Examination of Witnesses (Questions 60-79)
RT HON
MARGARET BECKETT
MP, MR RICHARD
MCCARTHY,
SIR ROBERT
KERSLAKE AND
MR PETER
MARSH
1 JUNE 2009
Q60 Mr Hands: What is that figure?
Margaret Beckett: The latest figure
for low-cost affordable housing, I think, is about 110,000.
Mr Hands: Yes, but in terms of HomeBuy,
which was introduced when, April 2008?
Q61 Chair: There are several other
HomeBuy --
Mr McCarthy: HomeBuy is a generic
term for a range of products.
Sir Robert Kerslake: If you look
at low-cost home ownership in 2008-09, there were something like
20,000 that we secured through low-cost home ownership, so there
are a number of schemes, of which HomeBuy Direct is one, and it
is the newest. I think the point I would make about this, it is
an issue of timing here. The scheme has been underway for a relatively
short period of time and all the evidence suggests (a) that there
is a high level of interest from the house-builders (b) that they
are getting a high level of interest from potential purchasers
and (c) that the lenders, the five major lenders in particular,
are willing to back it with mortgages, so all the evidence suggests
that this is a scheme that will follow through in terms of completions,
but we are at a relatively early stage, and therefore the numbers
are low.
Q62 Chair: Just to pick up on the
lenders, one of the points that was made by the previous witnesses
was that it would be helpful if the numbers of lenders could be
increased beyond the five.
Margaret Beckett: We agree with
that.
Q63 Chair: And the housing associations
involved.
Margaret Beckett: I think that
is right, but according to my notes, already Nationwide, Woolwich
and HSBC, as well as Halifax and Royal Bank of Scotland, are lenders
who are willing to lend specifically on HomeBuy Direct.
Q64 Mr Betts: Could I just move on
to the issue of long-term demand and supply. I think last time
when we had our session, the Government indicated they were going
to look at research being done by the National Housing and Planning
Advice Unit about these matters. I think that unit has reported
very clearly that housing demand is likely to carry on rising
in the long term; whatever the immediate hiccoughs, that is the
long-term situation. Is that the Government's view, that they
still need to have a target of three million by 2020?
Margaret Beckett: It is certainly
our view that the demand is not diminishing. In fact, every bit
of work I have seen actually, from wherever it comes, because
Shelter did their own report a while ago as well, everybody indicates
that, at the very least, demand is staying at the levels which
have previously been identified, and actually the likelihood is
that demand is, if anything, growing, so yes, we do not believe
that is changing. That means that, despite the difficulties of
the present economic circumstances, the aspiration that we have
has to remain very much key.
Q65 Mr Betts: How do we get to achieve
the aspiration then, even though a target is an aspiration? Given
that the private sector is clearly in the doldrums at present,
and it may come out, we are going to have significant problems
of skills in the industry and capacity if it does, but the public
finances are likely to get worse, so whatever levels of social
housing we have now, it is going to be very difficult to do very
much to improve them, given the Section 106 situation, the problems
across subsidising for housing association building, so where
does that leave us in terms of getting social housing built under
incredibly difficult circumstances?
Margaret Beckett: Well, it leaves
us in circumstances where it is extremely important, as we have
been trying to do, to maintain skills and capacity in construction
so that we do not have the dramatic drop-off that we have seen
in previous recessions because that obviously does make a difference.
Also, it puts greater stress on what we are doing to try and encourage
people to prepare for the upturn, so that again you do not suffer
the same level of loss of skills or capacity and, hence, ability
to build. This is partly why we are talking to people like local
authorities and others about how and where land can be made available,
how and where people can look to new development, and we were,
as I think the Committee knows, pretty much on course to meet
our building trajectory before the recession hit, so we have to
get back to that, but also we have to see whether we can do more,
which is a lot more than anyone has done of recent times, and
yes, we are looking very hard to see how that could be achieved,
whether there are new players, whether there are new methods that
can help to mean that we can meet some of those targets.
Q66 Mr Betts: The sort of ideas that
there might be around the social housing sector, because I know
models like housing companies were being developed in a number
of places, but clearly partnership models are almost off the agenda
at present. It seems the only thing that will work is government
subsidy and local authority free land put together. Is that the
reality of the situation? How long can we sustain that?
Margaret Beckett: I do not think
it is as bad as that, but certainly that is a more key component
than one would have wished it to be and would have thought it
would have been a couple of years ago.
Sir Robert Kerslake: I think there
are a number of things we can do, and I would not want to underestimate
the challenge that you are putting to us here because it clearly
is a big one from where things have fallen, but we could clearly
work with schemes like the Kickstart Scheme to get private house-builders
moving again, and try and restore some level of confidence in
the industry. A big part of this, I think, is confidence and their
judgment about the economy and the ability of people to buy. I
think a second area that we can and will work hard on is where
we can use public sector land generally to stimulate new house-build,
both affordable and market sale. A third area which I am very
interested in is to see whether we can encourage new entrants
into the market, and this has been much talked about in the past,
but I am keen to see whether a number of new players, people perhaps
who focused previously more on the construction side, might come
in and develop new housing. These are all emerging ideas rather
than fully worked-through things, but I think that is the sort
of territory we would need to look at in the future.
Q67 Mr Betts: But given the chronic
shortage that existed before of housing to rent in the social
sector, it is there, we all have it in our constituency surgeries,
it has got worse in the last year, but it was there before, how
are we going to deliver those social units? The Section 106 model
is not going to be around for some time which delivered a lot
of houses and housing associations are probably not going to be
able to sell on part of their schemes to cross-subsidise for the
foreseeable future, so how are we going to build social rented
housing in the medium term at least?
Margaret Beckett: We have to maximise
the resources we have available to us, and look to try to amalgamate
those resources as time goes on, and as we move out of the recession.
Q68 Mr Betts: When we get bids in
from local authorities for this funding, are we going to insist
that local authorities put their land in for free? Is that going
to be a requirement?
Sir Robert Kerslake: That is part
of the deal. It is also worth saying that, whilst when we met
last time, there was quite a concern about the appetite of housing
associations to keep developing, I think the flexible approach
to grants and to partnership has kept them in the game. I am feeling
much more confident about their capacity than I was actually six
months ago on this front, so I think they can and will continue
to play their part, but in terms of the local authority scheme,
the expectation is they put the land in for free, that is part
of the deal.
Q69 Emily Thornberry: So would it
be right to say that local authorities that have sold off public
land are at a distinct disadvantage when trying to build more
social housing for rent at this stage?
Sir Robert Kerslake: I think they
are potentially at a disadvantage in two ways actually. One is
that they would not have land available to go for this scheme
of course, so that would be one thing they would not have. I guess
also they would not have land which they could, if they wanted
to go via the housing association route, make available to housing
associations, so I think it is right to say that, if local authorities
have land now, they are potentially in a position to be more powerful
in driving forward affordable housing schemes at this stage.
Mr McCarthy: I think just to be
careful that, where there have been stock transfers, local authorities
will not necessarily have transferred undeveloped land, they will
just have simply transferred, in most cases, the housing. They
may have transferred land, and my experience would be that that
would be for the very explicit purpose of that land being used
for development. In other cases, local authorities have a history
and a proud history of releasing land for development across the
country, but I think you will be hard pressed to find a local
authority that still does not have assets. Through the nature
of things changing over time, the way services are delivered,
actually they can still release some of those land-based assets
into development, whether they were used previously for offices,
for depots, or whatever. I think the asset strategies that local
authorities have put in place have in many cases identified new
sources of land for future development. An often relatively modest
size can provide a very effective flow through of land into the
housing system, which is then developed for affordable housing,
completed and occupied, and so on.
Q70 Emily Thornberry: I understand
what you are saying, but I am saying that, if a local authority
has had a policy of perhaps selling off the publicly owned land
--
Mr McCarthy: It would have less
available, yes.
Emily Thornberry: And, therefore, in
the current circumstances, it would be at a distinct disadvantage.
Q71 Dr Pugh: Mr Marsh, a question
for you now, you will be delighted to know. You probably wondered
why you came, didn't you! The situation with housing associations,
they are bumping along the bottom, are they not, in many respects?
They have stocks of unsold houses, but probably the same stocks
they had maybe a couple of months ago, but last time I think we
were told there were six housing associations on the watch list
and they were described as not in intensive care, but subject
to more intensive regulatory scrutiny than is normally the case.
What is the current position? Is it still six? Has it gone up
or down?
Mr Marsh: Before I start commenting
on the numbers, and I know people care about the numbers, can
I just put the situation in context. I think the phrase "bumping
along the bottom" does not actually reflect the situation
that housing associations are facing. I share the position that
Bob outlined a few moments ago that, when we look at the number
of homes built in the last 12 months, actually housing associations
in England are now the major players in development and, whilst
they certainly have faced a number of risks since the TSA went
live on December 1, including mark-to-market calls, including
the shortfall of LCHO receipts, including impairment write-downs
and including some shortage of funding, actually development supply
has been maintained at levels that many commentators did not expect.
I think it is important to put the picture in context, and in
relation to new development, with land prices now in many places
at half what they were a year ago and the long-term cost of funds
still below the 7 per cent assumption that we had in the CSR settlement,
I think it is important to recognise the opportunities as well
as the threats.
Q72 Dr Pugh: But, on the downside,
you have the fact that they were projecting receipts of £1.3
billion, which they are clearly not going to get through sales,
are they?
Mr Marsh: Well, in our survey
that we concluded in April, which was a survey for the period
until 31 March, publicly reported on our website, we reported
that the volume of LCHO homes that are unsold has fallen by 16
per cent since the previous survey published in January to 31
December, so the facts are that the number of LCHO homes that
are unsold had fallen by—
Q73 Dr Pugh: They are still not going
to make their £1.3 billion, are they?
Mr Marsh: If you can allow me
to finish answering your question, in fact, in the last quarter,
£400 million of sales receipts were earned by housing associations
in addition to the £200 million-plus in the previous quarter,
so we do foresee in the 12-month period that housing associations
may fall short of their £1.2 billion by maybe 10-15 per cent,
but I think 10-15 per cent is some way away from bumping along
the bottom. To return to your original question, there were six
housing associations on our more intensive regulatory scrutiny
list and, since going live, the TSA Board has developed two forms
of intermediate regulatory lists, intensive and enhanced. Despite
much speculation, no associations have joined that intensive list
since I last spoke to the Committee in December, and some associations
have left that list.
Q74 Chair: How many?
Mr Marsh: The number has become
so small that, if I tell you the number, people then start speculating
on the names, so for reasons I shared with the Committee last
time round, the need to protect the interests of independent bodies
and the independent nature of regulation, I would rather not quote
an actual number—
Q75 Dr Pugh: What is the difference
between intensive and enhanced?
Mr Marsh: In terms of our approach,
we review on an annual basis the viability of every association
that owns more than 1,000 homes. On a quarterly basis, we are
now reviewing the risk exposure of all those associations and
their positioning with their lenders. An enhanced association
would be an association that we are reviewing more regularly than
quarterly, but less regularly than weekly, so intensive would
be an association that we are reviewing on a fairly frequent basis.
Q76 Dr Pugh: I am getting the general
impression, which I hope is a correct impression, that you are
improving your stress-testing of these organisations.
Mr Marsh: Correct.
Q77 Dr Pugh: In terms of the availability
of actual funds to the associations, what is the picture there?
The Minister mentioned that a number of well-known banking firms
will give money to the HomeBuy Scheme. What is the position with
regard to the big social landlords and housing associations?
Mr Marsh: This is not a simple
position, so bear with me while I explain where I think we are.
The first thing I would say is since July last year, we have seen
just under £1 billion, which is £985 million, being
made available to housing associations through the capital markets.
Those are bond markets, including an issuance by Places for People
the week after the Select Committee meeting, and even the speculation
about the state of the market at that time allowed that organisation
to borrow at less than 7 per cent total cost of funds. Since then,
we have had other issuances from Sanctuary, and the capital markets
are an area where, we believe, there is more appetite to lend
into associations, and we are working together with HCA on developing
our approach to warming that market up further, so £1 billion
has come through from that market. In terms of the more traditional
retail lenders, there are actually more lenders active today than
there were a year ago. This is both good news and bad news. The
reason why there are more lenders active today than there were
a year ago is because the price of funds has gone up. We had traditionally
an expectation in the housing association sector that one could
achieve the borrowing of new funds at the rate of 15, 20, 30 basis
points above LIBOR, but the days of 20 basis points above LIBOR
at the moment seem to be rather rosier than the current position.
It is not unusual for an association to be borrowing currently
at rates of between 200 and 300 basis points above LIBOR. However,
that said, when you take account of where the Bank of England
base rate is, and the LIBOR dislocation has been reducing in recent
weeks, the total cost of funds remains sub 7 per cent, often sub
6 per cent, sometimes sub 5.5 per cent, and in the context of
a rental increase of around 5.5 per cent last year, the cost of
funds in real terms remains not a barrier to new development,
but many associations are rightly saying, "I will wait until
that price comes down before I borrow new funds", so the
pricing has definitely gone up. The number of players is now at
around seven, and that includes and allows for Lloyds TSB and
HBOS becoming one lender, so we have seen the re-entry of Nationwide
into the market and we have seen Yorkshire Building Society and
more recently, following the merger of Co-op and Britannia, that
new institution coming back into the market. So there are some
positive signs as well as some price issues that associations
are having to face at the moment.
Q78 Mr Hands: Can I just come in
on your interest rate management. Most of these loans that you
are taking out, are they variable-rate loans or fixed-rate loans?
It sounds like they are variable-rate loans.
Mr Marsh: Our global accounts
for the period 31 March 2008 give a breakdown of the amount of
sector debt that is variable and fixed rate. Approximately one
third of the sector's current debt is variable, that is about
£12.6 billion, so on that variable-rate debt where the margins
are pre-agreed, clearly rates for that debt have come down. The
remaining two-thirds has traditionally been fixed. One of the
issues that associations are now having to consider is at what
length of time they can draw debt down, and many of the retail
banks in particular are offering debt at eight, ten or 15 years,
rather than 25 years, so there are new requirements for more sophisticated
Treasury Management, to manage shorter-term lending, compared
to the traditional 25 to 30-year lending that was the norm.
Q79 Dr Pugh: You have covered most
of what I wanted to ask you on this topic, but one thing you have
not touched on, and you illustrated very well what is going on
and your understanding of it, that is great, but does the TSA
play any role in facilitating dialogue between lenders and housing
associations?
Mr Marsh: We have an informal
and a formal role. Following the Committee's evidence in December,
we have an agreement with the CML about repricing in particularly
distressed cases. I have to say that we have not had to use our
statutory intervention powers to solve a financial viability issue
with an association, so we have not had a distress case, but,
had we had one, we had an agreement with the CML lenders that
repricing would not be used as, if you like, a weapon to prevent
a takeover or a merger taking place. Informally, we have conversations
with the CML lenders and with individual lenders on a daily basis
to understand their position and their pricing on individual loans,
but ultimately the matter of signing a contract is one between
an independent organisation and association and the lender, and
it will always be that way.
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