Memorandum by the Royal Institution of
Chartered Surveyors (RICS) (CRED 31)
By way of background, RICS is the world's leading
professional body on all aspects of land, property and construction
and associated environmental issues. As an independent and chartered
organisation, it regulates and maintains the professional standards
of 86,000 chartered members (FRICS and MRICS), many of whom deal
with residential property as valuers, estate agents or while working
for Housing Associations. RICS represents, regulates and promotes
the work of these property professionals throughout 146 countries
and is governed by a Royal Charter approved by Parliament which
requires it to act in the public interest.
KEY POINTS
— The Government's housebuilding targets
were set in very different market conditions and it now looks
highly unlikely that they will be met.
— There are fundamental structural
problems with the UK housebuilding industry which should be addressed
by significant changes to the land use and planning systems.
— Housing Associations are suffering
from lack of access to credit and a fall in sales of private sale
homes and low cost home ownership.
— Proposals for Housing Associations
to buy unsold new build stock will not provide sufficient affordable
homes.
— There are serious problems in the
housing market, highlighted by the lack of transactions. Last
month's RICS Housing Market Survey reported the lowest number
of sales per surveyor in its 30 year history, with an average
of 11.5 sales per surveyor branch in the 3 months to September
2008.
— One of the key causes is lack of
mortgage finance. Only 33,000 loans for new homes were approved
in September 2008.
— There should be immediate steps taken
to boost mortgage liquidity, help first time buyers save for a
deposit and expand rent to buy schemes.
Achievement of the Government's housebuilding
targets, both for market and for social housing
1. The Government's housebuilding targets
were set in very different market conditions and were considered
ambitious at the time by RICS. The Housing Green Paper of July
2007 sets a target for England of 240,000 additional homes per
year by 2016 with the aim of delivering two million new homes
by 2016 and three million by 2020. These targets were particularly
ambitious as in 2006-07 only 167,680[24]
new homes were built in England.
2. The housebuilding industry was one of
the first hit by the credit crunch as the supply of mortgage lending
fell and developers also found it more difficult to obtain credit
to fund projects. Provisional figures show that in 2007-08 housebuilding
levels had already started to fall after seven consecutive years
of growth and the RICS Construction Market Survey for the third
quarter of 2008[25]
demonstrates industry workloads are falling significantly. Fewer
than 66,220 new homes have been built this year and we expect
that total housebuilding levels in England will fall below 100,000
this year.
3. Against this background we predict it
is highly unlikely that the Government's targets for 2016 will
be met. With the industry in crisis the targets have become irrelevant
and Government efforts should instead be focussed on ensuring
that minimum levels of supply are maintained and skilled workers
are retained within the housebuilding industry.
4. These should be the two main aims of
Government housebuilding policy through the current period. Maintaining
supply levels is essential as household formation rates are still
running at a relatively high level of around 220,000 new households
per year. If the Government does not act to boost housebuilding
then levels of affordability when the market does pick up will
be even worse than in the years of the previous housing market
boom.
5. Government action to maintain housebuilding
levels is also essential to retain skilled workers within the
construction industry. The reduction in workloads may cause people
to leave the industry. Positive steps have been taken with the
announcement that money would be moved forward from future years'
funding streams to allow housing associations to build more properties
as soon as possible. Further steps that could be taken by the
Government include:
— Encouraging more Housing Associations
to act as lead developers; commissioning developers and contractors
to carry out projects on their behalf and questioning why some
Housing Associations are not acting as developers.
— The new Homes and Communities Agency
should take the opportunity of current market situations to buy
land for housebuilding.
— Rules should be relaxed so developments
built by Housing Associations can be 100% for social rent with
homes being converted into shared ownership and private sale as
the market picks up.
6. Research carried out by RICS suggests
that there are fundamental structural problems with the UK housebuilding
industry. When compared with the USA and Australia, the housebuilding
industry in the UK is dominated by the large firms to the detriment
of small and medium sized developers. In 2006 the top 10 firms
in the UK were responsible for 44% of housebuilding compared with
15% in both the USA and Australia.[26]
One of the key reasons for this is the scarcity of readily developable
land, as a result of planning rules and constraints which encourages
British firms to take each other over as a means of gaining access
to development land.
7. To address this, the Government must
take action to reduce the burdens and costs placed on housebuilders
by the planning system. In particular immediate action must be
taken to:
— Allow greater levels of well managed
development on Greenfield sites.
— Contract out low level decisions
to private firms freeing up local authorities to deal with more
complex applications.
— Increase levels of training for councillors
who sit on planning committees.
8. By taking these steps, the Government
can help the industry maintain supply in difficult conditions
and prevent serious affordability problems for future consumers.
The financial viability and ongoing business of
housing associations
9. RICS members working in the affordable
sector have raised serious concerns about the basic viability
of the Housing Association business model that has developed over
recent years. One of the main concerns that have been raised is
that Government planning policy has led to a reliance on section
106 agreements for the provision of affordable housing units.
Around 65% of affordable housing units were provided this way
in 2006-07, as demonstrated below:
Total affordable housing units provided in England 2006-07[27]
| 39,808
|
| Affordable housing units funded by developer contributions through the planning system (Section 106 Agreements)
| 25,838 |
| Affordable housing units funded by other means
| 13,970 |
| Percentage of affordable housing provided by developer contributions
| 65% |
10. Changes to market conditions have had a significant
effect on Housing Associations. The downturn in private development
has cut provision of units through section 106 agreements leaving
housing associations short of the number of units they need to
build. This has been compounded by Housing Associations' inability
to sell their own private sale and low cost home ownership products
which in the past had been used to cross-subsidise their other
activities including social rent.
11. A significant part of this problem is the reluctance
of mortgage providers to lend on shared ownership properties.
This problem pre-dates the credit crunch but has worsened since
there have been general restrictions on lending. Lenders consider
people moving into shared ownership properties to be high risk,
despite the fact that they are borrowing smaller amounts and have
been approved by a Housing Association. The mortgage for the purchaser's
share of the house is also considered by many lenders to have
a loan to value ratio of 100% despite the fact that only part
of the property is being bought. If the Government is committed
to promoting shared ownership it must work with mortgage providers
to encourage them to lend on these properties.
12. It is essential that the Government addresses the
lack of new units becoming available for affordable housing as
moves to fund the buy up of empty new build stock will only have
a limited success. The main problem with this stock is that it
does not meet guidelines on space and environmental standards.
Although the Government has relaxed these standards, the ongoing
management costs will be higher than properties built specifically
for Housing Associations and the tenants will not necessarily
receive a high quality product. As a result many Housing Associations
are reluctant to use the money available to buy up existing empty
new build stock.
13. Rather than giving Housing Associations money to
buy empty properties the Government might be better off taking
advantage of depressed development land values to buy cheap sites
for housing development. In particular the new Homes and Communities
Agency (HCA) has a role to play here as it will be able to identify
the best value sites and should have funding available to make
purchases. This should be a priority for the HCA when it starts
work in December.
14. Once land has been purchased, additional funding
should be made available in order to allow Housing Associations
to develop these sites. This Government funding should take two
forms. There will be a need for additional grant funding and the
Government has already taken positive steps in this area by bringing
forward future years' funding to be used immediately.
15. As well as providing additional grant funding the
Government should also look at establishing a source of capital
funding to replace private sector loans. Housing Associations
have suffered as a result of banks withdrawing lending as a result
of the credit crunch and are unable to obtain the finance that
is needed to undertake many projects. A year ago there were seven
banks actively lending to Housing Association at rates around
30 basis points above LIBOR. The number of lenders has fallen
significantly and some Housing Associations are reporting only
one lender now offering new business. Where there is lending,
banks are more sensitive about who they lend to and the rates
they are offering.
16. One solution to this problem would be the short term
introduction of Government funding for Housing Associations. With
a number of UK banks which have historically lent to the RSL sector
including Bradford and Bingley, HBOS, LloydsTSB and RBS now state
owned or influenced there is an opportunity for the Government
to work with the Homes and Communities Agency and the RSL sector
to establish a pool of lending at preferential rates and margins.
This would provide certainty about future funding which developer
RSLs need to underpin their development programmes.
Measures to help existing and prospective homeowners affected
by the credit crunch
17. There are currently serious problems with the housing
market that must be addressed by Government action. The RICS Housing
Market Survey from September 2008 shows that the (seasonally adjusted)
net balance of surveyors reporting falling rather than rising
prices edged lower from -81.8 to -84.2 and the number of completed
sales per surveyor over the last three months fell to 11.5 per
surveyor, which is a historic low for the survey. Mortgage lending
data from the Bank of England shows that the number of loans approved
has fallen significantly with only 33,000 new mortgages approved
for home purchase in September 2008.[28]
18. In this context the Government has put in place a
range of measures with two key aims, helping re-start the housing
market and protecting homeowners who are at risk from repossession.
19. RICS believe that there will be around 45,000 repossessions
this year and the measures put in place by the Government are
essential to help some homeowners avoid the distress caused by
repossession. Changes to Income Support Mortgage Interest (ISMI)
will protect people who have lost their jobs and are at risk of
falling behind in their mortgage payments. Mortgage rescue schemes,
where Housing Associations buy a share of a person's home, were
recommended to the Government by RICS as part of the organisation's
15 point residential policy plan.[29]
The success of these schemes will depend on the level of uptake
by Housing Associations once the Government has put its model
in place.
20. Other Government plans which have been more focussed
at addressing problems encountered by people who are seeking to
get on the housing ladder but are unable to do so as a result
of current conditions have been less succesful. In particular,
fewer first time buyers are able to get easy access to mortgage
finance to take the first step on the ladder.
21. Failure to address the issue of a lack of mortgage
lending will prevent other Government initiatives having a significant
impact on the housing market and prospective homeowners who are
affected by the credit crunch. The bulk of the problems currently
facing the market are a result of restricted mortgage lending
and lack of confidence from consumers. Without dealing with the
first issue, the housing market will struggle to get going again.
22. To achieve this, the Government should incentivise
the issuing of new mortgage backed securities and covered bonds
by allowing investors who buy them to enter into a repurchase
arrangement with the Bank of England. This process would use the
same repurchase system as the existing Special Liquidity Scheme
but would require the MBS or bonds to be sold in a public issue
before being eligible for repurchase. It would also be specifically
aimed at improving the flow of funding for new mortgage lending.
23. The Government should also use its greater level
of involvement and control over certain banks to encourage them
to resume mortgage lending at higher levels. This has been done
to some extent with the requirement on banks taking advantage
of the re-capitalisation scheme having to bring lending back up
to 2007 levels. Although this is the right general approach to
take, aiming for this specific target may not be sensible. A balance
needs to be struck between the current situation and the lending
practices of the past. 2007 lending levels could have been as
much a part of the current problem as part of the solution.
24. With a lack of mortgage lending in place new schemes
such as the Government's HomeBuy Direct will only have a limited
impact. Although the scheme could potentially help a significant
number of first time buyers, without increased levels of access
to mortgage finance the scheme may not help a significant number
of people. Mortgage lenders have been reluctant in the past to
lend on unconventional home purchase schemes, such as shared equity/ownership,
and are now even more reluctant to do so.
25. CLG action on the housing market was coordinated
with a Treasury announcement that stamp duty would not apply on
residential property purchases under £175,000 for one year.
This change will also have a very limited impact on the current
housing market with transactions at a low level. For instance,
in London the average first time buyer house price in August 2008
was 254,132, well above the £175,000 threshold. It will also
have a limited impact in boosting transactions in the North of
England and the Midlands where the average first time buyer pays
below the previous threshold of £125,000.[30]
Even in areas where the change will apply, its impact will be
negligible without additional mortgage lending.
26. Further changes to stamp duty are one of a set of
coordinated policy proposals that RICS has put to Government to
address short and long term issues in the residential property
industry. Key policies RICS would like to see introduced include:
— Reform of the Stamp duty system—The Government's
short term change to stamp duty must be used as an opportunity
to link seamlessly into longer term reform to introduce a marginal
stamp duty rate.
— First time buyer savings scheme—The Government
should establish a tax free savings account supported by Government
contributions to help first time buyers save for a deposit. RICS
estimate that this scheme would have a cost to the Treasury of
around £1.1 billion but would encourage saving and reduce
the need for high loan to value ratios.
— Expand rent to buy—Potential homebuyers
should be able to rent a property for an agreed period of three
to five years with an option to buy at a pre-agreed price the
end of the rental period.
— Build to rent and investment in the private rented
sector—Changes should be made to the planning system, stamp
duty and the REIT regime to encourage larger investors in the
private rented sector making it more professional and the tenure
of choice for more people.
— Bring empty homes back into use—The UK's
600,000 empty homes should be brought back into use by reducing
VAT on repair and maintenance and giving local authorities real
power rather than ineffective Empty Dwelling Management Orders.
November 2008
24
CLG housebuilding statistics dwellings completed http://www.communities.gov.uk/documents/housing/xls/323495.xls Back
25
RICS Construction Market Survey Q3 2008-10-27 http://www.rics.org/NR/rdonlyres/7FDB18D6-B0E4-4777-A777-5FA044873D71/0/RICSConstructionMarketSurveyQ32008.pdf Back
26
RICS Research FiBRE series Firm size and competition a comparison
of the housebuilding industries in Australia, the UK and the USA
http://www.rics.org/NR/rdonlyres/480AFF85-42DB-4E42-B0FE-81B23C12C18E/0/FiBREFirmsizeandcompetition.pdf Back
27
Housing Strategy Statistical Appendix 2006/07 Section N http://www.communities.gov.uk/documents/housing/xls/sectionn Back
28
Bank of England lending secured on dwellings: approvals http://www.bankofengland.co.uk/statistics/li/2008/Sep/lendind.pdf Back
29
RICS residential property proposals http://www.rics.org/Newsroom/Keyissues/UKresidentialpropertymarket/rics_residential_property_proposals_n_290808.html Back
30
CLG statistics Housing market: mix-adjusted house prices, by new/other
dwellings, type of buyer and region http://www.communities.gov.uk/documents/housing/xls/livetable592.xls Back
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