House of Commons - Communities and Local Government Committee

Select Committee on Communities and Local Government Committee Eighth Report

5 HOUSING PROVIDERS

199. The range of agents involved in the management and construction of social rented homes enlarged with the introduction of Arms-Length Management Organisations (ALMOs). Successive governments have encouraged local authorities to transfer the ownership and management of their housing stock since the passage of the 1988 Housing Act. Between 1988 and January 1998, 252,000 properties were transferred;[321] this figure increased to over 400,000 by early 2000.[322]

200. The 4 million social rented homes together form an asset worth around £400 billion,[323] the equivalent of all assets held by mutual financial organisations in the country.[324] But in our judgement the main significance of the social rented sector is its social benefit, not its financial worth. We note earlier in this Report the importance of the concept of asset management within the social rented sector.[325] Asset management is about more than just finances. Professor Cave, in his review of social housing, concluded that however successful the Government may be in increasing the supply of affordable homes, "it is the use of the existing stock that will have the greatest impact for the foreseeable future."[326]

201. Professor Hills reached very similar conclusions. Giving evidence to us, he said "one of my suggestions is that maybe we should think a bit more about encouraging landlords to think of themselves as asset managers."[327] In his report, Professor Hills recognises that the growth of housing associations, the ring-fencing of local authority landlord accounts and the introduction of arms-length management organisations (ALMOs) have introduced more efficient management mechanisms into the social rented sector. It is vital that these management mechanisms now be used in the most effective possible manner to improve the supply of rented housing.

202. Efficiencies have been introduced into the social rented sector; but these efficiencies have thus far been concentrated in the construction and refurbishment of homes, rather than in their use. The Government cannot build enough homes to meet the demand in the short term. We therefore endorse the conclusions of the Hills and Cave reviews that better management which uses the existing stock more efficiently is needed.

ALMOs and improvement in conditions through the decent homes standard

203. The Government announced the creation of arm's-length management organisations in its April 2000 Housing Green Paper, Quality and Choice: a decent home for all. In 2004, the Government stated that the primary objective for ALMOs was "to achieve the Decent Homes target across the local authority housing stock that they manage", continuing "The major part of ALMOs' expenditure, and hence of local authorities' bids for ALMO funding, will therefore be on repairing and improving the housing stock to bring it up to the Decent Homes standard."[328]

204. The Audit Commission considers ALMOs to be performing particularly well in comparison with housing associations and local authorities. The Commission is not aware of any research which identifies why ALMOs perform better, though it suggests that the need to deliver a high level of performance to attract funding is likely to be a key factor.[329]Beside the availability of funding, another possible explanation for the success of ALMOs may be that they tend to concentrate their activity within small areas, which creates some efficiencies.[330]However, there is no single system allowing direct comparisons between different providers of housing management, which means that drawing conclusions about the costs and benefits of each type of provider is difficult. The Cave review reached the same conclusion and recommended that reliable cost comparisons between the different provider groupings be made available within four years.[331]

205. The performance of ALMOs and other housing managers in improving the condition of existing homes is naturally of primary importance to those who have previously had to live in cold, damp, draughty and otherwise unsuitable homes; but it is also crucial to meeting housing demand. In areas of low demand, the poor quality of homes is preventing them from being used, effectively constraining supply because they do not meet people's standards. Poor management and maintenance of the existing stock can counteract the advantages of new supply.[332]

206. The Decent Homes programme has made considerable progress in clearing the massive backlog of maintenance and improvement work on social rented homes. It has also had other long-term benefits for the maintenance of the social rented stock. Mark Davies, Chief Executive of Connaught plc, a provider of social housing maintenance and estate management services, told us that the scale of the Decent Homes programme has driven cost and programme efficiencies, and that a partnering ethos has been established between social landlords, contractors and their suppliers, and with tenants.[333] Even once the programme is complete, the need for substantial investment in maintenance will remain. As Mr Davies reminded us,

334

Peter Morton, CEO of the ALMO Sheffield Homes, emphasised the importance of ensuring that Decent Homes is not seen as the end of the matter: "there is a real fear that we will go back to pre-ALMO spending [...] then the quality of stock will deteriorate quite rapidly".[335]

207. The quality of the social rented stock cannot be detached from the question of overall supply. If no one wants to live in a home because of its poor physical or environmental quality, then it is not contributing to the overall supply. The Government is to be commended for introducing the Decent Homes programme and for the substantial progress which has been made on the programme, but an ongoing programme of maintenance and improvement of the social rented stock is still needed. Long-term funding for maintenance must be secure if the good work of the Decent Homes programme is not to be undone. We will be monitoring carefully the successor to the Decent Homes programme, both to ensure that the original objective of the programme is met and to see how the Government proposes to ensure the long-term high quality of the social rented stock.

208. It will also be important not to lose the gains which have been made through the introduction of the ALMO management model. Indeed there is potential for such gains to be extended from the achievement of the Decent Homes target and into housing supply. The Government has indicated that ALMOs have a role in using housing corporation funding to build homes outside the Housing Revenue Account.[336]City West Homes, the ALMO covering Westminster, for example, told us of its intention not only to meet other stock maintenance requirements beyond the decent homes standard, but also, if allowed, to build new homes. As they pointed out, however, "sustaining this investment and undertaking a programme of continuous improvement beyond five years will require a longer time frame for planning [and] additional funding, freedoms and flexibility."[337]

209. ALMOs, which do not own assets which can be used to support borrowing, need long-term security to raise funding for building new homes.[338] The future for ALMOs has, however, been uncertain. Arms length management organisations have performed well in contributing to the implementation of the decent homes programme. There is now potential for them not only to build on these improvements by investing long-term in maintenance, but also to contribute to the addition of badly-needed new supply. We recommend that CLG retain and enhance this management model and confirm the future of ALMOs as soon as possible.

Regulation of social housing

210. Representing many Housing Associations, the National Housing Federation and Places for People raised complaints about the system of auditing and regulation.[339] We heard similar concerns during our visit to Manchester, specifically that different information is needed by each organisation (Audit Commission, Housing Corporation, different parts of central government) and that the information required varies depending on the source of money being used. Complying with the required accounting and auditing diverts time and resources from the core activities of constructing new homes and managing the existing stock. Regulation is more of a burden to smaller housing associations and has been a key driver behind amalgamation within the sector.[340]

211. Given the extent of public money channelled through social housing, there must be a publicly accountable audit trail; and it is not unreasonable to require organisations benefiting from public support to comply with national public policy. Housing providers recognise this.[341] Regulation of how public money is used is vital not only for democratic accountability, but also for the evaluation of what works. Tenants and the public will need to know where the money has come from, where is it going, and how objectives for quality of stock and tenant satisfaction, for example, are being met. These questions can be complicated to answer, but that is not an acceptable reason for avoiding doing so.

212. Effective regulation is also crucial to the continued supply of private funding into the social housing sector. Giving evidence to the Public Bill Committee considering the Housing and Regeneration Bill, which will establish the new regulator of social housing, Oftenant, Paul Stevens, representing the Council of Mortgage Lenders, said:

342

213. There is nonetheless scope for reducing the burden of regulation in the sector and thereby freeing up resources for the vital task of improving supply. The Cave Review concluded that the system of regulation was excessive and proposed a "co-regulatory" approach under which housing associations would agree the scope and extent of regulation with the regulator. The review also suggested that that there should be an ongoing process of lessening the burden of regulation.[343] The review's conclusions included proposals to allow high-performing organisations greater freedom to spend their surpluses on the issues that matter to them, such as quality or additional services; and to remove the requirement to provide information on income from non-core activities.[344]

214. The Housing and Regeneration Bill will establish a new regulator of social housing, Oftenant. The present basis for intervention by the Housing Corporation in the event of "misconduct or mismanagement" is set out in the 1996 Housing Act. The enforcement powers contained in the Housing and Regeneration Bill include the potential for intervention if there is mismanagement, but also if the registered provider has failed to meet standards which will be set by the regulator or the Secretary of State. The National Housing Federation, which represents not-for-profit housing associations in England, has expressed significant concerns about these provisions.[345]The Government is aware of these concerns but believes that "the regulator should have power to regulate registered providers' wider community activities."[346]Iain Wright MP, Parliamentary Under Secretary of State at CLG, told the Housing and Regeneration Bill Committee that he wished to "reassure the Committee and wider stakeholders that management control—direct micro-management by the Secretary of State—will not be enacted as a result of the Bill's provisions."[347]

215. One of the objectives of the new regulator will be to regulate in a manner which "minimises interference".[348] The explanatory notes to the Bill state that this provision gives the regulator the objective "to regulate in such a way as to minimise administrative burdens, consistent with its ability to achieve its other objectives."[349] The regulator will also have a critical role both in providing certainty to lenders and in making the links between other policies and programmes which support wider objectives: making effective use of housing as an asset, tackling anti-social behaviour, improving the quality of the environment, reducing the effects of climate change and encouraging greater participation in the labour market.

216. Oftenant will take on the oversight of the management of homes controlled by housing associations. Professor Cave's recommendation was to establish a single, domain-wide regulator.[350] In its consultation paper Delivering Housing and Regeneration, the Government announced the formation of a social housing regulator with much of the scope and many of the powers envisaged by the Cave Review. However, the Government has decided, at least initially, to apply the new regulatory regime only to housing associations and for-profit providers.[351] The Government intends to extend Oftenant's remit domain-wide—i.e. including homes managed by councils and ALMOs—two years after Oftenant has been established (by 2011).[352]

217. Significant amounts of public and private money are channelled into social housing, and effective regulation is essential both for proper democratic accountability and to retain the confidence of investors. All housing providers must recognise and account for the steps they take individually towards shared policy objectives. Nevertheless, there is scope for reducing the burden of regulation and freeing up housing providers' resources for the vital task of improving supply. For this reason, we welcome the introduction of Oftenant, particularly the potential for domain-wide regulation and the explicit objective which it has been given to regulate in a manner which minimises interference. When forming the new regulatory framework, we expect Oftenant clearly to state and to consult on how its regulatory approach will achieve this objective.

218. The potential for domain-wide regulation raises the issue of the potential for domain-wide dispute resolution. The Housing and Regeneration Bill retained the remit of the Housing Ombudsman.[353] The Housing Ombudsman will still enable tenants and other individuals to have complaints against social landlords heard. However, if Oftenant becomes the domain-wide regulator, there should be the same single agency dealing with complaints from tenants of housing associations, currently subject to Housing Ombudsman oversight, and local authorities, which are currently under the oversight of the Local Government Ombudsman. With greater interaction between local authorities and housing associations, an efficient dispute resolution system will be required.

Role of local authorities

219. In 1953 over 198,000 homes were built by local authorities in England. That is more than the total number of homes built each year by all types of house builder since 1988.[354]Local authorities are now severely constrained in their ability to build. Several witnesses to our inquiry complained that there was no "level playing field" in the social rented sector when it came to the powers and abilities of housing associations, local authorities and ALMOs to build new homes.[355] The inequality lies mainly in the inability of local authorities to borrow money to fund the construction of new homes; but other factors also prevent or deter local authorities from increasing supply in this way. The Housing Revenue Account system, which we consider further below, is a significant constraint; but even if there were more flexibility in the HRA, borrowing by councils to fund housebuilding would still count towards public sector borrowing totals, over which the Government keeps very tight rein.[356] Uncertainties about rental income over the long term resulting from fluctuations in the level of right-to-buy sales and rent capping may also be preventing many councils from borrowing.[357] The option of selling land and assets to fund housebuilding is also constrained. Although councils are able to make such sales, there are controls over what the money so raised may be used for.

220. With such a significant shortage of homes, we believe that it is time to reconsider the restrictions on local authorities' ability to build. We pressed the then Housing Minister on this in oral evidence. In response, she told us "we do need to see councils building more homes and believe that councils should be able to build quite substantial numbers of additional homes."[358]

221. In addition to what might be termed the "technical" restrictions on local authorities' housebuilding activities described above, there are also issues of capability. The decline in house building undertaken by local authorities and reforms of local government services have reduced the in-house capacity of local authorities to design and build new homes.[359]Lack of in-house capability need not be a significant bar to councils playing a role as developers, however. Having in-house staff is an advantage to local authorities, particularly during a project's conception, but it does not necessarily follow that the lack of such staff should prevent local authorities from being developers. Sub-contracting services is now commonplace both in the public sector and in the construction industry.

222. The Government is beginning to take steps towards addressing the "technical" constraints on local authorities' ability to build. It is, for example, trialling a mechanism for local authorities to opt out of the present HRA system. During our inquiry we took evidence from Hounslow Homes and from Sheffield City Council with its ALMO, Sheffield Homes. Hounslow and Sheffield are two of the six areas chosen by CLG to pilot a self-financing Housing Revenue Account. A self-financing revenue account would allow local authorities to plan their housing spending on a 30-year cycle, and allows for borrowing on future earnings. These pilots will test means of overcoming the restrictions placed on the activities of the likes of Sheffield Homes, who told us that because they do not own any assets and their management agreement only lasts ten years, they are not able to borrow to fund further expansion.[360]

223. The 2007 Housing Green Paper advances the role of Local Delivery Vehicles (LDVs), partnerships between local authorities and other public bodies, in building homes.[361]Local Delivery Vehicles can include ALMOs, Community Land Trusts, and limited liability companies.[362] The Government does not intend to be prescriptive about which type of LDV to use but a central theme running throughout the suggested models is the use of a council's own assets for new housing, including market housing, rather than funding councils to build new homes for social rent. The Housing Minister told us that such vehicles would be able to build new homes which are kept outside the HRA, and this would allow rents to pay for borrowing.[363] For the next round of funding for affordable homes (2008-2011), the Housing Corporation will consider bids from high-performing ALMOs and from local authorities through LDVs.

224. At present, councils are largely confined in their housebuilding activity to a model under which they gift their own land to an ALMO or an LDV, who then builds with a private developer. Sheffield Homes, for example, told us how after several discussions with the Housing Corporation about how they can build new homes, they worked with a private developer to develop infilling schemes using old garage sites to build affordable housing for sale and rent.[364]This follows a similar approach taken by Hounslow Homes, which was the first pilot ALMO allowed to build new homes. Hounslow Council donated land for Hounslow Homes to develop so that the homes for private sale can be used as a cross-subsidy for the construction of social rented homes. Chris Langstaff, Managing Director of Hounslow Homes, told us that, as a rough guide, they would sell one home on the open market and keep another for social rent, thus providing new housing without the need for a grant other than the gift of the land.[365]

225. Central government, however, appears to see the main role for local authorities as being at one remove from the direct provision of new housing. Local authorities' responsibility for the administration of many regulatory and community services gives them a detailed appreciation of the social and economic conditions of the area, as well as environmental constraints. The Government, with this in mind, considers the determination of policy and strategy to be a more appropriate role for local authorities.[366]The Local Government White Paper describes this role as "strategic commissioning".[367]In evidence to our inquiry, this role was supported by the Northern Housing Consortium, who argued that local authorities should move towards a strategic commissioning role through a strengthening of planning functions, with the offer of incentives to local authorities for housing delivery by others rather than providing housing directly themselves.[368]

226. This "strategic commissioning" role is similar to that which we saw being played by municipalities in the Netherlands. Local authorities in the Netherlands have much less influence over direct housing provision and therefore housing policy because of liberalisation of the housing associations. Development grants (for physical and economic improvements for example) are the main way in which municipalities can influence the housing associations. Other influences include agreeing allocations, land ownership, and spatial planning.

227. We agree that local authorities have an important role to play as "strategic enablers," and it may be that, as Lord Best told us, "it is unrealistic to expect councils, with public expenditure constraints, to know how to spend really big sums of what would be labelled public money and get back into housing big time."[369] Nevertheless, the Audit Commission estimates that, by 2012, 44 per cent of all local authorities will remain as landlords.[370] Local authorities are thus currently, and will continue to be, not just strategic enablers but housing providers. Given the severe shortage of homes and the consequent need for as many providers as possible to increase supply, we would not wish to see local authorities' "strategic" role developed at the expense of their ability to build new housing for their residents where there is a demand for it. The "place-shaping" role for local authorities envisaged by the Lyons report on local government[371] should entail not only "strategic commissioning" of housing, important though that may be. Rather, local authorities should be able actively to participate in the shaping of their communities by, among other things, building houses themselves. We do not expect local authorities now suddenly to become major developers of housing, but given that many remain as landlords, will continue to do so into the foreseeable future, and may want to build on land that they own, there should not be any impediment to them to doing so.

228. There is clearly demand from tenants to retain councils as their landlord. Over one hundred local authorities have balloted over 300,000 tenants on transferring ownership of council housing to housing associations. Most of the tenants balloted accepted the idea of a transfer but, overall, 37 per cent of tenants voted to stay with their council.[372]Given that the British Social Attitudes Survey estimates that 39 per cent of council tenants and 14 per cent of housing association tenants prefer renting from a council,[373] it is reasonable to assume that around a third of all social tenants want to live in a council-owned property.[374]

229. One of the issues raised by the Cave Review is that the social housing system has failed to provide customer choice.[375]Providing tenants with a choice is a fundamental plank of the Government's policy for housing.[376] The Government, through its maintenance of the housing revenue account system and by not allowing local authorities to bid directly for social housing grant, has prevented local authorities from building, and thereby offering future social renters the choice of a council tenancy. Some welcome moves are being made towards removing these impediments. But the Housing Green Paper made it clear that Local Delivery Vehicles are the preferred method for councils to bid for funds for new housebuilding; and which councils are able to build outside the HRA system if the provisions in the Housing and Regeneration Bill are made law will be entirely at CLG's discretion. The Government could go much further in freeing up councils to meet the housing needs of their communities.

230. We recognise that the Government has taken some steps towards breaking down the barriers which prevent local authorities from building new homes. However, the "strategic" housing role which it chiefly envisages for local authorities though important, does not address the desire within local authorities to enlarge the supply of council-owned stock and thereby give tenants a real choice of landlord. We recommend that CLG and its agencies take further steps to support and enable local authorities, in their place-shaping role, to add to the supply of social rented homes. In addition to the reform of the HRA for which we call elsewhere in this Report, such steps might include allowing councils to bid directly for social housing grant, the establishment of local housing companies, and ensuring the long-term future of ALMOs. In particular, the HCA will have an important role in promoting best practice and the development of these and other mechanisms to support and enable local authorities to add to their own housing stock.

HOUSING REVENUE ACCOUNT

231. Every local authority operates a Housing Revenue Account (HRA), which is an income and expenditure account for the authority's housing. Rents and subsidies form the income and the expenditure is accounted for by the management and maintenance of the properties.

232. Under the national housing revenue account system, local authorities do not retain control over the rents that they have collected. The Government either pays additional funds into, or takes money from, a local authority's HRA. How much is paid, and to whom, is determined by a complicated formula based on how much money the local authority needs to spend on the management and maintenance of its stock, set against how much it gets in rent.

233. In 2001, the Major Repairs Allowance was introduced to increase the resources available to local authorities to improve their housing. This programme allowed local authorities to retain more of the income they received from rent if the money went towards a repair programme. The graph below shows the significant increase in net expenditure through the national HRA which resulted from this change.

Figure 10—Net expenditure by the Exchequer through the Housing Revenue Account. 1994 -2006

Source: HC Deb, 30 Apr 2007, col 1519W

234. There are two main objections frequently made to the national HRA system. The first is that the Exchequer can take money out of the HRA system altogether and apply it to purposes which may have no connection with housing. The second is that some authorities have large sums of money taken from their area and passed to another. In its evidence the Audit Commission noted the fact that "council tenants in the Eastern region pay on average £14 per week through their rents to support housing costs elsewhere, while those in London are receiving a £15 per week subsidy from tenants in other parts of the country."[377] We heard evidence from Nuneaton and Bedworth District Council, who expect to contribute £3.3 million to the national Housing Revenue Account during 2007-08, which could have funded 150 social rented properties.[378]

Figure 11—Regional distribution of the Housing Revenue Account per dwelling in 200405.

Source—Ev 65 (Audit Commission)

235. A further significant disadvantage of the housing revenue account system is that annual changes to the system and the unpredictable fluctuation in income resulting from its redistributive nature mean that councils are only able to plan on a year-by-year basis.[379] This inhibits long term planning to use the land and the homes included within an authority's account more effectively.[380]

236. The national HRA system has few supporters. Most notably, the then Housing Minister, in evidence to us, openly stated that she is "not a fan of the housing revenue account in any way."[381] The system does not encourage high performance, and the ongoing support of indebted authorities represents a perverse incentive.[382] The Charted Institute of Housing summed up the problem with the HRA system in its evidence to us: "[the HRA] is essentially a means of redistributing assets and this masks both effective and poor performance."[383]

237. The 2007 Housing Green Paper advanced the potential for local authorities to form partnership arrangements, with English Partnerships for example, to build new homes outside the HRA system. During an evidence session with us on the Housing Green Paper, the then Housing Minister said:

384

Six authorities are trialling a system for opting out of the HRA system. Each has constructed a thirty-year business plan. Further live pilots will test the provision in Housing and Regeneration Bill to allow the Secretary of State to investigate further the potential for local authorities to opt out of the redistributive element of the Housing Revenue Account (HRA) system. The local authority and the Secretary of State could agree that no Housing Revenue Account subsidy would be payable by or to the Government in respect of the properties covered by the agreement. This agreement might be subject to terms and conditions and could include some form of one-off payment to or from the authority.

238. Reform of the system is clearly a difficult process. The former Housing Minister conceded the possibility that the results of the pilots would "raise even more complexities and that might not be the right way to do it".[385] CLG is investigating further ways to reform the HRA, and is looking long-term at dismantling it.[386] A review of the pilots to set out the way forward is due in spring 2009.[387] In the meantime, and to its credit, CLG is pursuing how the self-financing model can be implemented. The results of the modelling with the pilot authorities demonstrate how difficult such a process will be. For many authorities the business plans are not currently viable.[388] But the advantages of greater efficiency, asset management and, more significantly, opportunities to add new homes are fundamental to the long-term future for council-owned housing.

239. The national Housing Revenue Account system creates uncertainty and resentment and does not reward best practice. There is widespread consensus that the system is not working. We welcome the Government's attempts to investigate reform and look forward to seeing the results. We recommend that reforms to the system focus not only on removing from it the perverse incentives resulting from the subsidy system, but also on enabling councils to use the system either to build directly or to fund the construction of more social rented homes.

SURPLUS PUBLIC SECTOR LAND AND 'INFILLING'

240. Local authorities, like housing associations, are also being encouraged to use their assets more effectively for affordable housing. Thus far, because of the constraints of the Housing Revenue Account, the focus has been the use of surplus land for development by Local Delivery Vehicles and housing associations. Typically, a local authority will make a donation of such land, particularly within existing estates, to an LDV or housing association to enable that organisation to develop it for housing.[389]Central Government has also made considerable efforts to use its surplus land (often former NHS and Ministry of Defence sites) for housing development through English Partnerships; but this appears to be reaching its limits, as the supply of surplus public sector land has been in decline.[390]

241. Nevertheless, within towns and cities there will always be some areas of land or some buildings that are not being used effectively. In many cases the lack of use is only for a short period; but there are some areas where a more substantial rethink of the use of land and buildings is needed. Housing market renewal areas are an example of where such a rethink is taking place over a relatively large area. Similar approaches are needed at a more local level. When units within shopping parades, for example, are more often vacant than not, or when open space is still not used despite attempts at refreshment, the principal use of land needs to be reconsidered. Using such land to provide badly needed housing—open market and affordable—should be top of the list of options considered.

242. Redevelopment of land for housing should not be confined to situations where there is no demand for its current use. Shopping parades, of which many were built between the 1950s and 1970s, are a prime example. Demand may well exist for retail use in the area, but the problem may be that the age or size of the building or other characteristics such as space for deliveries, internal layout, or basic orientation do not suit modern needs. When considering options for redevelopment in such circumstances, we would encourage planning authorities not to confine themselves to thinking about more effective ways of continuing the existing land use. Subject to our comments below about the need to ensure that all the necessary facilities for a sustainable community are readily available, they should undertake a more fundamental rethink of the priorities for the use of land in the area and examine whether these areas, too, should be used to meet urgent housing supply needs.

243. At the same time as encouraging infilling to increase housing supply and to promote mixed communities, however, we consider that it is vitally important not to lose sight of the needs of existing communities, both in terms of the availability of facilities and in terms of community cohesion. In Ends and Means, Professor Hills acknowledges the role of infilling in working towards mixed communities;[391] but in evidence to us he emphasised that it is not enough in itself: "if you are trying to mix the incomes in an area it is thinking through what do we do to support the incomes of existing tenants that is important."[392]Like any new development, infilling is not always accepted by the existing residents, and the introduction of new homes for sale can create tension. Defend Council Housing, for example, told us that attempts to create mixed communities through new infill developments "[don't] lead to wealth rubbing off—it increases resentment and fragments communities at the expense of those with least money."[393] Whilst more supportive of the aims of infilling schemes, Lord Best, in evidence to us, raised a similar concern: he argued that flats within tower blocks which are vacant even after being refurbished should be sold, and new houses built on infill land used for social renting, to ensure genuine integration of communities rather than "[retaining] the old tower block but in its shadow these smart little homes for first-time buyers down below that look entirely different."[394] As Chris Langstaff, managing director of Hounslow Homes, told us, infilling "has to be part of an estate regeneration package where they [the existing residents] are going to get something out of it as well."[395] Infill developments are only likely to be effective towards creating a more mixed and sustainable community where there are clear and immediate benefits for the existing residents.

244. Notwithstanding our comments above on the use of shopping parades, for example, we are also mindful of the need to ensure that communities have ready access to all the necessary facilities. Land within estates is limited and the more housing that is built, the more associated facilities are needed: schools, shops, land for employment and indeed the very open space which often appears so attractive for potential development. There are many competing demands for land within a community and before land is disposed for housing, following which it is unlikely to be used for anything else, there should be a full assessment of the options, including extensive consultation. We are concerned that existing environmental quality or opportunities for improvement may be lost if too much emphasis is placed on housing.

245. Infilling can be a useful means of creating more mixed communities, but it needs to be designed around a widely accepted need for change. Redevelopment schemes must be part of agreed neighbourhood-wide regeneration plans, not piecemeal projects to boost housing numbers at the expense of social and environmental aims. Masterplanning exercises need to be managed sensitively, and immediate benefits must be established early and directed to existing communities. Management agreements which clearly identify a lead body need to be communicated to tenants at an early stage in the process. We recommend that guidance on the appropriate development of infilling schemes be made widely available to local authority planners.

Coordinating management of homes

246. While generally supportive of the use of wasted land for housing, Westminster Council's experience of infill development is that with different management in one space there tends to be much more tension and blame-passing.[396] Having one single agent for the management of neighbourhoods is vital to avoid confusion between organisations and to tenants. We saw the same problem on our visit to the Netherlands. The Dutch Ministry of Housing, Spatial Planning and the Environment told us that getting maintenance programmes agreed between housing associations, local authorities, residents and local businesses is a difficult process.

247. An additional restriction on effective maintenance and management is the requirement to charge VAT on housing management services. As the ALMO City West Homes told us:

397

248. A consistent approach to the management of homes and surrounding facilities is needed. All local authorities should review the management of homes in their areas to draw upon efficiencies and improved processes that could be derived from better co-ordination. We recommend that CLG provide clear and appropriate guidance to authorities on reviewing management, and provide support to local authorities throughout this process. In addition, we recommend that a review of the principle of charging VAT for management services be undertaken, with a view to lowering the rate.

Role of housing associations

249. There are over 1,500 housing associations in England, operating as independent not-for-profit businesses which build and manage a range of general and specialist social homes for rent or shared ownership. Housing associations have more flexibility in the use of their homes as assets than local authorities. Being able to borrow on the assets and future rental income and from private sources means that housing associations are able to add around 40 per cent to the value of public money funding new homes.[398]The Housing Corporation considers that, even with financial demands from investment in existing stock and rent restructuring, the sector is financially robust with steady profitability ratios and a capacity for further growth.[399]

EFFECT OF RENT RESTRUCTURING ON PROVISION OF NEW HOUSING

250. The Government's December 2000 policy statement The Way Forward for Housing set out a policy to achieve social rents in England which were "fair, affordable and less confusing for tenants." The objectives of the policy were to ensure that:

social rents should remain affordable and well below those in the private sector;

social rents should be fairer and less confusing for tenants;

there should be a closer link between rents and the qualities which tenants value in properties;

unjustifiable differences between the rents set by local authorities and housing associations should be removed.

The means to achieve those ends was the rent restructuring formula. Over a ten-year period from April 2002, the Government is encouraging councils and housing associations to set their rents according to a national formula which reflects a property's size, location and condition.[400]

251. The housing associations from Merseyside which we met during our visit to Manchester were concerned that the rent restructuring formula set rents which were uneconomic and which did not cover the cost of providing and managing homes. Rents are calculated with more reference to local incomes than to local property prices.[401]The weight of each in the formula depends on the extent to which wages and prices in the local area are above or below the average. In the northern regions, where property values are lower, the proportion of the rent formula reflecting property values is lower. This means that in some areas, rents are likely to be kept low, because wages are lower than average, even though property prices may have increased significantly. The rise in land prices following from increases in property prices increases the cost of those new developments, which in turn requires the setting of higher rents on the resulting homes to make the development economic. Where the rent restructuring formula prevents the setting of economic rents, the development cannot go ahead. It is of course important to ensure that tenants pay affordable rents; but if rents are set too low, the effect is to prevent housing associations from investing in new development. The Government needs to review the effects of the relationship between rent determination, housing associations' capacity to borrow, and the programme of building badly-needed new housing.

252. We recommend that CLG ensure that, through the rent restructuring process in particular, rents allow housing associations to devise and, more importantly, to implement viable new housing schemes. Oftenant and the Homes and Communities Agency must work very closely together to ensure that the rents are affordable to tenants but also economic to social housing providers. To this end, we recommend that they jointly publish an annual report on how they have coordinated rents and the level of subsidy for building new social rented homes.

USE OF ASSETS

253. The extent to which housing associations use their assets varies. Some associations are very active in developing new stock and a wide portfolio of other social and private enterprises. Others, while being effective managers, appear to be content not to develop and use their assets as effectively as they might.[402] Overall, it is clear that the financial capacity within the housing association sector is underused:[403] there is concern that some are generating huge surpluses.[404] (We heard that similar concerns had been raised in the Netherlands: given that housing associations manage over a third of all dwellings there, the issue was a controversial one.) Gavin Smart, representing the National Housing Federation, told us:

405

254. The Housing Corporation analysed the financial capacity of 348 housing associations in advance of the 2007 Comprehensive Spending Review.[406]This assessment concluded that, just within those analysed, a further £4.6 billion could be borrowed, which is equivalent to the total cost of over 35,500 new social rented homes. Most of this additional capacity is within larger associations and those within London, the South East and North West of England.[407]

255. The Housing Corporation has been right to expect housing associations to use their built-up surpluses as effectively as possible to build more homes and increase the supply of social rented housing. Following passage of the Housing and Regeneration Bill, Oftenant and the Homes and Communities Agency will need to work very closely together to undertake effective monitoring of the financial capacity within housing associations. We recommend that these agencies seek not only to ensure that surpluses are used effectively, but to persuade housing associations which are not using their assets in the most efficient manner to work towards a position where they, too, can help to meet the urgent need for more housing stock.

ROLE OF HOUSING ASSOCIATIONS IN PROVIDING FURTHER SERVICES TO THE COMMUNITY

256. Housing associations are able to use other forms of income to supplement their core activity of providing affordable homes. One way in which they do so is the receipt of private income, through the sale of homes on the open market for example, which is then used to supplement the construction or acquisition of new social rented homes. Another is in providing services as part of an overall package of housing provision to tenants and the wider community. The Housing Corporation encourages housing providers to develop non-housing functions such as childcare, employment training and other "added-value" services.[408] Housing associations which provide such services to their tenants and the wider community form separate agreements (with local authorities or primary care trusts for example) which are accounted for and audited separately from their core activity.

257. The Sunderland Housing Group, for example, told us that it had moved into many other areas—regeneration and providing apprenticeships, for example—and they see no reason why other housing organisations should not have similarly varied programmes.[409] Other witnesses similarly supported the development of housing associations' role in this way. The North West Housing Forum told us that any social landlord needs to "make the necessary investment in the development of neighbourhoods."[410]

258. Gaining income from other forms of activity is not widespread among housing associations. Only 174 housing associations were recorded undertaking non-housing services—health and social care, regeneration and management services, for example—in 2005.[411] Gaining income from other types of accommodation, particularly private renting, is also thus far relatively rare among individual housing associations.

259. There are two aims in the activity of housing providers in non-core areas. One is to obtain additional income to support and develop their core functions. The other is to develop the role of housing bodies as providers of public services. The former has a direct effect on the supply of rented housing because more money can be levered into supporting the improvement of existing homes and the construction of new homes. The role as public service providers is, however, in our view no less important. Housing associations are well-placed to assess and meet the needs of their communities for services which can vastly improve the quality of life of tenants. They can play a particularly important role in the provision of employment-related services, tackling the worklessness which is endemic within the social rented sector.

260. Housing associations also cross-subsidise their core activity of providing social rented housing by entering the private rental market, both by letting homes at full market rates and by making properties available at intermediate market rent to students and nurses, for example.[412] As with the development of non-housing activity, this practice has a dual benefit. Profits from private rents fund the building of new, and the maintenance of existing, social rented properties; but the letting of housing association properties to private tenants also leads to the creation of more mixed communities.[413]

261. Currently housing associations own just over 40,600 non-social units (2 per cent of total stock owned by housing associations). The vast majority (91 per cent) is owned by large associations with portfolios in excess of 2,500 units.[414]Student accommodation and units for private rent account for the greatest proportion, though the provision of specialist housing has seen the greatest growth since 2002.

Table 6—Non-social housing owned by housing associations 2002-2007

	Student accommodation	Specialist housing	Private rented	Total non-social housing
2002	11,919	3,639	8,643	35,070
2003	12,679	3,408	9,238	34,132
2004	14,133	4,295	9,124	39,810
2005	13,028	5,993	9,257	36,717
2006	14,596	5,504	9,032	38,753
2007	15,248	5,625	8,844	40,647
2002-07 % change	+28%	+55%	+2%	+16%

Source: Regulatory and Statistical Returns Survey (RSR) 2002-2007, Table 5

262. The private rented sector needs more socially responsible and larger organisations to counter the problems of quality in the sector and counter its negative image. As well as contributing to further supply within the private sector through the construction of new private rented homes or acquisition of existing stock, housing associations could also improve management standards within the private rented sector through management contracts. An example, provided by the BPF, is the involvement of the Hyde Housing Association in managing the Grainger Trust's Newlands development at West Waterlooville in Hampshire.[415]

263. We saw in the Netherlands how successful the extension of housing associations' activity into non-core business can be. Housing associations in the Netherlands are self-financing and use cross-subsidies to fund the provision and management of social rented homes. Vestia, one of the largest associations in the country, is comprised of different but complementary divisions including a maintenance section, a student rental service, an estate agency, and a development arm to find space for new homes and public amenities. Most of its money for cross-subsidy comes from sales of luxury apartments to households with higher incomes. Between €30,000 and €40,000 (£22,500£30,200) is transferred from profits to each new social housing unit. The Dutch Government provides back-up support measures to housing associations, such as a guaranteed fund which is used for collateral against the loans they take out.

264. Places for People, the second largest housing association in England, argued in evidence to us for further Government support for these sorts of activity. They proposed a "Gap Funding Model" which would fund housing associations through a combination of cross-subsidy from private sales and income from future social-rented revenues, with public funding making up the remainder of the funding necessary to make a project viable.[416]

265. Cross-subsidy from private activity is desirable, but the amount of investment required to make such activity a success makes it very much dependent on the size of the association.[417]Housing associations, particularly the more progressive, are responding to the pressure to use assets and private income more effectively. Such activity is, however, not without risk, particularly to lenders.[418] Investments in homes for sale on the open market and for shared ownership are subject to the risks inherent in the housing market. Giving evidence to the Committee examining the Housing and Regeneration Bill, representatives from the Tribal Group expressed their concern that the existing and proposed regulatory framework may not be capable of solving financial problems by finding another association (or group of associations) to take over the one in difficulty:[419]the risk that that may be the case increases with the size of the organisation concerned. The use of cross-subsidies will, therefore, be one of the most important areas for Oftenant to manage. It will be vital for the new social housing regulator to strike an appropriate balance between the risks and benefits involved in the use of private income to cross-subside the core social activities of housing associations, neither acting too cautiously and hindering its development, nor being overambitious and risking one or two high-profile cases destroying lenders' confidence in the security of investment in housing associations.

266. The Government is right to encourage housing associations to diversify into other private and social enterprises. Additional income can support the construction of new homes, and housing associations can make a vital contribution towards making communities more sustainable. There is plenty of room for further and wider development of this activity, building on the strengths of each housing association. We recommend that Oftenant, the Homes and Communities Agency and the Government all take further steps to encourage housing associations to diversify from their core programmes. At the same time, the risks involved must be closely monitored. We therefore further recommend that the Government examine the viability and benefit to social housing providers of the introduction of financial guarantees such as are offered in the Netherlands, to mitigate the risks involved in investment in non-core and income-earning activities. The provision of such backing should be dependent upon a satisfactory assessment of the quality of management of the housing association concerned.

Worklessness, benefits and the role of social landlords

267. The objective of social housing is to provide accommodation for the more vulnerable members of society. That being the case, it is to be expected that amongst social tenants there will be a higher level of indicators of social deprivation such as worklessness. Nevertheless, as we note above, the provision of social housing should also assist people to tackle some of the problems which lead to deprivation; and, as Professor Hills has shown, it is failing to do so.[420] One of the most significant themes of the Hills Review was the potential for linking measures to address worklessness within society with the management of the social rented stock. During questioning Professor Hills told us:

421

268. Addressing worklessness is not a core activity either for housing providers or for CLG itself, although there are some notable developments in this area. To be effective, measures to reduce worklessness need to be coordinated with other organisations. Elsewhere in this Report we consider and welcome the role of housing associations in providing non-housing services, including employment support. CLG is piloting five housing advice services with the aim of improving the links between employment services and housing. Given that a great deal of effort and money has already gone into tackling unemployment and worklessness, particularly the New Deal programmes, it is difficult to see how housing providers can make a significant improvement to high levels of worklessness. Even the Department of Work and Pensions, in written evidence to the Work and Pensions Committee, has acknowledged that "a very few people not looking for work find work," adding, "conversely, if you do look for a job there is a good chance that you will find one."[422] The chief responsibility for tackling worklessness lies elsewhere, and there is a danger that undue focus on this issue could distract their attention for the key and urgent task of increasing the supply of badly-needed housing.

269. Nevertheless, we welcome the efforts which have been and are continuing to be made to address the link between social housing and worklessness. We note that the Department for Work and Pensions is analysing how much worklessness in the social rented sector is explained by the characteristics of social tenants,[423]and we will be interested to see the results.

270. The new Minister for Housing, Caroline Flint MP, recently extended the debate surrounding this issue by suggesting that "social housing should be based around the principle of something for something", and raising the possibility that conditions could be built into tenancy agreements to commit tenants to self-improvement.[424] The proposal that tenants should lose their security of tenure if they do not take on work is not practicable. Local authorities' statutory duty to house the homeless means that they would still need to find the affected households new homes. This would mean a greater reliance on the private sector, which costs more, particularly if temporary accommodation is used. We have previously highlighted the damaging effect that poor supervision of private rented tenants, including those evicted from social tenancies, has on communities.[425]If a policy of eviction because of worklessness were to be followed, those problems might become more a common occurrence. That is not to say that social tenants should be excused for disruptive behaviour or for being unwilling to work; but it is to say that entwining these issues with the principle of the right to a home may not resolve the problems, but merely shift them elsewhere.

271. We welcome the efforts the Government and others have so far made to build on the conclusions and recommendations of Professor Hills's report Ends and Means on social housing and worklessness. We would be concerned if housing associations and local housing authorities were expected formally to address this issue through targets or extensive guidance, or if their performance against worklessness reduction were to become a factor affecting their funding or regulation. Worklessness is a complex issue and it will need intervention from a wide variety of different bodies if it is to be tackled successfully. Social housing providers can and should play their role in this, but it is crucial that they be able to focus on their core tasks of making better use of the existing stock and constructing badly needed new homes.

272. Nonetheless, there are two areas where efforts to address the effects of worklessness are of particular relevance to the core business of social housing providers. One is in reducing polarisation within social housing and reducing the concentration of deprivation; the other is the mobility of tenants. Concentrating deprivation magnifies the negative aspects of being in poverty such as low educational achievement, poor mental and physical health and worklessness.[426]Tenant mobility is necessary in a flexible labour market to allow individuals to move to where the work is. While there is such a severe shortage in social rented housing and such low levels of re-lets, addressing these two areas will be difficult. Once again we find that increasing the supply of rented housing is the key. In the meantime, however, as Professor Hills told us, "we can at least make sure that we are not running things in a way that all the people in greatest need and lowest incomes are put in particular areas."[427]

273. Social housing providers should be mindful of the negative consequences of polarising worklessness and deprivation within their housing, and should take whatever steps they can to address or avoid them. In particular, their allocation schemes should be designed so as to enable the movement of tenants who are making a genuine attempt to become more engaged in employment, including self-employment. We recommend that CLG enable housing associations and local authorities to trial alternative weightings within allocations and choice-based letting schemes designed to increase mobility in employment. We also recommend that CLG ensure that other relevant government departments, notably the Department for Work and Pensions, support that process. We would not, however, support any change which made security of tenure conditional on seeking employment.

Choice-based lettings

274. Choice-based letting schemes are vital for the efficient use of the existing stock; not just to ensure that social tenants can take advantage of labour market flexibility, but also to address issues of low demand. Choice-based schemes, under which prospective tenants may apply through a "bidding process" for a social rented home, were introduced relatively recently, following the 2000 Housing Green Paper. Thus far some 32 per cent of local authorities have introduced them.[428] Households applying through choice-based letting schemes are assessed according to the priority system adopted by the local authority and its partners; households' choices are taken into account alongside other factors such as need.[429]

275. Choice-based lettings bring two main benefits to housing policy. One is the potential to reduce the polarising effects of deprivation, in particular the number of homes classified as low demand. The other is the improvement to the mobility of tenants which such schemes can offer, which is particularly important to the effective functioning of a flexible labour market. Where a system of choice-based lettings has been introduced the results have been positive. Applicants prefer the system, homes are re-let faster, applications for low-demand homes increases and there are long-term cost savings.[430]

276. The combined effect of the Decent Homes programme and choice-based lettings in reducing low demand was highlighted to us during our visit to Manchester. Research by CLG shows that some landlords in the northern regions of England have used choice-based lettings as a means to counter low demand.[431] Professor Hills told us that "there are some positive lessons from the experience of choice-based lettings in the last few years which might have led to increased polarisation, but the evidence suggests they did not."[432]Sheffield, one of the first authorities to embrace the choice-based approach, has found that it has led to much greater transparency and customer control over where applicants choose to live.[433]

277. Extending choice-based letting systems across local authority boundaries, and even nationally, could enable a greater degree of mobility beyond individual towns and cities. However, Professor Hills also told us:

434

There have been significant problems implementing a national mobility scheme. The latest scheme, known as moveUK, was supposed to "bring together, for the first time, social housing and employment opportunities across the UK."[435] The contract for delivering moveUK ended on 20 January 2007: CLG made transitional arrangements for the existing schemes such as Seaside and Country Homes and the LAWN Mobility Scheme.[436]It took until December 2007 for CLG to announce a £3.8 million funding package for developing sub-regional approaches to mobility schemes through choice-based lettings.[437] Despite knowing that the mobility of tenants can reduce the pressure on social housing,[438] the Government has not provided a capable national scheme. Ministers may be "disappointed" about the lack of cross-border working within London,[439] but it is hard to take such criticism seriously when CLG itself has been unable to develop an integrated national choice-based letting scheme.

278. The Government also wishes to widen choice-based lettings schemes to include the private rented sector. The private sector is willing to participate if housing associations and local authorities are willing to share information on the prospective tenants. We were told that private landlords were unlikely to work with choice-based letting schemes if they become a means of shifting bad tenants out of the social sector.[440]

279. There is one shortcoming of choice-based lettings, that being the need to have a range of properties and locations in order to provide a choice. In areas of high demand, the real choice available is very limited. The problem is that there is scarcely a place in the country where social housing is not in high demand. Waiting lists for social housing in England are long and have been getting longer. Bald waiting list figures may not tell the whole story: it has been argued that waiting lists express demand, rather than need;[441] and there is inevitably potential for double counting when aggregating local authority waiting lists.[442] Nevertheless it is incontrovertible that waiting lists have grown (by 8 per cent in 2005[443]) and that there is a significant shortage of social rented homes, particularly for larger family homes.[444] In 2005, there were more than 1.5 million households on housing waiting lists, equivalent to almost 7 per cent of the total number of households in England.[445]

280. The result is that, for every home advertised on a choice-based lettings system in the northern regions of England, there are 80 to 100 applicants.[446] Any well-designed choice-based letting scheme should attract a lot of interest, and the number of applicants to such schemes is not in itself an expression of need. But the shortage in the supply of social rented housing is preventing realisation of the full extent of the benefits of choice-based lettings; and the competitive process can led to tension within communities.[447]

281. Choice-based letting schemes offer significant potential for addressing some of the problems of demand and of mobility within the social rented sector; they are vital for the efficient use of the existing stock. That potential cannot be fully realised unless, once again, there are sustained and substantial increases in the supply of homes to the sector. This is just one more reason to emphasise the necessity of making urgent progress. Meanwhile, however, CLG, and its predecessor, have failed to provide an adequate platform for a national mobility scheme which could be of considerable benefit even under the current constraints of supply. While developing sub-regional approaches using choice-based letting schemes is the right approach, past performance suggests that if the Department does not accept its role as the lead body, further initiatives will also fail. We recommend that CLG take steps to demonstrate that it is treating the improvement and development of choice-based letting schemes to a national level as a high priority.

Cost of housing benefit

282. Most of the discussion during this inquiry about housing benefit surrounded the operation of housing benefit supporting private rented tenants. However, the amount of money spent on assisting social rented tenants is also significant. Two-thirds of the total spending on housing (some £16 billion over 2003-04) is through demand-side subsidies such as housing benefit[448] and a majority of this expenditure (74 per cent) is used to support tenants in the social rented sector.[449]

283. Apart from concerns in the context of the operation of the national Housing Revenue Account system, we did not find much criticism of the fundamental operation of housing benefit as a demand-side subsidy within the social rented sector. It gives security to tenants as well as confidence to housing providers and lenders[450] and is crucial in allowing access to social housing to people with limited incomes,[451] particularly in London and the South East where most housing benefit is spent.[452]Relying solely on a system of personal support from the state to access a private rented system of housing, rather than funding "bricks and mortar", would create far worse benefit traps than the current system.[453]

284. The operation of the housing benefit system in the private rented sector is more problematic. There is clearly an important role for the private sector in providing temporary accommodation for those who find themselves homeless. The appropriateness of the private sector as a provider of long-term housing solutions for those on lower incomes is doubtful. In contrast to the social sector, the private rented sector is largely market driven: the aim of those who invest is to secure a return. As the Plus Housing Group points out, it does not therefore necessarily 'fit' with overall housing need.[454]The Royal Institution of Chartered Surveyors told us that "[the private rented sector's] existence should not be confused with the notion that it was established to compliment, or answer, any shortfalls in the social housing market."[455]

285. Yet this is precisely the role which it has come to serve in some areas. In London in 2005-06 £500 million (83 per cent of England's total) was paid to private landlords in housing benefit for temporary accommodation for homeless households.[456] For many households, particularly those who are not seen as a priority, the private sector is a "vitally important tool in providing accommodation".[457]Local authorities have for many years used private landlords as a source of temporary accommodation for those in acute housing need; increasingly, private rented housing is plugging the gap left by an overstretched social sector as local authorities enter long term leasing arrangements with private sector landlords.[458]Cheshire Housing Association told us:

459

Although the number of households in the private rented sector claiming housing benefit has decreased since 1993,[460]the proportion of housing benefit claimants who are living in the private rented sector has increased in recent years (from 19.0 per cent of all claimants in August 2001 to 21.4 per cent in August 2006.[461]) Part of this rise is due to the increased use of the private rented sector as temporary accommodation.

286. A distinction has to be made between the use of the private rented sector for temporary accommodation while more permanent accommodation is found, and households who have arranged to be within the private rented sector and claim housing benefit to be able to meet their rent. The former category accounts for about 50,000 households,[462]while over 700,000 households (25 per of all households in the private rented sector) who rent privately also claim housing benefit. [463]

287. Landlords appear to be profiting from the severe shortage of social rented homes by purchasing homes to let to housing benefit recipients. Barking and Dagenham Borough Council told us that "experience of recent housing developments has shown that buy-to-let investors are purchasing properties and in many cases the occupiers are households dependent upon benefit."[464] Blackpool Council told us of landlords "keen to enter the rented market or increase their current portfolio quickly snap[ping] up property, typically letting it in poor condition".[465] Similar events were also reported in Sunderland, where "a niche has emerged for private landlords providing temporary accommodation at premium housing benefit rates. Property provided can be of poor quality with insecure tenure and poor management."[466]

288. Local authorities are able to discharge their duty to homeless households if the household agrees to living in a private rented home instead of remaining on the housing waiting list. The Government encourages local authorities to maximise the use of the private sector.[467]Shelter highlighted to us how the pressure on local authorities to reduce the number of homeless households has encouraged some to press people to accept a home rented from the private sector instead of waiting until a social rented home is available.[468] Quite apart from the cost of this practice, people housed in this way lose the certainty of security of tenure which the social rented sector offers.

289. Households which cannot be found suitable accommodation, usually in a social rented home, and are in urgent need must be accommodated elsewhere by local authorities. These placements, which should be temporary, are made in private sector property leased by the local authority or a housing association, bed and breakfast accommodation (if less than six weeks), licensed accommodation such as hostels and refuges, or other non-permanent accommodation.[469] The Government has a longstanding policy to halve the number of households in insecure temporary accommodation by 2010. London accounted for approximately 80 per cent of England's temporary placements in the private rented sector and 68 per cent of all temporary placements over 2006-07.[470]

Table 7—Number of households in temporary accommodation in England and London 2006-07

	Households in temporary accommodation	Households in temporary private rented accommodation	% in Private Sector
England	88,655	51,280	58
London	59,982	41,032	68

Source: CLG Live Table 625, December 2007

Note: Averaged provisional quarterly results from Q3 2006-Q3 2007.

290. There are currently around 40,000 households in temporary accommodation leased from the private sector in London: double the number in 2001 and around 68 per cent of total households in temporary accommodation.[471]The Audit Commission's evidence to us highlighted the 20 per cent increase between 2000 and 2005 in the use of temporary accommodation through private leases to house statutory homeless households.[472]

291. In 2005-06, nearly £600 million was spent on housing benefit for temporary accommodation in England.[473] Rents paid to secure temporary accommodation from the private sector are even higher than market rents and although a cap is put on the level of housing benefit paid towards such rents, it is set high.[474]Housing benefit pays for all of the rent below the cap set for each local authority.[475]

Table 8—Number of households in temporary accommodation and expenditure through housing benefit 2005-06

	Total HB spent (£ million)	Households in temporary accommodation	Cost per household (£)
England	600	99,273	6,044
London	500	63,075	7,927
Newham	70	6,107	11,462

Source: Ev (HC 457) 154 (DWP) and CLG live tables 625 and 627

TEMPORARY-TO-SETTLED SCHEMES

292. Temporary-to-settled schemes have emerged as a method to use the money from housing benefit to fund the cost of a mortgage. The advantage of these schemes is that housing benefit revenue is used to acquire homes for the social rented sector, rather than disappearing into the pockets of a private landlord.[476] The theory is that after a lease period of around 10-15 years, throughout which housing benefit has been charged at the same rate as other private landlords receive, borrowing to purchase a property has been paid off and a new permanent social rented unit has been created.[477]

293. We took a keen interest in temporary-to-settled schemes. As the paragraphs above demonstrate, very significant amounts of money are flowing from housing benefit to pay for "costly temporary accommodation",[478] and this is a direct result of the shortage in social rented units, particularly in London. Homeless households must be found homes; but in London in particular this is requiring large numbers of people to be housed in expensive private accommodation.[479] We heard from Local Space, one of the pioneers of the temporary-to-settled model, who claim that if their approach were more widely adopted, 50,000 homes could be added to London's social housing stock.[480] This is equivalent to two years of total housing completions, or ten years of social housing completions in London.

294. Local Space in Newham and a similar scheme in Ealing (known as Safe Haven) were established by the Boroughs (under guidance from CLG) and identified the viability of the temporary-to-settled concept. These first temporary-to-settled schemes informed the development by CLG and the Greater London Authority of the Settled Homes Initiative, launched in October 2006.[481] This initiative aims to distribute £30 million to six other schemes in London to help fund the purchase of 900 homes by the end of March 2009.

295. Local Space is a housing association, but it does not build new homes. Instead it purchases a range of homes from the open market in various locations, avoiding large estates of social housing, to advance the concept of mixed communities.[482] Local Space has met the target which it set itself to purchase 1,000 homes in the east end of London by March 2008. The purchase of these homes was financed by a private sector loan secured at low rates because of a £25 million grant from the Housing Corporation and the use of equity from 450 properties transferred from the Borough of Newham.[483] The organisation offers the same tenancies as and charges rents similar to the private sector, but is subject to regulation and oversight by the Housing Corporation.[484] Bob Young, Chief Executive of Local Space, told us "The viability of the scheme is very much relying upon high rents and a continuing, committed, guaranteed rental stream. That is the biggest necessity to make the scheme viable."[485]

296. The Government has some concerns about the approach of Local Space. While CLG acknowledges that rents charged by Local Space and the other pilots are lower than other private rents, it is concerned about the length of time for which rents are kept high before the accommodation concerned becomes a permanent social rented unit and the rent lowered into line with that charged for other such accommodation.[486] Local Space argued that because their model generates a surplus, there is a possibility of changing to affordable rents earlier; but pointed out that this would reduce the total number of homes purchased to then be used for social rent.[487]

297. The Department for Work and Pensions has more fundamental concerns about the long term viability and risk of the Local Space scheme. The scheme is intended to run for 10 to 15 years before the housing purchased under it is converted to social rented units. DWP notes that there are likely to be changes to the housing benefit system from 2009 (separating the reasonable rent and management costs) which would "have significant implications for schemes such as those operated by Local Space."[488] DWP describes the potential impact on Local Space:

489

298. The effectiveness of the temporary-to-settled programmes will be significantly curtailed by the reforms that DWP has in mind. DWP justifies its reforms, and their effect on Local Space and similar schemes, by pointing out that the explicit use of housing benefit in this way is a departure from the expectation that it is paid to meet an individual's liability.[490] Ashley Horsey, Commercial Director of Local Space, told us

491

299. The Government, though previously having given support to the formation of the temporary-to-settled model, no longer considers it appropriate to use housing benefit to increase the supply of social rented homes and create more mixed communities. The cost of using the private rented sector to house the homeless is high, but inevitably so, at least whilst there remains such a shortage of social rented stock. Temporary-to-settled models have developed so that the public sector can get something from this process.

300. Necessary though they may be, reforms of the housing benefit system must not result in, as one of our witnesses put it, "throwing the baby out with the bathwater" when it comes to temporary-to-settled schemes. We recommend that, in implementing those reforms, the Government ensure the continued viability of temporary-to-settled schemes and the opportunity which they represent to use public funds which would otherwise only benefit a private landlord to increase the supply of social rented homes improved to a decent standard. We recognise that it is a costly approach, but so is paying for private accommodation for homeless households.

301. Meanwhile, we emphasise once again the importance of increasing the supply of social rented housing. Only by increasing that supply can the huge long-term costs of housing benefit, not to mention the misery of households forced to live in poor quality temporary accommodation, be reduced.

Private rented sector

302. Agents involved in the private rented sector encompass large institutional investors and landlords, individual investors in buy-to-let, letting agencies, housing associations using private income as cross-subsidy, regulators such as local authorities and a wide range of others. We were surprised to learn that, despite the large influx of new investors described above, most private buy-to-let stock is still held by investors with ten or more properties.[492] Landlords owning fewer than ten properties account for only a small proportion of the entire private rented sector and most homes rented privately are owned by landlords with more than 100 properties. Additionally, the fragmentation of the ownership of the private rented stock is not reflected to quite such an extent in its management, since many smaller landlords choose to use letting agents to manage their properties.

Figure 12—Ownership of private rented stock by landlords

Source: Ev 87 (Paragon)

LARGER INSTITUTIONAL INVESTMENT

303. Further significant increases in supply in the private rented sector will require large institutional investors to be attracted back to the sector. During oral evidence, the British Property Federation (BPF) told us that the several separate areas of regulation act as a disincentive to institutional investment.[493] However, giving further supplementary evidence, the BPF later acknowledged that:

494

304. Complaints about the burden of regulation on investment in the private rented sector are understandable, but we are not convinced that the effect of regulation is to disadvantage larger institutions, either by comparison with other investors or by comparison with alternative investment possibilities. Nonetheless we recommend that, when reviewing the future of regulation of the private rented sector, the Government investigate the potential for improvements to the regulatory process to encourage further investment from larger institutions to improve supply.

TAX REFORM

305. The private sector considers that improvements in supply through more institutional investment will also require further tax reforms.[495] One of the main issues raised by potential investors is the effect of aggregating the stamp duty of all properties, rather than applying the tax separately to properties, which acts as a disincentive for larger investors.[496] Another fiscal disincentive is the application of VAT to repairs and maintenance.[497]

^306.Given that one of the main problems with the private rented sector is the relatively poor standard of repair (the sector has the largest proportion of non-decent homes), taxing an activity which so badly needs to be carried out appears perverse. Complaints about VAT are not the sole preserve of profit-maximising private firms: it is also an obstacle for community ownership and management organisations.[498]We discussed the disincentive represented by the application of full-rate VAT to refurbishment, renovation and other improvement of homes in our recent Report Existing Housing and Climate Change, recommending that the Government seek to remove this anomaly.[499]

307. The Riverside Group, the parent body for several housing associations in England, told us of a further way in which the tax system could be acting as a disincentive to housing developers in developing affordable homes. The group noted that when housing associations dispose of land to private developers, to cross-subsidise the construction of new homes for example, any receipts (in cash or in kind) are subject to corporation tax, reducing the affordable housing outputs achievable.[500]By contrast, any surplus that housing associations or ALMOs make in the course of their core business is mainly untaxed.[501]We have also highlighted the need to review the application of VAT to management services offered by providers of social housing.[502]

308. The tax system should not impede or deter any housing provider from taking the steps necessary to improve the supply of rented housing. We recommend that CLG investigate, in cooperation with the Department for Business, Enterprise and Regulatory Reform and the Treasury, reforming the taxation system and introducing other measures:

to promote greater institutional investment in the private rented sector;
to encourage higher standards of maintenance and responsible management of homes;
to promote greater investment in energy efficiency; and
to enable the greatest possible amount of money to be available for improvement of the supply of rented housing, including abolishing corporation tax on cross-subsidy deals by housing associations where it can be demonstrated that the proceeds are being used for the provision of affordable housing.

321 HC Deb, 29 January 1998, Col 316WS. Back

322 DETR (2000), Quality and Choice: A Decent Home for All-The Housing Green Paper, para 7.10. Back

323 Ev 176 (CLG) Back

324 Treasury press notice 69/07, 21 June 2007. Back

325 Para 127ff. Back

326 Every Tenant Matters, para 5.74. Back

327 Q 418 Back

328 ODPM, Guidance on Arms Length Management of Local Authority Housing-2004 Edition, page 19. Back

329 Ev 68 (Audit Commission) Back

330 Q 356 Back

331 Every Tenant Matters, para. 5.68. Back

332 Ends and means, p169. Back