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Memorandum from the Building Societies Association (CRED 57)
Executive Summary - The Government should seek to allow the housebuilding targets set out in the Barker Review to be realised. - Encouraging lots of small scale development may be more productive than large scale developments - Shared ownership schemes designed to help aspirant first time buyers remain complex for both building societies and borrowers, deterring both from participating in the schemes - Adoption of standard section 106 agreements by local authorities and developers would facilitate greater building society involvement in affordable housing schemes - Homeowners who have difficulties repaying their mortgage need to be encouraged to contact their lender as soon as possible
The Building Societies Association 1. The Building Societies Association (BSA) welcomes the opportunity to contribute to the Committee's inquiry.
2. The BSA represents all 59 building
societies in the
Housebuilding Targets 3.
The Government is proposing that 75,000 more homes will be built in areas of
"high demand from Northumberland to
4. We welcome recognition from the Government of the need to build more houses. We agree with the findings of the Barker Review that the major contributor to the very high levels of house price inflation that have characterised the economy until recently has been the imbalance between supply and demand for housing, with the increase in the housing stock not keeping up with the demand for housing. As such, it is no surprise that house price inflation has been so high.
5. But despite the fall in house prices that is currently taking place, we believe that the underlying supply and demand imbalance remains (and, in view of the low levels of building currently taking place, could be worsening). As such, once buyers start to return to the market prices are likely to start rising again, albeit at slower rates than before.
6. Even in the unlikely event of this not happening, as a consequence of how high property prices have become, despite these recent price falls, property will remain unaffordable for many.
7. As such, it is vital that the Government continues to facilitate the building of property where there is need and a demand for that property. We believe that the new building levels identified in the Barker Review should be viewed as a minimum, and that new build properties should be of a design and type that will meet local demands.
8. We note that many of the Government's planned new developments have attracted considerable local opposition. We do not pretend that these are easy decisions to make but, if we are serious about addressing affordability issues then development will have to be allowed to take place in such areas.
9. To ensure that such development takes place with minimal environmental impact and with the support of local people, it should be done on a small scale. Some of the large developments that have taken place in rural areas in the past have alienated local communities simply because of their size - a 2 property development is going to attract a lot more support than a 200 property development in a small village.
10. It is also important to note that opposition to further development is often not as a consequence of the new development itself but because of the impact of the people who will live in the new properties on local services and infrastructure. As such, any increases in development should be accompanied by a proportionate increase in the provision of local services.
Help for Prospective Homeowners 11. We note that the Government is proposing a scheme that would allow eligible households earning less than £60,000 to rent a home at 80% of the market rent for 2-3 years and then be able to buy a part share in the property.
12. Potential first time buyers often view the problem of saving for a deposit as being one of the major barriers to getting on the housing ladder. As a consequence of prices being so high, aspirant buyers can often be faced with having to save £20,000 - £30,000 just for a deposit. And with these high property prices leading to high rents, the prospect of saving for a deposit that is often larger than an average annual salary can prove daunting for a potential buyer.
13. So giving potential buyers the opportunity to pay a reduced rent for a period to save up for a deposit may help.
14. However, in practice, we doubt that the scheme will have the impact that the Government hopes. Take up of the established shared ownership schemes has been low, amongst both lenders and borrowers. This is due to a number of factors, but not least the complexity of the schemes (don't forget that they are targeted at people who usually have very little understanding of how both the housing and mortgage markets work) which serves to prevent many potential applicants from going ahead with their plans.
15. The already complex system is further confused by the role of Homebuy Agents, who represent a further level of administrative burden and possible confusion for participants, especially as many of the friends and family members advising first time buyers will not be familiar with the role of Homebuy Agents.
16. Although the proposed scheme will be welcomed by aspirant first time buyers, for it to be successful, the scheme will have to be as simple as possible, from both a borrowers and lender's perspective. This will be especially critical as the introduction of the rental period would suggest the possibility that this new scheme could be even more complex than the existing schemes.
17. From a lender's perspective, there are two main issues that have made them reluctant to enter the low cost homeownership market, both via the Government schemes and through ones they have sought to develop unilaterally. Resolution of these issues would represent a major boost to building society participation in affordable homeownership schemes.
18. Firstly, they report that many housing association and local authority staff involved in low cost housing initiatives are not conversant with lender practices and processes, and how the mortgage application process works. This leads to unnecessary delays and difficulties, increasing costs for building societies and frustration to prospective buyers.
19. They also report that the use of widely differing section 106 (s.106) agreements also causes problems. While we recognise the benefits that s.106 requirements can bring, different local authorities and housing associations have different agreements. As such, societies have to devote considerable resource to investigating the implications for them of each one, which increases the cost and which can further dissuade societies from participating in the schemes.
20. This is all the more unfortunate as the Housing Corporation has developed standard s.106 agreements and clauses that meet lenders requirements, and we believe that local authorities would have much greater success with affordable housing projects if they utilised those standard agreements.
Help for Existing Homeowners 21. The number of homes being repossessed has gradually been increasing over the last twelve months. And while forecasts for the numbers of property repossessions suggest that the number of repossessions will rise, we expect them to remain well below the levels experienced during the last housing market slowdown.
22. This is a combination of building societies ensuring that they only lend to people who can afford the mortgage in the first place, and the systems that they have developed for helping people who encounter problems paying their mortgage and ensuring that they can stay in their homes.
23. Societies have found that the key to ensuring that a homeowner can stay in their property when they have repayment difficulties is that the borrower contacts them as soon as possible to arrange alternative repayment plans. This may include a rescheduling of the mortgage, a repayment holiday or help dealing with other debts.
24. However, if the borrower doesn't seek help with the mortgage repayments as soon as possible, then problems soon start to escalate, and the borrower can find themselves in a rapidly deteriorating situation that can then be difficult to get out of.
25. So it is critically important that mortgage borrowers who are facing difficulties contact their lender as soon as possible. And any help that Government can give, through local authorities or through other agencies, to encourage borrowers with problems to contact their lenders at an early stage is to be welcomed.
26. Likewise, the changes to the Income Support for Mortgage Interest (ISMI) system will in turn help homeowners by allowing them to claim the benefit sooner and to claim for larger amounts. This will in turn make it easier for societies to help homeowners in difficulty.
27. We view the proposals to allow local authorities the opportunity to help homeowners with mortgage problems with interest. Clearly any scheme that would avoid repossession is to be welcomed. However, as noted above, the key to allowing someone the opportunity to stay in their home is that the borrower contacts the lender as soon as they identify potential problems. If they do this, then a solution to the problem can usually be found.
28. We are concerned that the establishment of a well publicised local authority safety net could discourage borrowers contacting their lender at the earliest opportunity to seek to sort out a solution to their problems, and that this could, in practice, make it very difficult for the problems to be resolved because they had left seeking help too late.
29. It is the borrowers who do not do this who find themselves with problems. Not contacting the lender early enough sees them running up so much debt by the time that they seek to resolve their problem that it can be difficult for a solution to be found that meets the needs of both the borrower and the lender.
November 2008 |