HC 1652 Communities and Local Government CommitteeWritten submission from Hometrack

1. Hometrack is a privately owned, independent property analytics business. Established in 1999 the business has built up a wide range of clients spanning the whole residential market from mortgage lenders to house builders, local authorities, housing associations and corporate investors. The business provides automated valuation and risk services to over 90% of UK mortgage lenders and has over 150 public sector clients.

2. This submission focuses on the results of recent analysis into the Right to Buy (RTB) proposals detailed in the Government consultation launched in December 2011. Specifically the capacity to release capital for re-investment in delivery of new affordable housing.

3. Hometrack carried out a similar impact analysis of the proposed Affordable Rent model in spring 2010, details of which could be made available to the Committee.

4. One of the sources of funding for the delivery of new housing comes from releasing the underlying value of an asset for re-investment. In the social rented sector security of tenure and rent restrictions result in a sizable discount to open market value.

5. Hometrack estimate that the unencumbered, open market value of the whole social rented sector (both Local Authority and Registered Provider stock) in England is over £400 billion, considerably higher than the book value.

6. There is a sizable arbitrage (difference) between existing use value and open market value which Right to Buy or other sales based policies can potentially release for re-investment in housing. On a regional basis this gap ranges from £75,000 to over £150,000 of “capital release” per property.

7. The challenge is how to extract this value for re-investment in a sustainable manner while retaining a decent supply of affordable homes to meet demand.

8. Hometrack’s Right to Buy analysis used localised data on property prices and incomes to assess what level of discount would be needed to make RTB affordable for local authority tenants against key affordability criteria, primarily a 2.75 income mortgage multiple.

9. The findings show that the national average discount required to make RTB affordable to existing tenants would be 40% or £50,800—significantly higher than the average discount of 25%. In London the discount required to make RTB affordable is as high as 58% or £128,000. In the South East the figure is £75,000 (see figure 1).

10. While these figures show the discount to make RTB affordable the consultation announced by the Government on 22 December is to cap the discount at £50,000.

11. The Hometrack analysis shows that an estimated 65% of local authority tenants could afford to buy their home with a £50,000 discount. Across the country there is a wide regional variation and in London, where property prices are highest, only 12% of households could afford RTB with a maximum £50,000 discount (see figure 2 for regional breakdown).

12. The new discounts for RTB seeks to use the capital generated from each sale to re-invest in the delivery of a new home—a so-called one-for-one replacement. The Hometrack analysis shows that on a national basis the average capital raised per sale would be £64,725, much lower than the cost of delivering a new property and lower than the average RTB receipt of £77,470 under current policies. Figure 3 shows the average discount and capital released from each sale on a regional basis.

13. The analysis into the replacement rate of the Right to Buy proposals have been based on regional averages derived from the localised analysis.

14. The replacement costs for new housing have been based upon average values for re-let stock over 2010 to reflect a like-for-like replacement profile. For each new unit delivered there will be an element of self funding supported by the rental income. We assume housing providers will be able to borrow 70% of the capital value generated from the rental income ie if the replacement property generates £40,000 of capital value then we assume that this will enable funding for the first £28,000 of the replacement cost.

15. It is important to note that the analysis assumes replacement stock would be let at general needs rents rather than affordable rents which should deliver a slight higher capital value and improved replacement rate. Yet the assumed replacement costs are conservative and we would expect these two factors to broadly cancel each other out.

16. The capital generated from each RTB sale will be used to fund the difference between replacement cost and borrowings. Our analysis shows that to deliver one new home would require an average of 1.4 RTB sales. This ranges from a 1.1:1 rate in the North West to 1.6:1 in London—see figure 4.

17. The potential for RTB to deliver new funding for re-investment in new housing is clear. The greatest challenge is accurately assessing the propensity for tenants to take up the scheme and the availability and terms of mortgage finance. The vast majority of tenants are not in full-time employment which will have a major impact on likely take-up.

18. The Government has taken a cautious approach with its proposals. The aim will be to generate as much capital for re-investment with as few sales a possible to erode the stock of affordable housing. Targeting households on higher incomes in higher value areas will generate the greatest capital but these areas will also have high replacement costs. This raises the issue about the re-investment strategy for capital receipts.

19. The proposed £50,000 cap will impact on the likely take-up of the scheme. In Southern England where house prices are among the highest in the country, larger discounts are needed to make RTB affordable to tenants and this will limit take-up of the scheme.

20. There is a careful balance to be struck between the discount and likely take-up. The £50,000 cap means that take-up is more likely to be in the most affordable areas of the country with a lower level of receipt per sale than currently. This impacts on the ability to achieve a one-for-one replacement rate and it seems that extra subsidy in the form of development on low cost public land will play a vital role in meeting this policy objective.

21. The following charts set out the results of the analysis and are all sourced as Hometrack.

Figure 1


Source: Hometrack

Figure 2


Source: Hometrack

Figure 3


Source: Hometrack

Figure 4


Source: Hometrack

January 2012

Prepared 1st May 2012