HC 1652 Communities and Local Government CommitteeWritten submission from the National Association of Estate Agents and the Association of Residential Letting Agents

Mortgage Finance Supply.

Government Guarantee.

Affordable Housing including shared ownership.

Private Rented Sector.

Stamp Duty Land Tax.

We would not wish to comment on other areas as we have no relevant information to provide.

Mortgage Supply in itself is not the problem which many commentators claim it to be. The key challenge is the level of deposit required by, in particular a first time buyer, with many mortgage products having an 85% Loan to Value ratio. The regional variations in house prices cause this to be a bigger problem in some parts of the country than others. Recent industry reports suggest that the average price of a house in London is double that of the rest of the country, and whilst incomes in the capital are greater there is insufficient salary differential to allow deposits to be accrued.

The same is true for investor landlords with most buy-to-let mortgage products being at 70%–75% Loan to Value ratio. ARLA’s recent surveys indicate that there are investor landlords willing to purchase further properties: http://www.arla.co.uk/buy-to-let/buy-to-let-review/2011/q3/

However anecdotal evidence suggests investor landlords are being frustrated by:

A lack of suitable stock available to purchase probably caused by potential vendors waiting on house price recovery as well as lack of new development due to lack of finance for developers.

Rental arrears rising in the Private Rented Sector as illustrated by the recent ARLA survey and surveys by the National Landlords Association.

Surveys by ARLA and BDRC independently indicate low gross rental yields, approximately 5 % return on investment. Even this return is quickly swallowed up by interest payments and maintaining properties in good condition.

In the past landlords have been happy to sacrifice rental yield for capital growth but this is very uncertain in the foreseeable future.

Government Guarantees can take several forms including:

Complex financial instruments. Such instruments underpin mortgage lenders by allowing them to lend to higher risk profile borrowers at a more competitive rate.

Encouragement of Mortgage Guarantee products. In the past the insurance industry took an active role in providing insurance for lending above the normal criteria Anecdotally there appears to be little appetite within the insurance industry or the Government to resurrect this form of guarantee.

We suggest:

Providing sufficient fiscal stimulation through tax breaks or other such tools to the insurers to make the market viable. One such option could be to allow a full write off for tax purposes and then a subsequent write back when repayment is made or when the guarantee has reached its maturity. A five year period may be appropriate. This would set a finite figure for fiscal subsidy by HM Treasury.

Government to act as insurer/guarantor to the first time buyer market. This would allow a little money to go a long way. On a property valued at £180,000 with a 15% guarantee, allowing a 100% mortgage, this would equate to an underwrite of £27,000. £500 million of public money could underwrite approx 2,000 first time buyers. The advantages of this approach would be:

(i)It would be unlikely that all of the guarantee would be taken up as a result of default.

(ii)There would be income from the relevant premium charged.

(iii)The capital repayment on the mortgage could be applied in the first instance to reducing the level of guarantee outstanding.

Affordable Housing has taken many guises over recent years including requirements for affordable housing for sale and rent within new housing developments, co-ownership, and shared equity.

Comments could be made about how all these have worked but some basic problems have existed with some. Owner occupiers who have not qualified for affordable homes may feel that they have in fact subsidised their neighbours as on re-sale those who bought affordable homes can end up in a better financial situation to move up the property market than those who bought full price. This is because both properties would be likely to achieve the same or very similar prices.

The shared ownership model has also been problematic. These schemes were originally seen as meeting the aspirations of people to become homeowners. Young single people who could not get housing by any other means were attracted to shared ownership schemes. However as their circumstances change they are becoming disillusioned because they are facing negative equity which was never a possibility brought to their attention prior to purchase. A typical example would be a 50% owned 50% rented situation, borrowed at 95% on the 50% purchase price of £100,000 in 2006. Owners who wish to trade up to owning the whole of the property are advised it is now only worth £90,000. To purchase the other half they have to finance the negative equity plus the deposit on the balance of the property, but often they are unable to raise the finance beyond the expected figure of £2,500 from their own resource.

These problems result in an inability to sell, and as a result young families are now being housed in developments which were built without the necessary amenities for that type of occupier. This in turn will lead to the social problems which come from poor housing conditions. It is not just the quality of the home which creates poor housing conditions, it is a lack of infrastructure such as adequate health, educational, and leisure facilities.

Although well intentioned, it can be hard to see how these schemes have provided value for money for the public purse.

Institutional finance for the Private Rented Sector has been a governmental aspiration for several years. This topic featured in the Rugg and Rhodes review of the Private Rented Sector in 2008.1 Institutions have responded with various barriers to investment; and these have included:

Stamp Duty Land Tax on bulk purchase, albeit this has been addressed by the Government’s changes. However not a single Real Estate Investment Trust has been created for solely residential property. This has been totally the opposite experience to the success of Business Expansion Schemes available in the late 80s to the mid 90s. These historic schemes were a more suitable tax effective vehicle for institutions.

The inability to reclaim VAT on repairs.

The very small margin between rental yield and management costs including VAT. With gross rental yields being in the region of 5% the net yield can be in the region of 1% before allowing for any capital gain. The capital gain itself can be difficult for institutions to predict. Currently there is a very restricted re-sale market for this type of development and this prevents institutions from having a managed exit strategy. There have been suggestions that a derivatives market could be created, although many observers fear that would have many of the same types of problems associated with the sub-prime market.

An institution would require a medium to large number of units in any development. This doesn’t fit with the scale required by the Private Rented Sector which typically is small developments or single units, the notable exceptions being student accommodation and rented retirement property.

Another barrier is the perception of reputational risk. Institutional investors require similar numbers of properties as Registered Social Landlords, and the problems RSLs face are well documented. This could impact on the institution’s other products and services

Stamp Duty Land Tax reform is something we have continually asked for in conjunction with several other bodies in our pre-budget submissions to H.M. Treasury. Set out below are some of the key points we have made which we feel are still relevant today as part of the financing issues around housing in general.

Thresholds are inflexible

By not raising the stamp duty threshold in line with property prices, the tax yield from residential stamp duty has grown ten-fold since 1996–97. Between 1997 and 2008 receipts from Stamp Duty grew from £675 million per annum to £6.68 billion. While the impact of the tax may well have been offset by continually rising housing prices, in times of falling property prices it has the opposite effect. The “fiscal drag” of the tax is therefore exacerbated in an economic downturn, whereby static or falling house prices mean that this increased burden is not offset by an expected rise in value of the property. The current system makes it difficult for government to project its own revenue streams due to the volatility of Stamp Duty returns. Stamp duty receipts fell by nearly a half in 2008–2009 from the previous financial year. While both residential and commercial property prices declined, the HM Treasury notes that the key driver of the sharp fall in the duty is the “historically low levels of transactions.”

“Slab” structure distorts the residential housing market

As currently structured, the “slab structure” of Stamp Duty distorts the UK housing market. The “slab” structure of the tax, where rates are applied to the entire value of the property rather than the marginal value, leads to a sharp rise in the amount of duty payable as the price of a property moves from one band to the next. If a home moves beyond £250,000, for example, the rate of duty jumps from just 1% to 3%. This impacts the market for properties sold at prices just above the thresholds, rather than there being a smoother distribution of house prices as there should be in a well-functioning market.

First time buyers remain disadvantaged

Stamp Duty places a disproportionate burden on first time buyers, which is of particular importance in the current climate where new buyers in the market are finding it difficult to gain a foothold on the housing ladder. First time buyers are more likely to be near their credit limit, particularly in the current lending environment. This means they are less able to extend their borrowing to cover the additional cost of stamp duty. Moreover, stamp duty is not index-linked to rise with inflation. This has meant that Stamp Duty has been paid by increasing numbers of first time buyers.

Price ghettos

Stamp Duty creates differences across the country. Regional house price differences lead to a geographical inequality—or “price ghettos”—in terms of who bears the burden of the duty. Stamp Duty falls more heavily on the south of England where prices are higher. This demonstrates the need to consider regional variation in the Stamp Duty thresholds.

Effects on the wider economy

The slowdown in the housing market has had considerable implications for economic growth. House building, renovation and associated industries are important providers of jobs and an important source of aggregate demand in the domestic economy. As first time buyers are usually the foundation of sales chains, reforming or extending the current Stamp Duty system will encourage additional stamp duty and VAT revenues generated in other sales and ancillary services.

October 2011

1 The Private Rented Sector: its contribution and potential. Julie Rugg and David Rhodes. Centre for Housing Policy, the University of York.

Prepared 1st May 2012