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Memorandum from 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
· 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
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
7 consecutive years of growth and the RICS Construction Market Survey for the
third quarter of 2008[2] 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
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
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 · 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:
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 7 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
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.[5]
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[6]. 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
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 3 to 5 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
November 2008 [1] CLG housebuilding statistics dwellings completed http://www.communities.gov.uk/documents/housing/xls/323495.xls [2] RICS Construction Market Survey Q3 2008-10-27 http://www.rics.org/NR/rdonlyres/7FDB18D6-B0E4-4777-A777-5FA044873D71/0/RICSConstructionMarketSurveyQ32008.pdf [3] RICS Research FiBRE series Firm size and competition a comparison of the housebuilding industries in [4] Housing Strategy Statistical Appendix 2006/07 Section N http://www.communities.gov.uk/documents/housing/xls/sectionn [5] Bank of England lending secured on dwellings: approvals http://www.bankofengland.co.uk/statistics/li/2008/Sep/lendind.pdf [6] RICS residential property proposals http://www.rics.org/Newsroom/Keyissues/UKresidentialpropertymarket/rics_residential_property_proposals_n_290808.html [7] 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 |