Examination of Witnesses (Questions 1-19)
MR ANDREW
HEYWOOD, MR
DAVID ORR,
MR JOHN
STEWART AND
MR JOHN
HERON
1 JUNE 2009
Q1 Chair: Can I welcome the witnesses.
For the most part, I think it is welcoming you back but thank
you to Mr Heywood for standing in for Mr Coogan who I think is
unwell. As at the meeting last December, we will direct questions
at all of you, sometimes specifically at one of you. Given there
are four of you, do not feel obliged to repeat things that other
people have said, but obviously if you have a very different viewpoint
or slant on something that would be very helpful. This is obviously
a re-visiting, in a sense, of the issues that we explored before.
I would really like to start off by asking whether you believe
that the measures that were taken in the Budget are enough to
stimulate housing development and, as a subsidiary, whether you
think that the budget was fair to all different housing sectors
and, if not, why not? I do not mind who starts. Mr Orr?
Mr Orr: I am happy
to kick off. I think we certainly understood that the Budget was
announced in a particularly difficult economic environment, and
I think we recognised that housing and housing issues were an
important component of that Budget. We recognised the fact that
there was additional spend and for many parts of the economy that
was not the case. You will know that the Federation along with
some other organisations in the 2020 Group had proposed a much
bigger injection of capital funding. We still feel that it was
rather an opportunity lost just because the level of new building
in the market at present is so low that I think we are in danger
of storing up some real problems for the future. We thought that
investing in housing was not just a housing solution, we did think
it was a proper economic stimulant because of the economic multipliers
that housing investment delivers and which I know you have considered
in the past. I think most sections were addressed in the Budget
but the area that we were most disappointed in was that there
was a lack of any specific initiative to assist in the provision
of mortgages for people who want to buy under shared ownership
in particular, and the absence of mortgage funding for shared
ownership remains a significant problem, particularly when the
demand for that product is as high as it has ever been.
Mr Heron: The key dysfunction
from the mortgage lender's viewpoint at present in the economy,
and in mortgage lending and indeed in housing generally, is the
absence of funding and the absence of operating market mechanisms
to ensure a flow of funds to mortgage lenders which in due course,
of course, would fund both home ownership, private renting and
the social rented sector, and therefore whilst we were impressed
with the Asset-backed Guarantee Scheme that was announced and
subsequently introduced, it is a great shame that it falls short
of its objectives. A scheme that has been announced and has been
discussed with mortgage lenders by the Treasury is incapable of
doing what is required of it for a number of detailed reasons,
these being that it only covers the very highest risk of mortgage
funding, which means that only mortgages that require a greater
level of funding of capital can be funded by this scheme. Furthermore,
the scheme can only be accessed by banks and building societies,
which means that specialist lenders, who are the lenders that
have more typically supported the private rented sector for instance,
and have supported customers with greater financial difficulty,
have not been able to access the scheme at all. Unless the scheme
is improved, it will not do anything, I am afraid, to support
mortgage lending.
Q2 Chair: Can I briefly ask on that,
by "improved" you would also therefore require it to
have more money, presumably?
Mr Heron: At present the money
is not the issue. I think £50 billion was announced as being
associated with the scheme. That is not the issue. The problem
is that it simply does not work from a mortgage lender's viewpoint—any
mortgage lender—and that is putting to one side, as I say,
the fact that specialist lenders simply do not have access to
this scheme at all. It will only cover AAA-rated securities. It
was designed as a scheme to fund new lending and it makes new
lending incredibly capital inefficient. It is also entirely recourse
driven as a scheme and that means that, indirectly, the Government,
if called upon to make the guarantee work in due course, would
have the right to put the scheme back to the lender. So if, for
instance, we lent on this scheme, say, £50 billion, we could
be required under the terms of the guarantee to repay that £50
billion in three or five years' time, which is the way it is structured,
and of course that kind of arrangement is not satisfactory for
the long-term funding of mortgages that may be 20 or 25 years.
Q3 Anne Main: Just on that last comment,
are you saying that the scheme as it exists is not going to deliver
that injection that was indicated in the Budget because it is
just unworkable?
Mr Heron: No, it will not deliver
that.
Q4 Anne Main: Could you have come
up with something better? Were you asked your views on this?
Mr Heron: Both the Council of
Mortgage Lenders and the Intermediary Mortgage Lenders' Association
have put several proposals forward to the Treasury.
Q5 Anne Main: Since the Budget?
Mr Heron: Since the Budget, and
we have met with them on a number of occasions in an attempt to
put forward alternatives or improvements that might make this
scheme work.
Q6 Anne Main: Is anybody listening?
Mr Heron: I think, to be fair
to the people at the Treasury, they have listened, but I think
that where they stand at present is there is only so much a government-sponsored
scheme can achieve. There is only so much risk that a government-sponsored
scheme can reasonably take, and that is the position they are
in, but the problem with that is that it is rather like half a
leap across a chasm: very impressive but doomed to failure.
Q7 Chair: When you say there is only
so much risk it can take, who is it who is saying that they cannot
take any more risk?
Mr Heron: The Treasury is saying
that it cannot take any greater risk on behalf of the taxpayer
fundamentally.
Q8 Chair: Mr Heywood, do you want
to come in on this and then I will come back to you?
Mr Heywood: I would agree with
John Heron that the fundamental issue here is funding and the
fundamental issue is funding in relation to shared ownership also.
Yes, there are ways in which the Asset-backed Guarantee Scheme
could be improved—the fee structure for instance—but
I think, as we stand, there are clearly two areas where the Budget
has left a gap. As David has pointed out, because of the funding
issues, shared ownership and indeed low cost ownership generally
remains depressed as does the rest of the mortgage market; it
has not been singled out. The area which I think has missed out
seriously in the Budget, and in spite of the Private Rented Sector
Initiative announced since then, it has not really been addressed
adequately, is the private rented sector because the funding crisis
has artificially hit that. It was more reliant on some of the
lenders who have not been able to access government schemes. It
is universally acknowledged to need to expand because home ownership
is falling and that slack has to be taken up somewhere. No-one
expects government to have the money to continue to expand social
housing beyond the next year or two. The eternal search, it appears
to us, for institutional investment into the private rented sector
announced recently, while it is a good thing to do, is unlikely
to fill the gap which has been left by the cut-back in mortgage
funding for the individual and smaller landlord, who remain the
backbone of the private rented sector.
Q9 Chair: Just to pursue that, if
there is a bias towards favouring home ownership as opposed to
encouraging rental, what do you think the result is going to be?
Mr Heywood: I do not think there
is in that sense a bias in favour of home ownership at the moment.
I think there is a discussion for government to have—and
I understand the CLG is beginning to do that internally—about
where the balance of tenures is going. We have seen the beginnings
of a fall-off in the level of home ownership. Clearly private
renting is expanding and in many ways is more congruent with the
changing social and economic circumstances in which the country
finds itself. I think that thinking needs to catch up because,
clearly, if we are going to see some settling, as we are in other
countries in Europe in home ownership, then home ownership at
the margins, low-cost ownership, where that sits is perhaps different
from where it was thought to sit two or three years ago. I think
these are quite complex and difficult questions. They are difficult
particularly because politically traditionally the extension of
home ownership has been seen as a key plank of both Governments'
policies over the last 20 years.
Mr Heron: I think it is worth
pointing out that there is a bias though in the manner in which
policy has been implemented. I do not think the bias was intentional
but the fact that the government has supported the largest lenders
and has effectively left the smaller and specialist lenders to
survive on their own merits has meant that those lenders that
have supported specialist markets, particularly the private rented
sector, and indeed the social rented sector through support for
the housing associations, are left without access to funding and
therefore cannot support those markets. Bias may not have been
intended but bias is certainly the outcome.
Chair: I will come to you now Mr Stewart
and in order to facilitate things can I also ask Anne if you could
maybe direct your question at Mr Stewart who may be better placed
to respond in any case.
Q10 Anne Main: We are currently finding
ourselves in a situation where the levels of house building are
absolutely dropping off a cliff, so we are told, so are there
any signs of the recession bottoming out and what more could the
housing sector and government do to encourage recovery?
Mr Stewart: There are some signs
that house building is bottoming out but you get to a point where
things are so low that they cannot go much further. The National
House Building Council (NHBC) produces monthly statistics which
are very up-to-date, they are ahead of the CLG's own official
stats, and they have been broadly stable over the last few months,
but we are talking about very, very low levels so there is not
really much further to fall. The CLG official stats are still
falling and I suspect they have got further to fall, but that
is because they are lagging behind a little bit. Of course starts
are ahead and completions lag a long way behind so there is yet
further to fall for completions.
Q11 Anne Main: Do you have any thoughts
as to why? Does this accrual go way back to when we were not in
the position we are in now when the thought was that house builders
would just keep delivering at the level the Government was anticipating?
Of course now many have stopped; would you like to give us any
idea why you think they have stopped? Is it just because they
cannot get the prices they want or they cannot get the funding?
Obviously we know that it is not the demand because there are
still people out there needing houses.
Mr Stewart: It is very simple:
if you cannot sell a home, you do not build it. House builders
cannot afford to just endlessly build up stocks of unsold property
and work in progress clearly otherwise all the firms would go
bust, so they have to temper how many they build in any period
by the number that they can sell in that period. The root of it
goes back to what has already been discussed, the mortgage famine,
which has meant that many, many buyers have not been able to buy
because they cannot get a mortgage at all or they can get one
on terms which do not allow them to go ahead and buy. House builders'
profits have been pretty severely hit by the recession so it is
not a question of trying to hold up prices. Prices have come down
by probably 20 or 25 per cent, using Nationwide and Halifax figures
and talking to the house builders themselves, so I do not think
it is a lack of willingness on the part of the house builders,
it is just a practical business proposition that if you cannot
sell something clearly you do not go on building more and more
and more and piling up unsold properties.
Q12 Anne Main: I know it is slightly
off at a tangent but some of the properties that have already
been built have been offered to housing schemes and deemed not
to be at a standard suitable for a housing scheme so we have a
bit of logjam and maybe it is not the right properties that have
been built. Do you have a view on that?
Mr Stewart: Sorry, you mean offered
to housing associations?
Q13 Anne Main: Yes.
Mr Stewart: There has been an
issue here. I was quizzed about this recently on TV. There are
two quite distinct issues which came up in the interview I did
previously. One is the issue of the space standards and Code for
Sustainable Homes standards that are required for properties which
are funded by the Homes and Communities Agency or are on public
sector land. The housing association sector is very heavily subsidised
so it seems reasonable that it can afford to have those higher
standard requirements. In the private sector the key driver of
course is affordability. There is nothing to stop a house builder
building a 20 or 30 per cent larger dwelling but of course that
would have implications (a) for the number of dwellings because
in any acre you can only get so many dwellings of a certain kind,
so if you build them bigger you get fewer of them and (b) it will
have an impact on the price so if you build them 20 per cent bigger
you would logically put up the price by 15 or 20 per cent which
would mean that they would go into the next price bracket, and
if you are building first-time buyer homes, for example, where
prices in a normal market are very, very sensitive, you would
just price them out of the range of first-time buyers. You are
talking about two totally different markets, one to do with market-responsive
affordability and one to do with subsidy and meeting social housing
requirements, and the two have different standards because in
one the Government have imposed space standards and Code Level
3 requirements and in the other sector it has not.
Q14 Chair: We are having the Minister
later on and I would like to have your view on the suggestion
that was being made—and I am trying to remember the name
of the scheme now—where basically the encouragement was
that locally built units would be bought up and that is just proving
to be not feasible.
Mr Stewart: There was money put
forward for that and my understanding—and I have not seen
it officially announced what the results of that were but I do
understand from talking to people in the HCA—is that most
of that money has been spent and talking to house builders and
looking at our own survey evidence, there is not a stock problem
now in the private new homes sector. Most of the excess stock
has now been cleared. There are pockets where individual products
or in particular kinds of products in particular locations there
is still a stock overhang but across the industry as a whole that
is not really a problem anymore.
Q15 Anne Main: So what is going to
make that stock overhang move forward? Is there anything else
the Government could be doing to free this logjam up?
Mr Stewart: I am saying there
is not really a stock overhang.
Q16 Anne Main: But pockets.
Mr Stewart: Just pockets but generally
how can the Government help? The Government announced a scheme
in the Budget which was the £400 million scheme which is
now called Kickstart which we have been working very closely with
the HCA to make it a workable scheme. It is very live at the moment.
House builders are required to put in their bids for that scheme
by this Friday I think it is. We are talking to the HCA every
few weeks to refine that. The idea there is to get what are called
"mothballed" sites or stalled sites up and running.
You could say that £400 million is not enough but the Government's
finances are pretty constrained and so given those constraints
£400 million is going to help.
Q17 Mr Betts: When we had this issue
at the end of the 1980s/early 1990s when the housing market basically
crashed and you could not sell across the board, when we got out
the other end there was a major problem of lack of skills in the
industry. Is that going to happen again? Is there anything we
can do in the meantime to try and protect the situation so that
we do not end up in two or three years' time with demand returning
and no ability to actually deliver?
Mr Stewart: There is inevitably
definitely going to be a capacity problem. It is not just skills;
that is just one area of it. The whole house-building industry
has shrunk very significantly. Many companies have closed regional
offices. Many smaller companies must have gone out of business
altogether. The whole industry has contracted to, who knows, perhaps
half the size it was back in 2007 and the number of people employed
has contracted accordingly. Some of those skills will be lost
permanently as in the early 1990s. Some of those people will hopefully
come back as the industry expands, but that is going to be an
issue and the industry, with government help and help from the
CITB construction skills, is going to have to look towards training
people. One of the benefits we saw of what is now known as the
Kickstart scheme is that if you could open up mothballed sites,
okay a lot of people have already lost their jobs, but at least
that would help in terms of the number of units that you can start
up and the number of sites that you can start up. That would help
bring jobs. House building at the mothballed sites could bring
very quick benefits. The whole target of it is schemes which have
got planning permission, which are stalled for some financial
reason, and the idea for the HCA is to overcome that financial
constraint and get those schemes up and running. That could happen
very, very quickly.
Mr Orr: I think that there are
a whole series of problems here which link together. The case
that we made with the 2020 Group was that 100,000 new homes keeps
250,000 construction workers in jobs. Our latest assessment by
colleagues in the Federation is that we reckon that the output
of new homes this year across the whole market might be as few
as 70,000. That is less than a third of the output that we really
need. That leads to huge problems of unmet demand but, most frustratingly,
it means retraining in exactly the kind of skills that you are
talking about which left the industry in the early 1990s and did
not come back. It took ten years to get the level of capacity
back up. We are going to see that happening again because people
will leave the industry. The industry for a long time had a very
old age profile of people who were working there. It had begun
to reduce but what we will see is people who have been in the
industry for years and who are in their 50s who will not come
back. If we cannot build new homes and we lose that construction
capacity, and the skills, then it will take a long time for this
to build up again. The £400 million Kickstart is extremely
important because anything that gets new development moving again
on sites that are easily developable is obviously going to be
a major help, but I think all of us would agree that at root this
comes back to the availability of mortgage finance because there
needs to be product sold. Housing associations can build but unless
there is a sales based cross-subsidy, unless there is a degree
of shared ownership, and perhaps housing for market sale, the
level of public investment needed to allow that is much, much
higher. If we could get a flow of mortgage finance, even if it
was just for shared ownership—this may be special pleading—where
the demand is enormous, and bigger than it has ever been, then
I think that would do more to kick start the mothballed scheme
than the £400 million investment.
Q18 Mr Betts: Just one point about
this problem of the future and how we are going to address it,
given the skills shortage that is going to be there, it was there
before and we were getting people in from Eastern Europe to help
fill it, is this going to drive the industry into different forms
and methods of construction? If that is the case, can we be sure,
in doing that that, we do not repeat some of the horrible mistakes
of the past where that led into inappropriate developments and
often very poor materials as well?
Mr Heywood: I think that does
raise quite a serious issue which John touched on neatly, the
fact that what our present problems have shown is that in many
cases we have built the wrong things in the wrong place. Unfortunately,
the urge for density has meant that we have built a lot of new
build flats in places where we should not which are now proving
particularly difficult to shift. Many of those are in fact modern
methods of construction, although by no means all, and certainly
with modern methods of construction there were problems with mortgagability
even in the good times. I think we do have to be quite careful
that as we come out of the recession we do not simply, through
artificial attempts to shape the market, start building the wrong
things in the wrong place again. We need to actually be aware
of what the market tells us is required and will actually shift
because, as John says, in the longer term if you cannot sell it,
you cannot build it.
Mr Stewart: There is I think a
difference with the system of building that we saw in the past
in that house builders are building primarily for a private market
and they will build very cautiously. Warrantee providers will
be very cautious and the lenders are very cautious about new systems.
The industry is always slowly innovating. There are always new
systems coming through, but I do not imagine that this is going
to be solved by a sudden dramatic change in the way that we build
homes. One of the key issues is that everything I am told from
the house builders—and there is no hard government evidence
for it—is that modern methods of construction tend to be
more expensive, so there is a cost issue, and there always has
been a cost issue. That does not mean to say that they do not
use modern methods. I think there is often a feeling that house
builders have not innovated for years. It is a slow incremental
process. It is not a case of let's build something completely
different tomorrow than the way we build it today. It does not
happen like that.
Q19 Dr John Pugh: Talking of new
systems, can we move on to Section 106 agreements, the very traditional
method of creating batches of affordable homes. I think you expressed
some views in the past to say that this is a broken system and
it is not working particularly well. It must be working particularly
badly at the moment, must it not, because one assumes that there
is very little development going on to generate Section 106 agreements
and, secondly, even when you get into a discussion with a developer
over Section 106 agreements his margins are such that he cannot
really offer you very much. Given all that, and given the fact
that it is a traditional tool for generating affordable housing
that is now no longer useful, is there any alternative? Just to
add a little more, can you give us some impression of how badly
you think the non-functioning of Section 106 agreements has affected
the housing market?
Mr Stewart: I am not sure I would
say that the Section 106 system is itself broken because up until
2007 it kind of worked. There were stresses and strains. We need
to think of it as a method of funding, that is all it is, it is
a legal mechanism for funding affordable housing or infrastructure
or whatever. I do not think in itself it was broken. What has
happened is that there are a whole lot of things which have to
be funded out of, essentially, the land value. Those things in
Section 106, whether they be affordable housing or infrastructure,
will be the Code requirements and energy requirements going forward
to 2016. There are other local authority requirements and all
of those have to be funded somehow. What has happened is that
those regulatory impacts/policy impacts were getting to the point
in 2007 where they were already having a very major impact on
land values, to the point where some sites were not viable even
in 2007.
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