HC 1652 Communities and Local Government CommitteeWritten submission from the Northern Housing Consortium and the North West Housing Forum

This is a joint submission from the Northern Housing Consortium and the North West Housing Forum. We represent almost 200 registered providers of social housing and Local Authorities across the three northern regions.

We are pleased to respond to the Committee’s call for evidence into this topical subject matter.

Summary

Our submission covers three main areas:

Need to support access to mortgage financing to stimulate a stagnating housing market—thus unlocking further supply opportunities.

Securing new investment lines into housing delivery.

Making better use of assets to maximise capacity to deliver.

Introduction

The national requirement for new housing is accepted by all parties and yet supply is still not matching demands and rates of new build have been on a downward trajectory. This trend, coupled with wider economic condition, has restricted (although not removed) government finances directed at the delivery of affordable housing.

Current government policy is focused on incentivisation for new build—through New Homes Bonus, TIF, build now—pay later etc and in particular a call for better use of existing assets to support delivery and reduce direct government subsidy—through routes such as the Affordable Rents Framework.

Although initial concerns were raised by many Northern providers around the viability of the Affordable Rent proposals, providers in the North have worked collaboratively to develop innovative programmes and secured an increase in proportion of national allocation—intending to deliver 22% of outputs in this cycle compared to 14% during 200811 and securing an increased proportion of total investment—moving from 14% in 200811 to 22% in the 201115 programme. However, concerns remain as to the long term capacity of providers to develop in this manner and many organisations report they will be close to gearing ceilings over the course of this four year programme.

We welcome the principal of incentivisation into the delivery of new house building but felt that one of the current vehicles for incentivisation—the New Homes Bonus has limitations which need to be addressed.

Our submission focuses on three areas:

1.Improving access to the home ownership market—notwithstanding the need for a debate around the balance between rental and home ownership—it remains the case that many people aspire to home ownership and yet cannot access it. Building rates of new homes are affected by the speed in which sales occur and with sales in both “new” and “second hand” markets constrained we need to consider how to facilitate access.

2.Securing new investment sources into the delivery of new homes—particularly in the affordable housing sector, the cost of securing finance is increasing and the range of investors is reducing, compounding the problem yet further.

3.Better use of assets—Government expect housing providers to maximise the capacity of existing asset bases to improve the supply rate of new homes. The experience of the affordable rent framework suggests Northern providers are actively exploring how they can make best use of asset portfolios and our submission explores additional routes—although we acknowledge some have limitations.

1. Improving access to the home ownership market

Recent figures from the Halifax (October 2011) suggest that the average age of first time buyers (FTB) in the North is 2830 and those seeking to purchase face an enormous challenge in terms of affordability—indeed the CML report that over 80% of FTB needed support from others with their deposit last year, compared to just over 30% in 2005.

First time buyers, according to a HBF report “Broken Ladder” from October 2010 highlights the difficulty in securing a deposit for FTB, citing the percentage of net annual salary to deposit for the three Northern regions as:

NE 168%

NW 180%

YH 179%

Those first time buyers—including many in the North—who do not have this financial support must wait longer to get access to a mortgage and we should consider new product development aimed at this market.

Following the global economic crisis mortgage availability has constricted considerably and those mortgages that are available are more restrictive.

Whilst not advocating a return to the days of 110% mortgages we do feel that sensible lending could be within margins of 90 to 95% mortgages and would ask the government to consider how it can encourage lenders to return to a more balanced view of lending. Some in the house building industry are calling on the government to provide a guarantee to bridge the gap between 90% and 95% mortgages. The house-building industry suggest this “guarantee” would be relatively low risk for the government as it would only have to pay this money in the event of default. We would welcome further analysis of this proposal to better understand how it could open up access to home ownership.

Over the past year new entrants (or returners) to the mortgage market have been Local Authorities, who have—either individually, or in collaboration with banks and building societies—used their financial assistance powers to support mortgage provision. The demand for these LA mortgages has been high and given the Housing Minister’s support for these Local Authority mortgages, we urge the government to consider how it could expand these schemes—perhaps through pump priming with central government investment to reduce initial prudential borrowing requirements at a time when LA’s have considerable financial constraints.

There are other financial models available that perhaps merit wider roll out—for example Hitatchi Capital in conjunction with Barratts, now offer a 12 year unsecured loan for parents to use as part of the deposit for first time purchases for their children. The purchaser secures an 80% mortgage, pays a 5% deposit and the remaining 15% is provided through the unsecured loan.

Innovative schemes such as Gentoo’s Genie product is a strong response to the lack of mortgage availability—Genie is a means by which you can own your home without the need for a mortgage at all.

Summary of Genie www.justaskgenie.co.uk

A long-term structured payment plan, the Genie Home Purchase Plan enables purchaser to acquire a share of the home by making one residency fee payment each month.

The payment plan is flexible and lets the purchaser own up to 100% of a home over the 25-year term of the agreement. Access to the Genie does not need a mortgage nor a deposit.

Whilst current attention is focused on unlocking the stagnation of the housing market, we also need personal finance solutions that look to the horizon. Although the age of first time buyers has increased, there are further potential barriers. Young people entering university this year will be the first generation to leave with significant debt. It will not be uncommon for students to be graduating in their early 1920’s with almost £30,000 of debt, we need to better understand how this level of debt will shape their housing pathways—will the attraction of home ownership further diminish and therefore do we need to consider more investment in rental models, or will the aspiration to ownership remain—in which case mortgage provision may need to adapt significantly to reflect the—by then—more commonplace levels of personal debt.

2. Securing new investment

In terms of lending to the affordable housing sector, traditional lending routes have constricted—this is as a result of wider global economic pressures but has led to a position of reduced lenders, shorter loan periods, repricing on loan portfolios and on some occasions enacting of covenants.

Housing providers continue to represent sound investment vehicles—although wider reforms around welfare may impact this. We would welcome steps by government to support the low risk perception of the sector. For example, in terms of macro-economic policy we would urge the government to consider how “credit easing” proposals can be directed to stimulate housing supply—perhaps through supporting and growing the corporate bonds market for SME’s—including housing providers.

Outside of traditional lending, bond financing is increasing throughout the affordable housing sector—however these can be at a rate which is more expensive than historical levels which will have to be managed through greater efficiency gains or could impact on deliverable out turns.

We would welcome larger scale institutional investment into housing provision which has not happened at scale in the UK. Particular concepts that are emerging include lease backed funds which provide an alternative to bond finance. In this model, ownership of the scheme transfers to the investor and is leased back to the provider until the loan is paid. There are concerns around this model, particularly its ability to manage risk given turbulent performance of pension markets in recent year.

The NHC is currently exploring the potential offered by sovereign wealth routes. Whilst the UK has proven to be an attractive investment hub for sovereign wealth, it has historically been focused around London and initially was focussed into commercial rather than residential investment. However, in recent years we have seen this pattern begin to change with investment moving north and into Scotland—initially into commercial facilities but also into scaleable residential development—including student accommodation. Scale appears to be the primary issue in terms of securing investment and this would require collaboration across the affordable housing sector—we feel the NHC and NWHF are well placed to support such collaboration.

Developer led lease arrangements are also a model which could warrant further consideration—in summary the arrangements would see a developer building and owning the properties but leasing them on a 25 year lease to a registered provider. The provider would charge flexible rents and use this financing route to buy back the properties at the end of the lease period. A rolling development programme involving a consortia approach which includes a programme of asset balancing in this context may generate additional financial capacity.

Government policy has seen a switch to incentivisation via the New Homes Bonus, this additional source of investment has real potential to add capacity to new delivery. However, we do have some concerns regarding its possible limitations. In particular we have concerns that the long term funding of the scheme via top slicing of formula grant will disproportionately impact on the North. We are calling on the government to fully fund the scheme from Treasury to ensure that investment in supply is provided throughout the country.

3. Better use of assets

The government is expecting the affordable housing sector to make better use of its asset base in building a platform for new delivery.

Active asset management is being progressed by many providers and modelling suggests that in some parts of the country 0.41.5 additional properties can be delivered for each unit migrated to alternative tenures or disposed of. Clearly for migration to be viable, the issues outlined previously around access to mortgage finance—or the development of new models—must be progressed.

Understanding asset capacity is limited when considered in a single organisation perspective—greater capacity is likely to be generated when worked across a sub region—or even region. Providers in the NW explored this approach in advance of the Affordable Rent framework, however it was not possible to secure a new model of asset maximisation and recycling. It may be timely for this debate to return—supported by the HCA with their capacity via land and RDA asset management.

Strategic asset management across the wider public spectrum—building on the total capital pilots—may provide considerable additional capacity—some estimate that £2 billion capital and revenue savings could be generated in North of England if pilot activity was rolled out. Whilst this approach looks to provide significant capacity, inevitably the scale of collaboration required will mean this is a medium term approach.

Conclusion

Stimulating housing supply will support economic growth strategies and it is imperative that the Government work across the housing supply sector to explore all opportunities that could unlock barriers.

However, we are conscious that policy development needs to be attuned to geographical and economic conditions across the country.

Members of the NHC and NWHF are committed to working with government to explore innovative approaches along the lines highlighted in our submission.

October 2011

Prepared 1st May 2012