an impressive
ability to deliver the investment needed to meet housing demand
and raise standards, it seems surprising that government is now
imposing a number of new regulations that will have the effect
of raising landlords' costs, creating a disincentive for new investment
at a time when more investment is required to meet the projected
increase in housing demand.
19. The PRS now faces a considerable increase
in the burden of new regulation including licensing of houses
in multiple occupation (HMOs), selective licensing, the compulsory
tenant deposit scheme, a new health and safety rating system,
the Disability Discrimination Act and a change in the way housing
benefit is paid for PRS tenants. In Scotland, HMO licensing rules
have been more draconian and this year compulsory registration
of all privately rented property has been introduced.
20. One of the biggest concerns is with
the needless complexity of new rules. Take the tenant deposit
protection scheme for example. This attempts to address the problem
of landlords who unreasonably withhold tenant deposits. Under
current rules tenants must go to County Court to seek redress,
a time- consuming and costly process. But all that was required
was a cheaper alternative dispute resolution (ADR) mechanism with
the requirement that landlords must inform their tenants in writing
about its existence and a requirement that landlords would not
benefit from stringing out the legal process (which could be achieved
by requiring disputed funds to be lodged with an impartial third
party until adjudication). Instead what we are faced with is a
combination of a custodial scheme and up to two insurance schemes.
Landlords will be required to provide paperwork to the scheme
for each tenancy and tenants will have to wait for up to 10 days
to receive their deposits backs from the custodial scheme.
21. The Government has rightly identified
the benefits of a vibrant PRS and acknowledged the role that it
will be required to play in meeting growing housing needs. It
is therefore surprising that the government has introduced so
much new regulation without proper consideration of its impact
on landlords' incentive to invest.
The priorities and effectiveness of the Housing
Corporation (HC), English Partnerships (EP) and the Regional Housing
boards in responding to housing needs
22. For lenders the key issues in the context
of the above bodies at present are the debate about the possible
merger of the HC and EP and the associated review of regulation
currently being carried out by DCLG.
23. The CML has not taken a position for
or against merger but has stressed that the accumulated knowledge
of the HC in the field of HA regulation should not be lost in
any institutional change to the HC or EP or to the regulatory
function. In relation to the latter the CML has emphasised:
— The continuing importance of regulation
in providing comfort to lenders and thus in securing private finance
in circumstances where it might otherwise not be available and
at rates well below those for other commercial lending.
— The value of co-location of regulation
and investment in one organisation to allow for better communications
and to enable investment funding to financially underpin mergers
or other remedial action where housing associations have found
themselves in financial difficulties.
— The importance of independence of
the regulator from government so that the quality or integrity
of regulation is not compromised by the pursuit of political imperatives.
The effectiveness of housing benefit as a means
of providing access to rented housing to those in need
The PRS
24. The importance of housing benefit should
not be under estimated. Housing benefit accounts for over 15%
of rent receipts in the PRS and enables many homeless families
to find at least temporary accommodation. The Government plans
to move from its pathfinders of the Local Housing Allowance to
a national roll out and proposals are contained in the Welfare
Rights Bill. The CML is opposed to these proposals which it fears
will:
— Lead to increased rent arrears and
higher costs of collection for landlords since the Local Housing
Allowance will be paid to tenants rather than landlords and, therefore:
— Discourage landlords from letting
to tenants on housing benefit. There was clear evidence of this
in the pathfinders but that evidence has apparently been ignored.
— Encourage some landlords to disinvest
entirely as they will see housing benefit reform as a further
example of government interference.
— Discourage lenders from lending to
landlords who let to those on housing benefit.
— Put more pressure on the SRS, as
fewer homes for those on housing benefit are available in the
PRS.
The SRS
25. Housing benefit accounts for some 70%
of rent receipts in the SRS. It thus crucially underpins the cash
flow and borrowing ability of housing associations. The government
has withdrawn its plans to introduced Local Housing Allowance
into the sector and the CML supports this.
APPENDIX
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