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Memorandum from The Joseph Rowntree Foundation (JRF) (CRED 40)
About the JRF The Joseph Rowntree Foundation (JRF) is one of the
largest social policy research and development charities in the
This memorandum draws on a range of JRF research projects, summaries of which are attached. However, it is worth at this stage highlighting one - a short report published in July this year which compares the current down turn with the one that occurred in the early 1990s and identifies significant differences. This clearly sets out many of the issues that will be of concern to the Committee and can be found in appendix i.
Summary
· Under the current circumstances it seems unlikely that the government's new house building targets will be met without a significant increase in investment from the public purse.
· The government needs to ensure that releasing funds for housing associations to buy empty stock does not incentivise them to buy stock that is inappropriate for their clients' needs or for their association's long term business plan.
· Many of the government's recently announced interventions in the market were used during the last down turn in the early 1990s with limited effect. Of greater importance is the announced pre-action protocol for lenders.
· The recent growth in unemployment is very concerning; any significant increase in unemployment rates is likely to have a negative impact on 2009 repossession levels.
· The effect of debt and repossession on families is profound and long-lasting, and high levels of repossessions also have wider social impacts. For both of these reasons, repossessions should be avoided if at all possible.
· The Committee should use this opportunity to consider some of the longer term questions this down turn poses, such as the delivery of new homes, sustainable levels of home ownership and balancing fiscal incentives across the tenures.
November 2008 Achievement of the Government's house building targets, both for market and for social housing
As set out in the JRF's
response to the 2007 Housing Green Paper, the targets for new build market and social
housing were welcome but very ambitious given past supply and committed funding
from the
The achievement of the targets for market and social housing are highly intertwined. As JRF research highlights (Whitehead 2007 - see appendix ii) the number of units provided by single tenure sites has been declining for some time. This gap has been filled by housing associations (HAs) using cross subsidy from market housing sales to provide additional affordable homes and private developers being required by planning agreements to provide affordable housing (with this latter element alone providing around 50% of new affordable housing in recent years).
With market sales rapidly falling, and private developers cutting the number of new sites being brought forward on which planning gain would have been sought, the target for 2 million new homes by 2016 looks unachievable without a significant increase in investment of public funds.
The financial viability and ongoing business of housing associations
As mentioned above, the drop in market sales that housing associations used to cross-subsidise their schemes will affect the financial viability of certain developments.
The government has brought forward Social Housing Grant spending so that housing associations can purchase empty stock from developers or on the open market. This approach was also used during the last housing market downturn, and evidence from our research suggests that there were problems arising from the scale and location of some of these developments, particularly where they were sited away from infrastructure and services.
Measures to help existing and prospective homeowners affected by the credit crunch
Our response to the governments' proposed measures is based on a report comparing this down turn with the one in the early 1990s, which is attached at appendix i.
· One year Stamp Duty holiday on homes worth up £175,000
This compares with a 6 month Stamp Duty holiday from December 1991 on homes worth up to £250,000. Given the fact that fewer than 1% of transactions exceeded £250,000 at the time, this amounted to a virtual suspension of stamp duty. However, the impact of this measure was limited: the number of transactions it brought forward were not sufficient to revive the market, and when the 'holiday' ended, transactions fell away.
· Offering 10,000 first time buyers currently frozen out of the mortgage market the chance to get onto the property ladder through a new £300m shared equity scheme
This compares with a £173m 'tenant incentive' scheme launched by the government in 1992 which enabled just over 5,000 social tenants to purchase a home, mostly on the open market.
The current scheme aims to support more first-time buyers but through shared equity rather than full purchase (see later section on shared equity)
· supporting up to 6,000 of the most vulnerable homeowners facing repossession to remain in their home through a £200m mortgage rescue scheme
This is proposal is similar to a mortgage rescue scheme launched in 1991 which was intended to help around 20,000 households, but in fact only reached 2,000. Problems with the 1991 scheme included a lack of security for lenders' loans to housing associations, rents that often exceeded mortgage payments and a reluctance to participate amongst home-owners.
Though we won't know the full details of the current scheme until December or January, given the growing scale of repossessions - forecast to be 45,00 this year and likely to be higher in 2009 if unemployment continues to rise - the commitment to help 6,000 households will make very little impact.
· a £400 million boost in spending power for social housing providers, including registered social landlords and councils, to deliver 5,500 more social houses over the next 18 months by bringing funding forward
In 1992 the government's 'mini-budget provided £612m of new money for housing associations' development programme. This was in large part used to buy existing empty properties and the government target of 18,000 empty homes being taken off the market was exceeded.
However, evidence suggests that this may have incentivised housing associations to take action that did not meet the needs of their client groups, and despite taking empty homes out of the market, house price falls continued into 1993 and 1994.
· £100m investment to support ISMI reform which could help prevent a further 10,000 repossessions
This measure effectively rolls back many of the cuts made to ISMI in 1995. While welcome, it is important to note its many restrictions. Home owners can only receive ISMI if they are in receipt of JSA, Income Support or Pensions Credit and ISMI only becomes available after 13 weeks on the benefit in question. Further it only covers interest payments on a capital amount up to £175,000 using a standardised interest rate which may be below the claimant's actual payments leaving them with significant shortfalls. Finally, the extension is not being implemented until April next year. The Treasury estimates this will help 10,000 homeowners when implemented, a figure which stands in sharp contrast with suggestions that repossession levels next year will be higher than this year's projected 45,000.
Importantly, this benefit does not cover those homeowners facing repossession because of reduced in-work income. One possible remedy would be to introduce a housing element to the tax credit system. This could be based on regional housing costs to support families in work and would also offer a stronger back to work incentive for those needing to claim ISMI (see appendix IV). Whilst this proposal would support vulnerable homeowners during the downturn, any decision to implement it over the long term would need to take account of the risks associated with further incentivising home ownership.
· Pre-action protocol for courts in mortgage repossession cases We welcome the introduction of a pre-action protocol as it should ensure lenders take all possible steps before seeking a repossession order. It is hoped that the pre-action protocol together with potentially falling interest rates will slow repossession growth.
The impact of repossession on households
The global nature of the credit crunch, the vast sums of money at stake, and the use of terms such as 'toxic debt' all mean that the very real impact this is having on people's lives can be forgotten.
It is worth emphasising that many of the households
facing repossession are already experiencing poverty. DWP research[1]
highlights that half of all households in poverty are homeowners, with between
30-50% having an outstanding mortgage. If applied to current figures[2]
this equates to 2-3 million people in low income households with a mortgage in
the
The the recent rise in unemployment and potential drops in earnings are of key concern as 55% of homeowners have an outstanding mortgage with over 90% of these relying on employment to meet their mortgage payments in the first instance.
Repossessions have a deep and long lasting impact on the mental, physical, educational and financial lives of the families involved. The impact of repossession doesn't begin or end with the loss of a home. It is often preceded by months of building debts and court appearances and followed by months or even years of continued debts, moves to new accommodation and compounding levels of ill-health. Further, the number of households repossessed is the tip of the iceberg. The headline projection of 45,000 repossessions by the end of the year hides a further 170,000 households projected to be over 3 months in arrears (CML), with some significantly beyond 3 months behind and facing all the distress this causes.
Research by the JRF on the social consequences of repossession highlights these concerns starkly. Adults experienced stress, depression, declining physical health and very strong feelings of insecurity, low self-esteem and inadequacy. The study highlighted that this was particularly the case for women who, tended to stay in the family home with the children after a relationship breakdown and face the brunt of the financial difficulty. The distress of parents had a direct and long lasting impact on the children of the family.
Quotes from the research
"I haven't got the same energy that I used to have, it drains you does this. It drains you physically and mentally...All the worry, all the debts, everything. And especially since this [the £60,000 owed on the house] has come up. I mean since [the debt clearing agency] contacted me I've been getting chest pains. And it was when they contacted me; it was just after that I came down with the first bug. Because stress depletes the immune system". (Lone mother with one dependent child, repossessed in 1993 through relationship breakdown)
"I just wished that there was something, some difference or some way, that I could have helped my Mum to prevent it from happening" (Child of lone mother repossessed in 1997 due to relationship breakdown).
The chief conclusion of this work was that repossession should be avoided at all costs given the long lasting impact on adults and children involved and costs for wider society as a consequence of escalating health and education support needs.
The private rented sector
The JRF would ask that the Committee also keep in mind the effect the current economic down turn is having on tenants in the private rented sector. Alongside the growing risk of unemployment and rising household costs, in many areas tenants are facing rising rental costs and, for an important minority, the need to quickly find alternative accommodation when a landlord is required to sell. Further, there is some suggestion that the quality and frequency of maintenance and repairs in the sector may fall during this period of economic downturn.
Considering the medium-to-long term
While it is vitally important to consider the short term impact on families and the interventions that may help, it will also be important for the Committee to consider medium-to-longer term questions about how a more sustainable housing system might be created. We have set out some of these questions below.
New housing delivery - is the current model overly reliant on cross-subsidy from the private sector and, if so, should policy makers be looking at increased public expenditure in this area and/or changes to the planning system that make house building cheaper?
Home ownership levels - the expansion in the percentage of home owners inevitably draws people with more economically vulnerable positions into the tenure. Are our current levels of home ownership sustainable?
The offer in the rental sectors - How do these sectors need to change if they are to offer people a desirable alternative to home ownership?
Flexible tenure - it has been suggested that one solution is more flexible tenure schemes where people can enjoy elements of home ownership and renting (e.g. shared equity and shared ownership schemes). If this route is to be employed how can it be developed so it makes sense to consumers and allows people mobility within the sector so that they do not get trapped[3]?
Balancing fiscal incentives across tenures - current government policy heavily incentivises home ownership, which distorts the market in a number of ways. Restructuring fiscal incentives might contribute to a more sustainable housing market over the long term.
Roger Harding Senior Policy and Public Affairs Officer Joseph Rowntree Foundation
Appendix I - Housing market recessions and sustainable home ownership, JRF (July 2008)
Appendix II - Research complied by Whitehead et al for the JRF's submission to the 2007 housing green paper
Appendix III - Losing the Family Home, JRF (1999), summary.
Appendix IV - Housing tax credit proposal, Wilcox, S (JRF 2008)
[1] Low-income
homeowners in [2] 2006/7 data from www.poverty.org.uk using DWP data [3] Forthcoming research funded by the JRF (Wallace 2008) highlights that for some people who used shared ownership schemes this tenure is becoming a permanent one as they cannot afford to staircase up their original stake to full home ownership and because of the lack of scale of the sector some can struggle to find suitable move-on accommodation as their needs change. |