HC 1652 Communities and Local Government CommitteeWritten submission from the Scottish Government

Executive Summary

The Scottish Government welcomes the opportunity to offer evidence to the Communities and Local Government Committee’s inquiry into the financing of new housing supply. Increasing the supply of all types of housing is fundamental to achieving our 2020 vision of a housing system which provides an affordable home for all.

This memorandum, focused around the questions posed by the Committee, highlights the range of innovative approaches we are taking to support the delivery of housing of all types and tenures and maximise the impact and leverage of our investment. In addition, where appropriate and relevant, it raises concerns about policy areas reserved to the UK Government which impact on the Scottish Government’s capacity to deliver on our objectives. In particular it highlights difficulties related to the UK Government’s plans to reform housing benefit, and the pressing need for action to increase the availability of higher loan to value mortgages to credit worthy borrowers throughout Scotland. Without the ability to influence these key drivers of the overall housing supply system in Scotland, our capacity to deliver our objectives is hindered.

In addition to the above, key points raised in our response include that:

The Scottish Government believes that there remains an imperative to support the delivery of affordable housing. Within that, given the scale of need, we believe that the clear majority of investment should be in the form of grants to support housing for social rent. We have made a commitment that at least two thirds of the 30,000 affordable homes we intend to support the delivery of over the next five years will be for social rent.

There is however significant scope to reduce the average level of subsidy provided to social rented housing by encouraging providers to make full use of the other resources available to them. As an example of this, awards of funding made this year through our Innovation and Investment Fund have had an average per unit subsidy level of £40,000, compared to a previous level of around £70,000.

Whilst grants will comprise the bulk of our investment, the drive to maximise the leverage achieved through our funding demands that we make use of other investment approaches, including guarantees, equity loans and other forms of loan arrangements.

We are therefore also developing a range of innovative approaches that will support the delivery of other forms of affordable housing. In particular, the National Housing Trust initiative is on track to deliver hundreds of new homes for intermediate rent for a Scottish Government investment, costed at only £2,700 per unit of potential outlay through guarantees.

In addition, we are continuing to invest in shared equity schemes, have launched a £10 million Housebuilding Infrastructure Loan Fund to unlock stalled sites and have announced support for the development of a private sector mortgage indemnity scheme.


1. The Scottish Government welcomes the opportunity to offer evidence to the Communities and Local Government Committee’s inquiry into the financing of new housing supply.

2. Increasing the supply of all types of housing is fundamental to achieving our 2020 vision of a housing system which provides an affordable home for all. Our recently published housing strategy and action plan, Homes fit for the 21st Century,1 made clear the need to increase supply right across the housing system, including expanding the availability of mid-range housing products to support the growing number of people whose needs aren’t met by the established tenures.

3. The credit crunch and subsequent economic downturn have had a significant impact on housing supply in Scotland. Private sector housebuilding in particular has fallen dramatically given the decline in mortgage lending and uncertain economic climate, and the overall level of funding available to the Scottish Government has reduced significantly. Over the course of the next Spending Review period, the overall level of capital investment allocated to Scotland from the UK will decline by some 36%.

4. In response, we have actively pursued an innovation agenda with housing partners to identify new methods for financing and delivering new affordable housing, focused on securing the maximum possible leverage for our investment. In addition, we have taken action, within the limits of our powers and responsibility, to support private housebuilding and the housing market more broadly.

5. Difficult decisions have had to be made in pursuit of our goal, and we have laid down a significant challenge to housing providers throughout Scotland. However, given the pressing ongoing need to increase the supply of affordable housing in Scotland, there is no other realistic option.

6. Our actions are now beginning to bear fruit. From a standing start, local authorities in Scotland are now building almost as many council houses as the rest of the UK combined. We have developed the highly innovative new National Housing Trust initiative, which will enable hundreds of homes to be built for intermediate rent, support hundreds of jobs and maintain activity in the housebuilding industry. We have significantly reduced the average levels of subsidy used to support social rented housing, and identified a range of potential new approaches for the future.

7. Taking account of the initiatives we have put in place and the position in Scotland, the response below offers the Scottish Government’s views on a number of the questions posed by the Committee in its call for evidence.

How and where should the more limited capital and revenue public subsidy best be applied to provide the biggest return in housing supply terms?

8. The Scottish Government believes that there remains an imperative to support the delivery of new affordable housing in Scotland and that our investment should reflect that. It is a vital strand of our efforts to build a better and a fairer Scotland, address homelessness and affordability issues and continue to regenerate our most deprived neighbourhoods. As such, despite the reductions in capital spend for housing necessitated by the UK Government’s cuts, we have prioritised over £600m for new housing over the next three years.

9. Within that, in contrast with the UK Government’s approach, we believe that there is a compelling case for continuing to support the delivery of homes for social rent. Initiatives to support the supply of all forms of affordable housing are important, and we say more about that later in this response, but social rented housing plays a vital role in providing people with an affordable home and a platform for getting on in life. Accordingly, of the 30,000 affordable homes we intend to deliver over the five year term of this Scottish Parliament, at least 20,000 will be for social rent.

10. By its nature, social rented housing is the most expensive form of affordable housing in terms of the Government subsidy it requires. However, our experience suggests that there is real scope to support it at a much lower level of subsidy than has previously been the case. We see significant opportunities for housing associations and local authorities to bring other resources to the table in producing their bids for funding—for example by drawing on existing borrowing capacity, through cross-subsidy, by reducing costs, or by justifiable increases in rents.

11. The recent awards of funding from our Innovation and Investment Fund2 make clear the potential to increase the leverage of our investment in social rented housing. This one year challenge fund, focused on driving innovation, collaborative working and value for money to the Scottish Government, elicited a large number of competitive bids from councils, housing associations and other bodies willing to contribute resources to affordable housing developments.

12. In all, the total grant of £142 million from the three strands of the Innovation and Investment Fund is levering in a total of £349 million from other sources, and delivering over 4,300 homes. Of that total, almost 3,200 new social rented homes will be supported, at much lower rates of subsidy than had previously been possible. The subsidy benchmark for housing association developments has dropped from around £70,000 to around £40,000 per unit, resulting in those associations needing less in public subsidy compared to last year’s subsidy rates. And many councils are working with us to develop new social housing at still lower levels of central Government subsidy.

13. The challenge funding approach has stimulated innovation in the wider system and allowed a wide range of organisations to show their willingness to embrace change. However we recognise that the approach does not suit all partners or provide longer-term certainty. We are therefore now working together with partners to see how we can build on the achievements of the fund, whilst also meeting shared objectives for a longer-term programme approach. As part of that, we will continue to expect a benchmark of £40,000 subsidy for housing association developments. Higher levels of subsidy will be available only where absolutely necessary for priority developments that would otherwise be unviable.

14. In considering the longer term picture, it is worth highlighting the damaging impact that changes to housing benefit could have on both the financial model underpinning investment in Scotland’s social rented sector, and the types of homes which can be supported. Housing benefit currently meets two thirds of the total rents in the social rented sector in Scotland (£1 billion) and can meet up to the 100% of rent for people on low incomes living in it.

15. The Scottish Government fully understands that housing benefit must be affordable for Government. However, housing benefit expenditure in Scotland has remained relatively level in recent years. Our stakeholders are extremely concerned that the changes planned by the UK Government to introduce direct payments to social landlords, if not implemented with sufficient safeguards, threaten to undermine the attractiveness of the social rented sector to lenders.

16. In addition, the Department for Work and Pensions proposal to introduce penalties for social sector benefit claimants under-occupying their property cuts right across the Scottish Government’s investment focus on homes of two bedrooms or more which can offer “homes for life” for our social tenants. The Scottish Government has made its opposition to this proposal clear and will continue to do so.

Other Approaches to Affordable Housing Supply

17. In addition to driving greater leverage in our investment in social rented housing, the Scottish Government is leading the way in developing innovative new approaches to other forms of affordable housing. We see significant scope here to increase the impact of our investment and harness new sources of finance to support housebuilding, whilst still focusing on those in most need.

18. In particular, the Committee may be interested in the National Housing Trust initiative (NHT),3 an entirely new model for funding affordable housing which we have developed with the Scottish Futures Trust, local authorities and the housebuilding industry. The NHT is founded on a risk-based approach which requires much smaller public subsidy than is the case in other approaches to affordable housing—costed at only £2,700 per unit of potential outlay through guarantees.

19. The first round of procurement for the NHT involved 12 Councils across Scotland last financial year, and contracts are now signed, or underway, to deliver nearly 500 new homes. This will boost Scotland’s economy by as much as £70m and help to support 800 jobs.

20. The initiative uses local authority borrowing to part-fund new homes built by private sector developers, with the Scottish Government acting as a guarantor for Councils’ loans. Developers take the rest of the risk on new homes brought into the scheme. To qualify for our help, the rents have to be lower than both the usual market rates and housing benefit subsidy limits, thereby helping lower income families. As developers will sell the homes in one go to the scheme as soon as they are completed, they can more easily attract sufficient bank working capital to unlock stalled developments and banks can de-leverage their balance sheets.

21. The first phase of the NHT has proven the concept and encouraged engagement in innovation, and Councils are keen to see the model applied more widely. The housing association and private developer sectors are keen for a version of the model to be developed directly for the housing association sector, and have co-produced options with us which were the subject of summer consultation.

22. In addition, to support the development of new innovative approaches we launched a £10m “Innovation Fund” strand as part of the overall Innovation and Investment Fund. This fund, open to a very wide range of bidders and not just the housing association and local authority sectors, aimed to support innovative proposals for the delivery of all types of affordable housing. A number of complex, potentially transformative and larger-scale proposals involving institutional and other new forms of investment are being proposed as well. Officials are actively considering those bids further with the organisations that proposed them.

23. Finally, we continue to see a role for supporting new supply and first time buyers through the use of shared equity schemes. Our schemes are targeted at priority group applicants on low to moderate incomes which include social renters, members of the armed forces, veterans and widows, widowers and other partners of service personnel. A recent evaluation of our shared equity schemes concluded that they are reducing pressure on the social rented sector through freeing up properties and reducing demand expressed through housing lists. Under our innovative New Supply Shared Equity with Developers Scheme, the Scottish Government and a developer each hold a security over the proportion of the home they have funded. This enables us to help first time buyers to access home ownership for considerably lower public subsidy.

24. Our shared equity schemes differ from the English schemes in that buyers do not have to pay any interest charges after five years. Buyers in Scotland can receive assistance from the Scottish Government (and, where applicable, its developer partners) of up to 40% of the purchase price, whereas in England the maximum equity loan that buyers can currently access is 20%.

25. And we are supporting the broader housing supply through supporting work to establish a private sector mortgage indemnity scheme and a housebuilding infrastructure loan fund to unblock developments in the current economic climate which are stalled solely by a lack of funding for upfront enabling infrastructure. We say more about those areas below.

What the role is of state lending or investment, as opposed to grant funding, and the appropriate balance between them?

26. Given our strong commitment to social rented housing, grant support will account for the bulk of our funding to support increased housing supply, albeit at lower per unit levels than ever before. However, the drive to maximise the leverage achieved through our funding demands that we make use of other investment approaches, including guarantees, equity loans and other forms of loan arrangements.

27. As outlined earlier in this memorandum, the potential for using guarantees to lever in other investment has been demonstrated by our ground-breaking NHT initiative, and they feature in a couple of the complex Innovation bids which we are exploring further at the moment. Guarantees can be a less expensive option than more traditional grant-based approaches, but they also have a potential impact on resources and we do not consider them to be appropriate for every situation. The case for a Government guarantee must be demonstrated and evidenced on an individual basis.

28. In addition, the Scottish Government sees a limited role for alternative forms of investment in order to support activity in the owner occupied sector and wider housing market. We understand the need to take a systems-based approach to housing supply and we recognise that action to support private sector housebuilding not only supports economic recovery and growth, but can also help to unlock opportunities elsewhere in the system. Our investment in open market and new build shared equity products has, for example, resulted in approximately 1,285 households coming off the social housing waiting lists between 2005 and 2010 and around 1,130 social rented properties have been freed up across Scotland over the same period through the LIFT schemes.

29. In terms of supporting wider market activity, members of the Committee may be interested in the £10 million Housebuilding Infrastructure Loan Fund,4 for which we recently launched a call for bids. The fund is intended to unlock the development of good house-building projects stalled solely as a consequence of a lack of development funding for enabling infrastructure. Repayable loans will be offered to successful applicants to support the provision of on-site enabling physical infrastructure and other work genuinely required to commence house-building projects and thereby accelerate housebuilding in the current economic climate. Whilst the overall size of the fund is limited, we believe that it has the potential to lever in significant sums of additional funding, enable development which would not otherwise have occurred and thereby support Scotland’s economic growth. We intend to evaluate this approach and than make an assessment based on that evaluation.

30. Finally, we believe that there is more that lenders could do to support first time buyers into the market, and have repeatedly called on the UK Government to do more to enable that to happen. With that in mind, we are also breaking new ground by providing loan funding to support the housebuilding industry body, Homes for Scotland, to develop a private sector mortgage indemnity scheme for new build housing in Scotland. Our funding will enable a scheme to be established, with the potential to subsequently unlock much higher volumes of lending to credit worthy borrowers where it is sensible and sustainable and consequently support new private sector supply.

How could long-term private finance, especially from large financial institutions, be brought into the private and social rented sectors, and what the barriers are to that happening?

31. We want to encourage growth of a high quality private rented sector (PRS) in Scotland that can help meet housing need and offer enhanced choice to households. To assist this, we are developing a new Strategy for the PRS. We plan to consult on our strategy early next year. This will be about existing housing and the encouragement of new supply.

32. Institutional investment in private rented housing has been low in Scotland. In part this is a feature of the position across the UK and reflects the UK’s fiscal arrangements. It also reflects the highly fragmented nature of the sector and a lack of scale in terms of properties owned and managed by individual landlords, which militates against large scale investment by pension funds and other institutions. We welcome the recent change in the Stamp Duty Land Tax (SDLT) rules on bulk purchases so that the SDLT rate paid is now set based on the average purchase price of each property, rather than the total, combined purchase price. We hope this change will help to encourage large-scale investment in the PRS and expect to maintain this change if the proposals for the devolution of responsibility for SDLT in Scotland to the Scottish Parliament are agreed through the Scotland Bill. As renting becomes more popular, particularly with younger households, we will engage with potential investors to describe the dynamics of the housing market in Scotland and where opportunities exist for growth.

33. We are in discussions with a range of individual funds and providers of institutional investment to attract private investment into both housing and infrastructure, and we are seeking ways to align investors’ interests with those of landlords. To the extent that such further innovations continue the drive towards increased outcomes, increased value for money, and lower or manageable Government risk, they offer us the chance to increase further our economic growth and the number of new affordable homes for families who need them throughout the country.

How could housing associations and, potentially, ALMOs be enabled to increase the amount of private finance going into housing supply?

34. Scottish Government believes it is necessary to identify which housing associations have the financial capacity to increase the amount of private finance through expansion of their stock and which do not. This targeted approach will avoid a situation where social landlords are being encouraged to take on greater debt when it is clearly not advisable to do so. There are no ALMOs operating in Scotland, but that principle would also hold for such a group of landlords if they existed here. However, attractive though it may be for government to encourage landlords to expand their activities, the final decision on whether to do so should be for the landlords themselves, in consultation with their tenants.

How might reform of the council Housing Revenue Account system enable more funding to be made available for housing supply?

35. We believe that the nature of the HRA subsidy system may have stifled performance incentives for many English local authorities and that its removal, after being in place for a generation, is to be warmly welcomed.

36. In Scotland, the finances of the 26 individual HRAs are independent of one another to the extent that any revenue surplus on an individual account can be flexibly re-invested in that local authority area either in existing stock, in new supply or to repay debt. This surplus amounted to an estimated £144 million in 201112 at Scottish level. In addition, any HRA receipts (Right-to-Buy and other property and land sales) can also be fully re-invested in the stock or in new supply or used to repay HRA debt at the discretion of each local authority. This figure, though much smaller than in recent years, was £61 million in 201112 and is also used to supplement council housing investment in new or existing stock or debt repayment in the area it is generated in.

37. To boost supply further, and thus build on these sources of investment, Scottish Government is offering grants of up to £30,000 per property to build new council houses. The HRA surplus working together with SG grant can therefore help to boost the supply of council housing in the local area—and the greater the HRA surplus the greater, in theory, the supply boost.

38. As with all policies aimed at freeing up any system, however, HRA reform could have some unintended consequences. Our experience outside the HRA subsidy system, was that between 2003 and 2007, six Scottish local authorities out of 32 transferred their stock to Registered Social Landlords as their HRAs became unsustainable in terms of being able to invest sufficiently in the stock. A further four local authorities would have joined them in ceasing to be a landlord had tenants voted for stock transfer in these areas. Though we acknowledge many stock transfers also occurred in England from within the HRA subsidy system, the self-financing system, can only truly flourish in all areas if councils use their freedoms wisely and generate healthy HRA surpluses. This essentially needs to happen through careful cost control in relation to rents charged and through prudent investment and borrowing. In 201011, all 26 remaining HRAs in Scotland made some form of HRA surplus. However, a small group of them made very small surpluses which will not be able to be used to generate much, if any, additional investment in new supply. If the self-financing HRA system was working evenly across Scotland, all 26 HRAs would be generating very healthy surpluses for the greater benefit of their current and future tenants. So, moving to the new system, though positive, will probably not result in an even performance across the board unless all English authorities respond equally positively to their newly-formed incentives.

39. Despite these moderately cautious remarks, the Scottish Government believes English local authorities should optimistically look forward to the new system. Scottish Government wishes the newly reformed HRA system in England well and will watch its implementation with great interest taking on board any lessons we are think are relevant to Scotland.

October 2011

1 http://www.scotland.gov.uk/Publications/2011/02/03132933/0

2 http://www.scotland.gov.uk/Topics/Built-Environment/Housing/investment/innovationfund

3 http://www.scotland.gov.uk/Topics/Built-Environment/Housing/supply-demand/nht

4 http://www.scotland.gov.uk/Topics/Built-Environment/Housing/supply-demand/hilf

Prepared 1st May 2012