Memorandum from CgMs Consulting Limited (CRED 09)
Summary · The current financial and economic conditions will materially prejudice the delivery of the Government's housing target of 240,000 dwellings per annum by 2016. · Both the private and public sector housing providers are affected by the down turn in the economy albeit the private sector has been affected more severely. The financial wellbeing of both private companies and Registered Social Landlords needs to be monitored. · The rate completions and commencements of new housing have dramatically fallen and will continue to fall. The 'pipeline' supply of new housing land which is in the planning system is also slowing down. · Current Government initiatives to acquire existing dwellings from house builders is welcomed but will not necessarily increase the rate of development to meaningfully contribute towards increasing the supply of new homes to meet the original housing target.
1. Introduction
1.1 CGMS Consulting Limited provides advice
on planning, archaeology and historic building matters to a wide range of
clients including numerous national and regional house builders, as well as Registered
Social Landlords (RSLs). Geographically,
CgMs operate across
1.2 The following written evidence to the Committee expresses the views of CgMs concerning the state of the housing market, during the current 'credit crunch', based on the firm's experiences and perceptions. This written evidence principally addresses the first matter raised by the Committee. 2. Achievement of the Government's House Building Targets, Both for Market and for Social Housing
2.1 As part of the 2007 Comprehensive Spending Review (CSR07), the Government established a target to increase the number of net additional homes provided per annum to 240,000 by 2016. Whilst there was a trend suggesting that this level of annual completions might be reached by 2016 (i.e. annual completions were 129,000 dwellings in 2001/02 increasing to a peak of 174,500 dwellings for 2007 - a 34% increase in approximately a six year period), the downturn in the housing market has affected the ability of the industry to achieve the target. For example, the Centre for Economics and Business Research (August 2008) is predicting housing completions in the UK will plummet 20% in 2008 when compared to 2007.
2.2 The deteriorating state of the housing market has regularly been reported, both in the media and via the various announcements made by the country's leading national house builders, financial institutions, Government agencies and other organisations throughout 2008. This written evidence does not reiterate the content of those announcements as they will not doubt be reflected in submissions made by other parties. However, what should be noted are the financial problems faced by the private sector house building industry associated with poor cash flow, substantial debts, unsold stock, reduced rates of sale, reduce sales margins and the reduction of companies' asset values due to the writing down of the land banks. There may be a question as to whether some of these companies, even if they do not fail during the current credit crunch period, can continue to operate their current business models in the future.
2.3 The latest national statistics on house building were released in August 2008 and include quarterly housing completion data for the period since April 2006. The statistics indicate that between the third quarter of the financial year 2007/08 and the first quarter of the financial year 2008/09 the number of market (private enterprise) dwellings completed has significantly reduced from 41,210 to 31,560 dwellings. This is a fall of 23% in two quarters. For RSLs and local authority housing the fall was only 16%.
2.4 The statistics also indicate that the number of new starts (future completions) is significantly reduced since the second quarter of the financial year 2007/08 when the initial indications that there might be problems with bad debt arising from the United States sub-prime mortgage market first appeared. Having said that there is some positive news namely starts by RSLs are at their highest quarterly level since the March quarter of 1998. However, a word of caution is required because without the housing sites controlled by private house builders coming forward for development the supply of affordable housing required by Section 106 Planning Obligations will not be delivered as originally envisaged. It would be useful if statistics on this matter were available to the Committee.
2.5 The initiative recently announced and augmented by the Government to enable market dwellings to be purchased by RSLs and local authorities is welcomed by CgMs as a means to encourage the construction of more homes. However, this initiative is only likely to either 'soak up' the stock of existing unsold dwellings which have been completed or encourage the development of sites which are currently 'on hold' rather than the delivery of new sites through the planning system. For example, Bellway Homes and Bloor Homes have recently sold already consented/unsold new homes to RSLs rather than these dwellings being additional to the already existing supply/stock of new houses required to meet the Government's target. As a result there will be no material contribution to increasing the overall level of house building to meet the target of 240,000 new dwellings per annum by 2016. As an aside, there is an issue with market housing because (at the moment) they are not constructed to the same Eco/Code for Sustainable Homes standards as currently required by the Government for RSL housing. Additional costs are being incurred by RSLs to undertake work to meet the required standards.
2.6 The Government's initiatives do not necessarily provide confidence to the prospective purchasers, particularly first time buyers, of new homes to enter the housing market unless they have to (e.g. job relocation). Indeed current conditions in the housing market are deterring prospective purchasers from entering it because house prices have yet to the bottom out and, as with any other good, they might as well wait until they can buy at the lowest price possible. In addition there is an issue over incurring a financial loss from selling a property in a market where house prices are reducing and the incidence of negative equity is reportedly increasing. Without 'liquidity' in the housing market in terms of people wanting to move there will be little demand for new homes and a continued unwillingness by house builders to construct new dwellings.
2.7 Other submissions will no doubt comment on: the reduced demand and supply of mortgages; the condition of the buy to let/investment market which is critical for new apartment schemes, and the potential increased demand for social rented accommodation. Notwithstanding this CgMs can comment that RSLs are continuing to promote housing schemes in their own right for development which will deliver new homes. However, some RSLs are advising of the difficulties in disposing of shared equity properties because of the limited access to appropriate mortgage products having regard to: the status of the prospective purchaser; the difficulties of raising a deposit; and purchasers being able to budget for both the monthly mortgage and rental payments. If the properties remain unsold then some RSLs with a high proportion of share equity homes to sell will encounter the same cash flow issues as private sector house builders.
2.8 RSLs are also experiencing the same issues as other house builders in terms of the financial viability of schemes. These difficulties arise as a consequence of the application of tariff based contributions on a per dwellings basis towards social and physical infrastructure (e.g. education, healthcare, sustainable transport and other sustainability measures) required as part of a planning permission. Affordable housing is rightly not exempt from the principle of these charges but CgMs has had experience of RSLs not progressing sites suitable and appropriate for affordable housing because of the level of contributions being sought. This is situation is likely to be exacerbated in September 2009 when the Community Infrastructure Levy (CIL) is scheduled to be introduced. Accordingly low land values and high planning gain contributions will restrict the supply of future housing land.
2.9 The financial viability of all housing schemes will be marginal during any initial recovery period. Therefore, some flexibility in the application of standard tariffs and CIL by local planning authorities will be needed to provide all house builders with the confidence that their schemes will be financially viable. If either the schemes are not financially viable or the residual land value is too low (after deductions such as CIL and other taxes) to encourage owners to sell then the housing will not be constructed and the targets not met.
2.10 A positive aspect of the credit crunch is the falling price of homes means the affordability ratio (house prices to earnings) is reducing to more sustainable levels which may encourage some first time buyers to enter the housing market. This, of course, assumes that the unemployment situation does not materially worsen and current employees have some form of job security giving them confidence invest in a new home knowing the mortgage payments will be met. However, this statement requires some qualification as there may be a shortage of suitable new homes available for first time buyers, which in recent times have tended to be apartments. It is just such schemes that are currently 'on hold' because, unlike individual houses, an apartment building can not effectively be phased in terms of its construction and the release of accommodation to the housing market - apartment blocks tend to be 'all or nothing' schemes to develop,
2.11 There may also be some positive news in respect of 'buy to let' or 'investment' purchasers being willing to re-enter the new housing market assuming appropriate credit is available. Demand for rented accommodation has risen by 50% between September 2007 and September 2008 according to Your Move (October 2008). This demand is based on: aspiring homebuyers continuing to struggle to join the housing ladder; others waiting for the market slump to run its course before seeking to purchase a new home, and those who may have wanted to purchase a new home but consider their job prospects are sufficiently uncertain to want the responsibility of a mortgage. What is unclear at present is whether there may be a new paradigm whereby people will be happy to live in rented accommodation rather than aspire to actually own a new home.
2.12 CgMs is actively involved in the promotion of housing and mixed use sites for development. It is evident that the level of instructions from the major house builders, especially outside London and south east England, has declined with a reluctance to incur the high costs of promoting land for development through the planning system in the current economic and financial climate. As an example, any planning application submitted now, for a small or moderately sized scheme, would normally be implemented in spring/early summer 2009. However, the number of planning applications submitted by CgMs (and other planning consultancies as evidence by the statistics on planning applications) has dramatically declined. This may be perceived to be anecdotal evidence concerning the future supply of new homes but it does demonstrate that even if there is a dramatic 'recovery' in the housing market in late 2010/early 2009 there will not necessarily be an available supply of land in the planning system to meet the demand in say 2010. The saving grace in the short term may be the ability to bring forward those 'on hold' schemes (not purchased by RSLs) for development assuming they are financially viable.
3. The Financial Viability and Ongoing Business of Housing Associations
3.1 Other than the comments already made in Section 2, CgMs cannot usefully provide any further information to the Committee on this matters.
3.2 CgMs can comment the current initiatives being undertaken by the Government via the Housing Corporation and RSLs to stimulate the housing market are welcomed. However, the money which is being used is effectively being 'brought forward' from future years and there is a need for the Government to confirm that the finance will still be available in the following years for the provision of social rented and shared equity housing. Without this reassurance there is the possibility that affordable housing in future years will not be provided in sufficient quantity to meet the identified housing needs.
3.3 Comment has already been made in respect of the possibility of some RSLs experiencing cash flow difficulties due to a high proportion of shared equity properties being part of their stock. It would be advisable if the Housing Corporation undertook a brief review of the financial well-being of all RSLs and identify those which may be experiencing difficulties. As with the financial sector, either encouragement could be given to the merging of poorly performing RSLs with stronger RSLs or loans provided. Such an approach should ensure a continuity of supply of affordable housing.
4 Measures to Help Existing and Prospective Homeowners Affected by the Credit Crunch
4.1 Other than the comments already made in Section 2, CgMs cannot usefully provide any further information to the Committee on this matters.
October 2008 |