House of Commons - Financing of new housing supply - Communities and Local Government Committee

Financing of new housing supply - Communities and Local Government Committee Contents

7 Financing new build for owner occupation

130. In this chapter we will consider possible ways of funding the building of new homes for owner occupation. We will begin by considering the Government's proposals for the NewBuy guarantee scheme. We will then examine the funding of shared ownership and shared equity mortgage schemes, followed by the potential for building new homes on Government land. Finally, we will consider some alternative models for housing delivery, focussing in particular on the contribution self or custom-build schemes can make to new housing supply.

NewBuy Guarantee scheme

131. Laying the Foundations announced the introduction of a "new build indemnity scheme", led by the Council of Mortgage Lenders (CML) and the Home Builders Federation (HBF). It said that the scheme would:

provide up to 95 per cent loan to value mortgages for new build properties in England, backed by a housebuilder indemnity fund. Housebuilders will deposit 3.5 per cent of the sale price in the indemnity fund for each home sold through the scheme, and the Government will provide additional security for the loan in the form of a guarantee. In the event of repossession, the lender will be able to recover any losses on mortgages to the maximum covered by the scheme.[279]

The scheme, which has been branded as the NewBuy Guarantee, was launched on 12 March 2012.[280]

132. Peter Williams, Director of the Cambridge Centre for Housing and Planning Research, giving evidence in November on the day the scheme was first announced, warned that the lending enabled by this scheme would "be netted off against an aggregate volume of mortgage finance, which is still very limited".[281] He explained: "Both this and the right to buy are new priorities, but actually it will mean less mortgage finance out there in the rest of the market to support other things".[282] Since the launch of the scheme, concerns have been expressed in the media about the risk of buyers falling into negative equity.[283] The CML's guidance for potential buyers explains that some "new build properties include an extra premium on the sale price that can reduce as soon as someone moves into the property" and warns potential buyers that were house prices to fall they "may not have enough money from selling the property to repay the mortgage". It adds, however, that negative equity is "a risk of high loan-to-value borrowing [...] not of the NewBuy scheme itself".[284] We recommend that the Government review the NewBuy Guarantee after the first year of its operation, to assess its impact upon mortgage finance in other parts of the market. It should also consider how many properties sold under the scheme have fallen into negative equity, and the impact this has had on buyers.

133. We asked Paul Smee, Director General of the CML, how the Government planned to control valuations, so that builders did not increase the sales price to cover the cost of their 3.5% deposit into the indemnity fund. He pointed to the Royal Institution of Chartered Surveyors' guidelines on conducting valuations and said that the CML and the Government would require "absolute transparency about the prices at which comparable properties—for example, on a particular development—are changing hands".[285] Nick Jopling of Grainger plc considered this issue to be "a particularly important point", saying that he "would expect the lender and the Government to have an RICS evaluation backed by a professionally indemnified professional, who is going to ensure that exactly what you are worried about does not happen".[286] The HBF guidance for builders states that those valuing the properties "will be very sensitive" to concerns about artificial price increases, "and will not allow the valuation to incorporate any inflation of the new build premium, other than any general movement in local house prices".[287]

134. Igloo Regeneration submitting evidence on behalf of the Local Developers' Forum (LDF), a group of small volume residential developers, expressed the LDF's support for the NewBuy scheme, but raised concerns "that the implementation will discriminate against small volume builders".[288] It stated that to establish a "cell" with a lender on its own, a builder would have to build "an absolute minimum volume of 100 units per annum". It claimed that, as a result of this, around 40% of builders could be excluded. Although there was a proposal for smaller builders to share in a cell, this would be more complicated to establish, take longer and involve builders "sharing risks and returns with their competitors". Igloo also suggested that the costs of joining the scheme should be "on a per home basis rather than fixed amounts" and that a "lack of transparency" in the process of setting up the scheme had further disadvantaged smaller builders.[289]

135. Paul Smee, giving evidence to us in December 2011, said that there was already interest in the scheme from smaller lenders and that it was possible to "envisage situations where smaller builders, with perhaps strong regional presences, are talking to lenders with equally strong regional presences, which gives a local flavour to the scheme".[290] We consider it important that local builders have the opportunity to be involved in the scheme. We recommend that the Government bring forward changes to the NewBuy Guarantee to allow smaller builders to become fully involved in the scheme. In doing so, it should work closely with the Local Developers' Forum and other smaller builders to ensure that the changes address their key concerns. It should also promote opportunities for smaller builders and smaller lenders to work together.

'Intermediate' products

136. Our evidence suggests that one way of supporting the building of new homes is through the use of 'intermediate' products such as shared ownership and shared equity mortgages.[291] The National Housing Federation stated that it had "recently called for Government to invest £1 billion in building shared ownership over the next three years"; this investment would deliver 66,000 homes, create jobs and bring some wider economic benefits.[292]

137. The Chartered Institute of Housing (CIH) suggested that shared ownership products "clearly have a role but suffer from a number of handicaps such as the often narrow gap between the costs of shared and full ownership, unfamiliarity by buyers, etc". It added that in the past governments had "not succeeded in raising levels of shared ownership much above 100,000 nationally at any one time (given that units eventually move out of shared and into full ownership)".[293]

Private sector models

138. We heard from a number of private sector organisations developing shared investment models, some of which involved investment from large financial institutions. David Toplas, Chief Executive of Mill Group, told us his organisation's "co-investment" model was "seeking to bring long-term investment money to people so that they can buy homes through co-investment in the mainstream housing market".[294] Graeme Moran, Managing Director of Assettrust, said that his organisation was developing a "shared ownership version of right to buy, which is aimed at helping social rented tenants get on and meet their home ownership aspirations and purchase their existing social rented home".[295] We also heard from Sean Oldfield, the Chief Executive of Castle Trust; his organisation, subject to authorisation from the Financial Services Authority,[296] planned to introduce a shared equity mortgage product alongside an investment product for savers through which the mortgages would be funded.[297] We received written evidence about a number of further intermediate schemes.[298]

139. Castle Trust suggested to us that the Government "should make clear its strong support for privately financed shared equity for the housing market, as a complement to the Government's own shared equity offerings".[299] Sean Oldfield told us that such "support, not the financial support, does provide a very real impetus to the ongoing growth of such solutions".[300] Mill Group expressed similar sentiments saying that in the absence of cash, "the State can have a significant influence in gaining traction for new models by declaring publicly that it can see merit in the concept and would like to see it in action".[301] In written evidence, David Toplas referred to the NewBuy Guarantee scheme and asked "that Government provide a similar financial encouragement to institutions to provide investment finance to enable consumers to buy homes and simultaneously initiate a new investment market for institutions".[302]

140. Mr Shapps said: "I really like shared equity and shared ownership products". However, he added that he felt that such products "suffer a little bit through complexity". He added that there were "some very interesting ideas coming down the track that I will back to the hilt, assuming they do not require taxpayer subsidy".[303]

141. There are benefits to investment in shared ownership schemes, which can help those people looking to get on the housing ladder, and can make an important contribution to new housing supply. They allow housing associations to recycle funding in that they receive a proportion of the price immediately on sale and further inflows as "staircasing" occurs. We have heard, however, concerns about the complexity of both shared ownership and shared equity mortgage products.

142. There is a case for the Government enabling the growth of private sector shared ownership and shared equity mortgage products, through, for example, a clearer regulatory framework. In giving its endorsement to such products, however, the Government should not be perceived as providing a guarantee. It therefore needs to be clear about its intentions.

143. We have also heard suggestions that the Government could go further by providing financial encouragement to private shared investment schemes. There may be some merit in introducing a version of the NewBuy Guarantee to underwrite investment in shared ownership and shared equity mortgage products as long as the individual risks are clearly recognised. We recommend that the Government bring forward proposals to establish such a scheme, making clear that it will only be provided if a number of steps are followed to make the product more transparent for the consumer.

Government land

144. We have established that the release of publicly-owned land has a role to play in supporting development,[304] and have considered in particular the release of local authority land.[305] Mr Shapps identified plans to build 100,000 homes on land currently owned by the Government as one of the key measures in Laying the Foundations.[306] He stated that "very good progress" had been made with this initiative and that he considered the Government to be "ahead of where we thought it might be by this stage".[307] He referred in particular to the "Build Now, Pay Later" initiative, through which developers could build on certain sites and pay for the land at a later date.[308]

145. Alan Benson of the Greater London Authority said that one of the challenges in releasing public land was a difference between land owned by departments and agencies with a housing objective and that owned by those "responsible for something very different indeed". He explained:

If you are the Ministry of Defence and you are required to replace your missiles, and are given the option instead of handing over some land at a less-than-best-cost deal to build some homes, that is not a compelling case to make to the Ministry of Defence. They would rightly say back to you [...] that if you want to build housing, you should put the money into the housing budget and pay the Ministry of Defence for that land.[309]

Abigail Davies of the CIH suggested that in some cases an alternative to Build Now, Pay Later might be "some kind of joint venture model [...] to enable the public sector to keep a stake in it and to benefit from the uplift in that value".[310]

146. Grainger plc said that it had established a partnership with the Defence Infrastructure Organisation (DIO) "to develop up to 4,250 houses on under-used military land" in Hampshire. Nick Jopling, Grainger's Executive Director of Property, said that the partnership was intent on "maximising the value" of the DIO's asset. Grainger was responsible for master-planning the site and putting infrastructure in place. When it was ready for sale to developers on the open market, Grainger would "take a small share of the receipt; the Government will get the vast majority of it".[311] By enhancing the value of the land before sale, partnerships of this kind could secure better value for taxpayers' money.

147. We welcome the Government's commitment to release land for development and the progress it has made so far in doing this. We support the Build Now, Pay Later initiative and recognise that it has an important role to play in stimulating development. We would also, however, encourage the Government to be mindful of other approaches to making land available—such as joint ventures or partnerships with developers—where these offer a better deal for the taxpayer.

Other models

148. The Building and Social Housing Foundation (BSHF) suggested that the "Government should investigate the barriers to adequate finance being available for a diverse range of housing models", including sweat equity, community land trusts, self build and housing cooperatives.[312] It said that models such as these "account for only a fraction of the housing stock in the UK, unlike some other countries in Europe or North America where they are much larger, both in terms of total numbers and as proportions of the stock".[313] Jim Vine, Head of UK Housing Policy and Practice at BSHF, said that such models could make a significant impact given "the right following winds".[314] Andy Hull, Senior Fellow at the Institute for Public Policy Research, referred to community land trusts, saying that they had "worked okay in rural settings in this country so far, but we have not really pulled one off in an urban setting". He explained: "it is notoriously difficult to upscale those sorts of models. Part of what we are exercised by here is scale".[315]

SELF/CUSTOM BUILD HOUSING

149. During our inquiry, we heard in particular about the potential of self or custom build housing, in which prospective home owners buy a plot of land and either build a house themselves or employ contractors to build it for them. We visited the city of Almere in the Netherlands, home to Europe's largest self build project: since the project's inception, 800 self build homes had been built on publicly-owned land reclaimed from the sea. The municipal authorities played a number of important roles, including designating plots, putting in place purchase arrangements, and providing roads and other infrastructure. They had taken a relaxed approach to regulating the design and construction of buildings; which had led to some of the homes having innovative designs. Nevertheless, they still enforced building regulations, including ones relating to safety and energy conservation. We heard that it was on average €50,000 cheaper to build a house than to buy one on the market: a number of residents had opted for modern system-build houses, which had enabled them to dramatically reduce the cost. We were also told that demand for plots had been high and that, so far, lenders had been willing to provide finance for self build. It was intimated to us that the Netherlands would be aiming to deliver 40,000 to 50,000 self build homes over five years; similar numbers per head of population in England could result in up to 150,000 self build homes being built over the same period.

150. Laying the Foundations included a section on what it described as "custom build" housing, which included the case study of the Almere project. It referred to "huge untapped potential", pointing out that currently only one in ten homes were custom built, "a very low proportion by international standards". It said that over 100,000 people were looking for plots to build on and added: "we know from recent market research that one in two people would consider building their own home if they could". It also set out a number of steps the Government would take to support custom build, including making "up to £30 million available to support provision of short-term project finance to this sector on a repayable basis".[316] Giving evidence to us, Mr Shapps was very enthusiastic about self and custom build housing. He said that the self and custom build market had "accounted for 13,000 houses built last year", making it the "nation's biggest builder". He said that it was the Government's intention "to double that marketplace in the next 10 years".[317] We welcome Mr Shapps's enthusiasm, but consider that the Government needs to assist further in addressing some of the barriers to self and custom build development.

151. The National Self Build Association (NaSBA) considered the "biggest hurdle" faced by self build projects to be "finding a suitable building plot", although it noted that the Government was taking steps to assist, in particular through proposals in the draft National Planning Policy Framework requiring councils to assess demand for self build, and through the Homes and Communities Agency's release of five large sites.[318] BuildStore Financial Services, an organisation providing support to self builders, agreed that finding land was a major problem and referred in particular to the need to make "land available in the major conurbations".[319] It further noted that land accounted for a third or, in some cases, half of a self builder's budget and suggested that "if land were to be offered at a reduced price as a means of assistance, this would have a substantial impact on the accessibility of self build housing".[320]

152. The second major barrier in NaSBA's view was the availability of finance. It said that mortgages were "still available for individuals hoping to build their own homes" but that they would "still need a sizeable deposit for the land and the construction cost (around 25% of the total is typical)". It did not consider that incentives such as the NewBuy Guarantee would "ever be practical to help one-off self builders".[321] Paul Smee of the CML said that there was:

limited availability of self build mortgages among mainstream lenders. Where finance is available, there are often a number of conditions attached to it—for example, no lending against the first stage of the build or lending only up to the value of the part-build rather than against a projected valuation of the completed build. In addition, self build often requires specialist underwriting. This is a resource that, at this stage, cannot be justified by many lenders given the relatively low demand for self build finance coupled with its inherent risk.[322]

BuildStore said that the self build mortgage market was dominated by small regional building societies.[323] It noted that the "tightening of lending criteria across the mortgage market has hit self funding harder, due to the majority of self builders needing to fund two mortgages simultaneously, for at least a part of the build period".[324] It considered that lenders would often "shy away from the self build lending market" because of the perceived risk that borrowers would not complete their projects when "in reality, that risk is very low, and the incidence of loss is minimal". It had seen an average repossession rate of 0.46% since 1998, and the average percentage of mortgages in arrears between 2002 and 2008 had been 0.41%, compared to the CML average of 1.11%.[325]

153. We also heard about the possibility of self build development taking place at a larger scale. NaSBA referred to "groups of people trying to get a community self build project off the ground—say 10-15 families", noting that they would have difficulty getting finance to buy a large plot. It suggested that the Government's £30 million fund would be helpful for such groups and would "enable them to bid for sites (against the more nimble land buyers from the major housebuilders)".[326]

154. On the potential of "volume self build", Buildstore described proposals it was developing to enable individuals "to purchase land on larger sites specifically for self build":

The model is very flexible and can be tailored to suit different types of people in different areas. Grouping individual builds together on larger sites removes the requirement for large scale development finance that has been so difficult to obtain in recent years, while creating significant numbers of new homes.[327]

It argued that such an approach could suit shared ownership and shared equity schemes, suggesting that a council could provide the land "at no initial charge" and the participant could "buy out their plot over an extended period of time via staircasing".[328] NaSBA stated that it would welcome projects similar to the one in Almere being established in the UK, but noted that they would "require a mind-shift from some people in the planning world". It considered that the key challenge would be "finding a local authority with the vision and enterprise to give it ago", although the initial cost of the land would also be an issue.[329]

155. We fully share the Government's enthusiasm for self and custom build development, which provides a very different model for the delivery of owner-occupied homes. It enables homes to be built a lower cost and brings economic benefits to an area by creating opportunities for smaller builders and other local businesses. It already delivers significant numbers of new homes in England but does not come close to fulfilling its potential. We were impressed by the large scale project underway in Almere. A similar, high-profile scheme in England could help to kick-start a new enthusiasm for self build across the country. There are clearly a number of barriers, including land supply, the availability of mortgage finance, and planning constraints. We welcome the steps the Government has taken so far to address some of these issues. However, it will need to take further action if it is to succeed in its aim of doubling the self build marketplace in the next ten years. We recommend that the Government work with mortgage lenders to identify and overcome the barriers to lending to self builders. We further recommend that the Government establish a fund to incentivise local authorities to support pilot "volume self build" schemes by allocating sites and taking a flexible approach to planning (whilst ensuring continued compliance with energy and safety regulations). We see no reason why the first pilots could not be up and running in two years' time and ask that the Government report back to us in 2014.

279 Laying the Foundations, p 8 Back

280 "Grant Shapps: Unlocking aspiration for a new generation of home buyers", Department for Communities and Local Government press notice, 12 March 2012, www.commmunities.gov.uk Back

281 Q 40 Back

282 As above Back

283 See, for example, "NewBuy borrowers risk negative equity", Financial Times online, 16 March 2012, www.ft.com. Back

284 "NewBuy, what you need to know before you go ahead", www.cml.org.uk Back

285 Q 124 Back

286 Q 125 Back

287 Home Builders Federation, Guidance for home builders thinking of applying to join NewBuy, March 2012. Back

288 Ev w105 Back

289 As above Back

290 Q 125 Back