Examination of Witnesses (Questions 1-19)
MICHAEL COOGAN,
DAVID ORR,
JOHN STEWART
AND DR
PETER WILLIAMS
16 DECEMBER 2008
Q1 Chairman: May I welcome you to this
session and just explain that flu is raging through Parliament
so it is partly responsible for the absence of some of our colleagues.
The rest of us are here, moderately healthy and keen to question
you on the issues relating to the credit crunch and housing. I
should like to start off by focusing on the current delivery of
new-house build and the relationship to the targets which the
Government have set themselves over the medium and long term and
to get your estimates of where you think house building is at
the moment and how difficult it is going to be for the Government
to deliver on their long-term target of 70,000 affordable homes
a year.
Mr Orr: First of
all thank you for inviting me to come along to give evidence.
The first thing to say about the targets is that we in the National
Housing Federation were very strong supporters of the scale of
new development implied by the targets. It is very important to
recognise that, in the midst of all the other turmoil in the financial
markets and the impact that has had on housing and particularly
owner occupation, housing need has not gone away and housing demand
has not gone away. We are enthusiastic supporters of the target
of 70,000 new homes a year. The way that housing associations
have contributed to meeting that target has been through a combination
of public investment, private borrowing and sales-based cross-subsidy.
If you take the sales-based cross-subsidy out of the equation,
you have to replace that. We think we can deliver a very high
proportion of that number of homes provided we can replace that
sales-based cross-subsidy. There is more land available, we have
sites which have the capacity to be started, but we cannot do
it based on an assumption of a significant volume of sales. It
needs to be re-profiled so that it is more about rent with a more
varied rent offer including market rent, intermediate rent and
the prospect of rent then becoming a leap into a purchase. It
will require a different degree of support from Government, perhaps
equity investment by the Homes and Communities Agency or a higher
proportion of grant funding or land becoming cheaper or more easily
available. We are in a position now where we have a very detailed
conversation with the HCA and with Communities and Local Government
officials. It is difficult and unless changes are made very quickly
the programme for next year will be very thin indeed, but I am
increasingly optimistic that we can reach those agreements with
Government and the Homes and Communities Agency.
Q2 Chairman: That is very helpful.
Before we explore all of those in detail, do any of the rest of
you have any comment on that?
Dr Williams: The NHF point is
well made. The question of whether the cross-subsidy model is
completely broken is a point of emphasis and David actually said
that; he made the point that it would be more varied, more complicated
going forward. We cannot assume the simple read-across from low-cost
home ownership cross-subsidising renting. There is no doubt that
puts a constraint on the development programme. However, I want
to raise a more serious constraint on targets which are still
valid and they are for the long term and much of that turns on
capacity which I am sure John will talk about. The big question
is resolving whether there will be a long-term credit constraint.
If the mortgage market is simply to be based on deposits, this
is problematic at least until securitisation markets re-open.
Crosby has recommended that they should be re-opened and that
Government should provide a guarantee but the proposals as set
out at present are quite limited. We can perhaps come back to
that. So there is an issue there about the capacity of the funding
market ultimately to support the volumes that people are talking
about in total. We were expecting lending volumes to be lower
next year; clearly new development is only a small part of that
but it will be a factor and that will mean that some people find
access to the market more difficult. The final point I just make
from this is that in all of this clearly what we are re-writing
is the landscape of housing tenure in the UK ultimately through
the credit crunch and perhaps we might come back to that. It ultimately
means a smaller home-ownership sector and a larger set of rented
sectors.
Mr Stewart: I very much support
Peter's comments about Crosby. The new home sector—I am
thinking particularly of the private side—is dependent on
the housing market as a whole; it is about 10% of the market so
if the market is down then house building comes down as well.
The underlying targets, the wider targets—the two million
and the three million, not just the affordable housing targets—remain
just as valid because they are about people and housing need and
housing demand. The fact that supply will be down over the next
two or three years, possibly longer, does not change the fundamental
fact that those people exist, they need homes, they need adequate
housing. I do not think we should lose sight of the fact that
the targets are still as valid today as they were 12 to 18 months
ago. We very much support the Crosby recommendations and we are
concerned that the Government waited until the Crosby report and
then said they were going to wait yet again until the Budget.
We were very surprised by that. The Treasury must have been well
aware of what Crosby was thinking about. He had already done his
interim report earlier in the year. We were very disappointed
when they put off a decision until the Budget, which will presumably
be March or April. We think urgency is important.
Mr Coogan: The first thing to
say is that you do need targets. The timeframe in which you achieve
your objectives is obviously more challenging in the current environment.
The Crosby report and recommendations which were touched on were
first put to Government in autumn 2007, so we, like others, are
frustrated that they are not yet implemented. We do have a rationed
mortgage market and that does mean that the money will either
go to home owners or private renting or social housing and we
do not yet know how that is going to play out into the future.
We need to make sure all of the sectors are appropriately funded,
but the pie is smaller.
Q3 Chairman: May I take up a couple
of points which have come up there and I am sure we will explore
the others in the rest of the session? The first is this issue
about demand and need. Clearly demand, as expressed by people
with money to buy, has fallen off. Are you all saying what Dr
Williams was saying which was basically that the underlying need
remains the same and is not affected by the credit crunch or by
the economic downturn?
Mr Stewart: I would certainly
support that view. There is a subtle distinction between need
and demand of course. What matters to a private house builder
is effective demand, not just a desire of someone to buy and it
is the effective demand which has fallen so sharply. From our
evidence—and we do not have hard statistics on this, certainly
what house builders tell us is that the number of visitors to
new home sites is down by a certain amount whereas the number
who can actually buy is down significantly more than that. We
have taken that to mean there is still, even given current circumstances,
strong demand for housing but many of those people who would like
to buy are unable to at the moment; they have not gone away, they
are still there.
Mr Orr: I would say that it is
probably the case that the need is increasing; it is not just
remaining stable but is increasing. It is increasing because we
continue to create new households for a whole variety of different
reasons at a rate much greater than the replacement rate in the
economy. The kind of indicators of that are that the one in 12
people in England on social housing waiting lists is, according
to the LGA, likely within a couple of years to become one in ten
and that seems right to us; that is certainly what we understand.
The level of overcrowding in London is growing, the number of
three-generation households is growing, these are measures of
unmet housing need and those measures are going to grow. So there
is an absolute requirement in this market in particular to think
flexibly about how we can respond to that challenge and ensure
that we continue to develop new homes.
Q4 Chairman: Just to clarify, are
you saying that overall need is increasing or that the type of
need is shifting from ownership into rental or social rental?
If it is that, is there also going to be increasing demand for
private rental?
Mr Orr: It is both, clearly both.
One of the potential benefits of the re-thinking that we are having
to do is that it may allow us to create a much more varied rental
market in the economy than we have had until now. Actually we
have needed that for some time. Our market has been able to accommodate
people who can afford to buy and people who are on very low incomes
accessing social rented homes, but there has not been anything
in between. This gives us an opportunity to think much more creatively
about what a fully functioning rental market would look like.
Mr Stewart: It is an important
distinction. There are those who will always require social housing
and there will be those who will always be able to buy in the
open market even in today's market. There is a large intermediate
category, which I suspect at the moment is extremely large because
many of those people who even theoretically could buy just cannot
get access to a mortgage. We would certainly support a healthy
private rented sector and we are working with others to try to
help that along. There is no way that we can say that the nature
of the credit crisis has reduced the demand for owner occupation,
for example. It is still there, it is just that there is this
artificial constraint on whether people can actually achieve what
they aspire to.
Q5 Mr Betts: In terms of this development
of a different rental provision, are we talking here, as some
of the British Property Federation have been arguing for, about
people coming in and investing for the long term in the private
rented sector, not the buy-to-let sector but actually developing
their own products and then letting them and managing them and
seeing them as a long-term asset to hold? Is this the sort of
arrangement you are looking for?
Dr Williams: Many buy-to-let investors
are long-term holders. To characterise buy-to-let investors as
here and gone is not at all what the survey evidence would support.
Buy-to-let investors by and large are long-term holders. Clearly
there is the opportunity to open up a wider investment market,
pension funds being one obvious category. There is also an opportunity
for housing associations to be, potentially short term but in
some cases maybe long term, themselves owners of private rented
housing that is renting for the private market as opposed to the
social rented market. So there is potential for a diversity of
providers. If I may, just to reinforce a point I wanted to make,
we should not assume that because prices all decrease affordability
increases because clearly we are facing a situation where we have
tightening access to credit, the terms of credit are much tighter
and in some cases, if you use the example of the non-prime market,
the credit simply is not available, so there is virtually no mortgage
provision in some parts of the market. That impacts upon a number
of people including right-to-buy purchasers, foreign nationals,
relationship breakdowns and a number of people who would otherwise
have entered and accessed the home ownership market will need
to go somewhere else.
Q6 Mr Betts: May I come to my second
point? You are talking about the fact that long-term demand and
the desire to be owner-occupiers for many people who cannot afford
it at present probably has not gone away. Is there not a potential
major problem coming at some point in the medium term if the credit
squeeze relaxes before the industry gets itself back in the capacity
to start building again? We could actually see home prices, having
gone down very rapidly, starting to come back very rapidly because
of the shortage which has built up and because people have begun
to be able to buy again.
Mr Coogan: We do have some risks
here but clearly it depends on the timeframes of both the slowdown
and the bounce-back. We are in a situation where the demand is
out there but it is being curtailed in terms of home ownership
because of house price falls. If there is not sufficient supply
you will come back to the point where there is more demand in
individual areas and that starts to stop the slowing down of house
prices and starts turning it round. I do not think it will necessarily
bounce back very fast but that is one of the questions because
it is unclear at the moment where we are going in terms of the
recession, the timeframe, how long house prices will keep falling
or when they may start to go back up. Clearly if you do not have
the infrastructure ready to have the supply of houses to meet
the demand you do have a potential underpin for house prices and
create some of the pressures we have seen over the last ten years.
Mr Stewart: Definitely the capacity
will be there for another spike in house prices because we have
a long-term under-supply in this country, which Kate Barker recognised
in her report and we have been arguing that long before Kate reported.
That situation will worsen over the next few years because the
housing numbers will fall below what had been assumed would happen,
but it critically depends on what happens in the mortgage market.
If the mortgage market were to go back to where it was, then clearly
you would have capacity for a big increase in house prices, but
that is unlikely to happen in the short term. We must not forget
that last time we had a crash in the housing market it finished
in 1992 and it was 1996 before we finally began to see some recovery.
It will be several years before that could happen but fundamental
to it is that that is a problem which is there; the under-supply
has not gone away and in fact has probably got worse.
Dr Williams: We do not know post
the crunch what the regulatory response will be in terms of constraints
on mortgage lending by regulators, international, European and
UK. Lending risk appetite is massively depressed, as you might
expect, and will be diminished for a long time. Overlaid on top
of that will be the question of the regulatory response which
we do not know at this stage.
Mr Stewart: May I just add that
I think that is absolutely critical. A lot of this is premised
on nothing being done. The Government have taken action and we
welcome what has been done so far but if Crosby were implemented
and if it worked, we would hope that could cause a fairly quick
turnaround. If Crosby is not implemented, then the situation will
be much worse. The Government have in their power measures they
could introduce which probably all of us would believe would have
a significant impact.
Q7 Mr Betts: Is Crosby felt by all
of you to be absolutely key to the recovery?
Mr Coogan: The prognosis that
if we have a net lending negative figure next year the market
would shrink is a view that he has expressed that we would not
disagree with in the current environment. That does mean therefore
that there are fewer lenders available to lend, less money available
to lend to those you want to lend to and your choice is where
to lend. Do you lend to home owners, do you lend for private rental,
do you lend to social housing? Those choices will be more difficult,
the pie will be smaller but it is in an environment where the
customers also are less likely to come to you and ask to borrow.
Mr Orr: It is also the case for
us that the availability of mortgage funding is absolutely critical.
The incidence of people looking for shared ownership purchases
is higher this year than it was last year. Housing associations
are seeing more and more inquiries about different kinds of shared
ownership. However, the rate at which these become completions
is absolutely tiny. In some cases it is because people are saying
that they think this property may still go down in price so they
are not going to buy, but in the big majority of cases the transaction
fails because of the non-availability of mortgage finance.
Q8 Emily Thornberry: You were talking
about differential rents and certainly it is something which within
inner London we are very conscious of. The average two-bedroom
social rented housing in Islington is £80 a week whereas
in the private sector it is £300 a week. However, we have
many people from the housing waiting list who end up in the private
rented sector but being paid for by housing benefits and obviously
therefore getting caught in the classic poverty trap we have always
wanted everyone to avoid. The idea of differential rents and different
types of rents, intermediate rents and everything else, opens
a political spectre which is quite frightening. How would you
distinguish between those who are given the social rent and those
given the intermediate rent and those given a private sector rent?
The idea of the housing associations in particular going in wholesale
to an entirely different type of rented system is something which
is a really big nettle for us to have to grasp. I wondered whether
you could talk any more about that.
Mr Orr: There is no way around
this. If you have different kinds of renting offers, then the
determination of who gets them is going to be income dependent.
If you have an intermediate renting offer—and intermediate
at present is defined as being 80% of market rent—then that
is likely to have the same kind of income cap on it as the low-cost
ownership initiative of various kinds. So if you are earning above
an income cap then you would not be eligible for that and inevitably
intermediate rent would come with a degree of eligibility criteria
because there is a degree of subsidy implied in it. Market rent
of course is different because if you are paying what is in the
market, then that is open to anyone who wants to be able to access
it. Is it appropriate for a housing association to be doing this?
Some already are of course. Is it appropriate to be doing it in
the volumes that may be necessary? There are some very important
questions for housing associations and local authorities and others
about how we retain mixed income communities. The way that we
have tended to do that has been through a focus on tenure. If
we are not going to be able to deliver mixed tenure development
for the next few years, then we do need to deliver mixed income
developments. Market rent with an opportunity but not an obligation
to buy is one option. Intermediate rent leading to a shared ownership
opportunity is another possible way. We have to think creatively
about it. One thing housing associations can bring to the table
is pretty widespread expertise in property maintenance and housing
management.
Dr Williams: I do think it would
be unwise if associations en masse thought they could enter
the private rented sector. The business skills there are quite
different; the competition is complicated, not least because there
are large numbers of home owners renting out their properties
as well, so it is a very uncertain base in terms of the price
to be achieved. It is clearly very appropriate for some who have
the expertise and competence but the idea that the sector as a
whole makes a major entry into the private rented sector would
probably be inappropriate.
Q9 Emily Thornberry: Also do you
not have an obligation as social landlords to have properties
of a particular type. You have higher standards, larger rooms,
better insulation, these sorts of things?
Mr Orr: Yes; absolutely.
Q10 Emily Thornberry: Would you be
able to rent in the private sector?
Dr Williams: That is why I suggested
that it is an intermediate hold for some associations. In other
words, you recognise exactly the point you are making and David
was agreeing with which is that you are not going to make all
of those high standards without a lot of retro-fitting and all
the rest. You therefore hold them as private rented property for
a period and then potentially take the decision whether to exit
that in the recovery or whether to sustain and support them and
potentially even move them into social housing.
Mr Orr: Yes, but you do have to
approach that from the end which says how do we improve the environmental
and space standards of our housing stock more generally? I do
not think it would be appropriate to use the present market as
an excuse for moving backwards from some of the decisions we have
taken about environmental and space standards.
Q11 Emily Thornberry: You were talking
earlier about housing associations delivering housing based on
public investment, private borrowing and cross-subsidy from sales
and the sales aspect having dried up. Are you saying that private
borrowing is not drying up?
Mr Orr: No, I am not saying that.
There was a spell three or four months ago when it was virtually
impossible for housing associations to access new borrowing. They
are able to access new borrowing now but at different cost. The
price of money for new development has increased significantly
which obviously has an impact on the relationship between public
and private investment within a fixed rent envelope. There is
a much wider range of issues about lender behaviour which impacts
on housing associations' business than purely new borrowing for
new development. In a way that is the easy bit.
Q12 Chairman: On the point Mr Orr
was making that we should not use the recession as an excuse to
reduce environmental and space standards, Mr Stewart do you have
the same view or not on that point?
Mr Stewart: This is a difficult
one because I know David makes this point. The inference often
is that somehow standards in the private sector are inadequate,
which I would strongly dispute. The OFT carried out their study
recently and I doubt the OFT came in thinking that the industry
was absolutely squeaky clean.
Q13 Chairman: We are not suggesting
they are inadequate, but it is the case, for example, that on
the code for sustainable homes housing associations are required
to deliver to a higher standard than is obligatory in the private
sector. That is what we are talking about, for example.
Mr Stewart: Okay, yes, I understand
that. The reason that the ten-year programme was originally agreed
between private sector and Government was because it was felt
that was feasible from a technical point of view, from a point
of view of research and development, consumer satisfaction and
particularly from developing capacity within the supply industries.
The idea that you could apply code 3 immediately across the entire
output, put aside the credit crunch, was just unrealistic; it
just could not have been done practically.
Q14 Chairman: But you are not saying
that the credit crunch means you should delay it still further.
Mr Stewart: It depends; it very
much depends. In our submission there is a very big issue about
the degree to which land value can fund policy and regulation.
Q15 Andrew George: May I come back
to the issue of targets? I just need to understand where you are
with this. As I have always understood it, the three million by
2020 target is merely a means to an end, the end being meeting
housing need. We are in a different environment now. There has
been a credit crunch, the supply side is drying up to an extent
we can tell and you are concerned still about meeting that particular
target. I am sure Mr Orr's organisation is obviously very concerned
about those in social housing need, but if the end—because
the three million is merely the means—is meeting housing
need, I do not hear anything you are saying which reassures me
that you have any understanding of what the current level of need
is. That is surely what we should be targeting, not simply numbers.
Mr Stewart: I am not sure I quite
understand your question. House builders can only build what they
can sell, whether to a housing association through a 106 agreement
or to the private buyer. House builders do not relish the thought
of cutting back on staff and cutting back on capacity and not
building. If today they could be building 50% more than they are,
they would be doing that. The problem is an artificial constraint
on whether people can buy or not. That does not affect the fundamentals
of population and household formation and so on. So the need and
the aspiration for housing are still there. Households still need
a dwelling. You could debate about which exact households.
Q16 Andrew George: Are you saying
that you agreed with the three million figure only because it
sounded a nice high number for you?
Mr Stewart: No, no. We agreed
with it because it was a sensible number, because we believed
it was based on hard evidence inasmuch as any projection is hard
evidence.
Q17 Andrew George: So what is the
evidence now then?
Mr Stewart: It will not have changed.
The only way that figure could change significantly, given that
most of the people who would have formed the households over the
next 10 or 15 years are here today, they are living today, they
are my kids who are growing up and so on, would be if there were
a very significant change in inward and outward migration over
the next 10 or 15 years.
Q18 Andrew George: Or through second
homes or less churn in the market. There are lots of lifestyle
choices.
Mr Stewart: Second homes is a
very small component, tiny, it does not make a significant difference.
Empty housing is very small in the context of this. These are
tidal forces we are talking about and unless we assume that migration
changes significantly, those households and those people will
be there. Some of those households will not be able to form if
the dwellings are not there. Children will not be able to leave
home, people who get divorced will have to go back and live with
Mum and Dad. Those kinds of things will happen. The people will
still be there.
Dr Williams: Do not forget that
the three million is also about affordability. The three million
is about slowing the increase in house prices, improving affordability
so that demand can become effective. We have rehearsed already
a number of reasons why that is more difficult but it is not just
about a need-based measure.
Q19 Chairman: May I just mop up one
or two little queries we have from your evidence about unsold
new private homes? There seems to be disagreement between you
as to quite the volume of unsold private homes, why they were
not being bought by anybody, including housing associations and
also the issue of land prices where there seemed disagreement.
Unsold private homes first.
Mr Stewart: That affects our members.
I was not aware that there was disagreement. There are no figures
on that in this country unfortunately, unlike the United States.
We do not have figures for stock levels so we do not know the
numbers of unsold stock. Certainly from talking to the house builders—and
we are in very close touch with them—a few of them have
reported numbers but we have no industry figure. One suspects
that it is quite a large number. The Government have implemented
a number of measures. There is the so-called clearing house which
was £300 million for RSLs to buy up unsold stock. I appreciate
there are some concerns that RSLs are expected to meet code 3
and higher space standards than the private sector can offer and
there is some degree of flexibility. I know that there has been
success in that. I do not think the numbers have been published
but I understand that there has been some success there. The house
builders themselves are gradually clearing the stock. The key
thing about stock from an economic perspective is that as long
as you have stock outstanding you tend not to start new dwellings.
So the whole process tends to grind to a halt; which is why starts
are so volatile because they reflect what is happening to stock.
Once you have cleared those then house builders will be ready
to start new sites or new properties. A lot of sites have been
not started or have been mothballed while they are trying to clear
current stocks.
Mr Orr: It is the case that we
do not know exactly what the numbers are. It is also the case
that there is evidence of significant numbers in particular places
of one- and two-bed city centre apartments which are lying unsold
and housing associations have been invited to buy those. These
properties are generally not suitable for social housing and the
reasons are to do with standards. In the private sector a two-bed
apartment may well be bought by a couple, two people, who will
live there for four or five years and sell it to a similar household.
If you are running a social housing organisation, the expectation
and the expectation from local authorities making nominations
to it will be that a two-bed apartment will be occupied by three
or possibly four people and possibly for the next 20 years. That
is a huge maintenance cost on properties which are too small to
be able to accommodate that properly, but it is also a huge personal
cost on the people who actually live in those homes. Generally
in social housing we house people who are on very low incomes,
so if they are not environmentally sustainable, you trap people
in fuel poverty as well. These properties are not suitable for
a social housing purpose. The challenge for us is to identify
what purpose they are suitable for in a market in which individuals
are not prepared to buy them and lenders are not prepared to lend
on them. That is where it is right that we should be looking at
market rent and much more short-term use so that we can at a future
point revert to the original expected use, but if we buy them
for social housing, they do not revert to that original intended
use, which is why housing associations are not really in the market
to buy them in bulk.
Dr Williams: I chair a housing
association. There is a point about the capacity of associations.
Clearly associations are having to re-work their business plans
significantly at present, reflecting the credit crunch, reflecting
the loss of receipts from low-cost home ownership, reflecting
uncertainty about values. There is an issue again about choices
and whether associations devote resources to buying up unsold
stock from the market with all the weaknesses David rightly pointed
to or pushing on with existing development, some of which had
been assumed to be cross-subsidised by other things they were
doing. It is not a free ride here about associations just waiting
to step in and buy things up. They too have capacity constraints
and we have already alluded to fairly significant funding constraints.
| 
