Communities and Local Government CommitteeWritten submission from the Building & Social Housing Foundation

Executive Summary

BSHF welcomes the opportunity to submit evidence to the Select Committee on this important and timely issue. The UK’s historic and growing undersupply of housing has a substantial impact on the country.

The current government, like the last, is publicly committed to a vision for significantly increased housing supply, and is implementing a variety of policies, which are designed to deliver new homes. However, critics suggest that these changes are insufficient to deal with the scale of the problem.

The following strategic objectives would work together to overcome many of the substantial barriers to delivering sufficient housing:

Build new places.

Enhance delivery of land.

Ensure that an appropriate range of finance is available to support development.

Maximise the use of the existing building stock.

There are a number of specific policy changes within each of these four areas, which could support an increase in housing supply. These include:

Local authorities should create revolving funds to support infrastructure development and, where relevant, land purchases.

Local authorities should prioritise having a senior role within the organisation with responsibility for inward investment and the securing of the common wealth of the area.

Government should seek to develop mechanisms that would allow local communities to capture some of the planning gain.

Government should investigate the barriers to adequate finance being available for a diverse range of housing models.

Government should investigate new mechanisms for helping potential first-time buyers in building up a sufficient deposit.

HM Treasury should move to the internationally accepted “general government” system of classifying public sector debt.

Detailed assessment of the different mechanisms used across Europe would provide greater insight into the options available in the UK.

About BSHF

The Building and Social Housing Foundation (BSHF) is an independent housing research charity committed to ensuring that everyone has access to decent and affordable housing, and holds Special Consultative Status with the United Nations Economic and Social Council. Since 1994 BSHF has organised an annual series of Consultations at St George’s House, Windsor Castle, bringing together diverse groups of experts for in-depth discussion and consideration of an important housing issue. Earlier in the summer a Consultation was held on housing supply and the findings have been published as More Homes and Better Places: Solutions to address the scale of housing need.1 This submission is based on this report and on original research that BSHF has been involved in.

Introduction

The UK’s historic and growing undersupply of housing has a substantial impact on the country: it affects individual households, who struggle to find housing that fits their needs at a price they can afford; it affects the wider economy, creating a drag on growth and hindering labour mobility; and it affects society, worsening inequality and amplifying the challenges of demographic change.2

This undersupply of housing is a longstanding problem, which has been exacerbated by the financial crisis of 2007–08. The structural problems—such as those related to land and planning, opposition to development, and the operation of the construction industry—have been compounded by increased restrictions on finance and mortgage availability. An inquiry into the delivery of new homes by the Select Committee is, therefore, very timely.

The current government, like the last, is publicly committed to a vision for significantly increased housing supply, and is implementing a variety of policies across different aspects of housing supply. However, critics suggest that these changes are insufficient to deal with the scale of the problem. Significant, but achievable, change is necessary if the country is to get the housing it needs.

At present, however, there is an absence of clearly articulated strategic objectives, to provide a coherent framework within which individual policies can be developed, to contribute to the overall vision of greater supply. The following strategic objectives would work together to overcome many of the substantial barriers to delivering sufficient housing.

Build new places. Local authorities should take a leading role in assembling land and parcelling it out to a range of suppliers, to increase competition amongst firms and between different models of development.

Enhance delivery of land. Those who own or control land that is suitable for housing need to be encouraged to bring it forward for prompt development, at values that will secure appropriate quality. Government policies, regulations and taxation structures create certain patterns of incentives, which may or may not support the prompt development of land. These rules and their consequent incentives should be aligned to ensure that they provide the maximum possible incentive for development.

Ensure that an appropriate range of finance is available to support development. Following the global financial crisis, there has been a fundamental change to the financing of housing supply and purchase, in addition to short-term credit constraints. Government and the housing sector need to ensure that these changes are adapted to, so that housing supply is not inhibited, and that funding is available for the infrastructure needed to boost growth, and cope with climate change.

Maximise the use of the existing building stock. The existing stock of buildings, including empty homes and some commercial properties, represents a potential source of additional housing. Where possible this should be brought into use to help to meet housing needs.

BSHF considers that the specific policy responses outlined below must form part of a coherent strategy if they are to deliver the new homes that are required in the UK.

1. How and where the more limited capital and revenue public subsidy can best be applied to provide the biggest return on the investment, in housing supply terms

1.1 Since the early 1990s successive governments in the UK have relied on revenue subsidies such as Housing Benefit to “take the strain” of housing policy. Whilst the economy is strong it can appear relatively easy to rely on revenue subsidies that can be covered by healthy tax receipts. However, such a system inevitably comes under pressure in times of economic constriction, when upward pressures on claimant numbers are likely to coincide with downward pressure on government spending.

1.2 Expenditure on Housing Benefit continues to rise and is likely to continue to increase, despite government measures to control it.3 Evidence suggests that expenditure on Housing Benefit has increased primarily for two reasons. Since the start of the recent recession, the increase in expenditure is largely due to rising numbers of working age claimants. Prior to the recession the increase in expenditure on Housing Benefit was due to rising rents. The longer term trend towards higher rents suggests that the sustainability of the support can be best ensured by adopting policies that seek to restrain increases in housing costs (including rents). This is unlikely to be resolved without serious attention to the supply side of the housing system, ensuring more homes are developed to suppress increases in housing costs.

1.3 Therefore, securing the long term financial sustainability of support with housing is closely linked to the need to increase housing supply. It may be necessary to rebalance capital and revenue subsidies, to provide greater investment in the development of a long-term social housing asset. It may now be time for supply side “bricks and mortar” subsidies to take more of the strain to ensure that housing support is financially sustainable in the long term. A particular emphasis on increasing the provision of social housing at below market rents in areas of high demand could have a real impact on the long-term sustainability of support with housing costs.

1.4 Focusing on the supply side and increasing the delivery of new homes includes options beyond a simple return to substantial levels of grant funding for new build housing. The answer to question two below begins to highlight the variety of types of support that can be provided to finance new housing supply.

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

2.1 The state has an important role to play in supporting the delivery of new housing supply, which goes beyond simple direct capital and revenue subsidies. Lending and investment in different forms provide alternative options, which could be developed further alongside a range of other state actions.

2.2 Research by Housing Europe has identified eleven different mechanisms being used to finance social housing in different European countries, including interest rate subsidies, tax-privileged private investment, and Government secured private investment.4 Detailed assessment of the different mechanisms used across Europe would provide greater insight into the options available in the UK. For example:5

In France, tax-free household savings schemes finance non-market loans to social housing providers alongside state and local subsidies, tax incentives and other loans. Land is often provided by local authorities.

In Germany, the federal government has withdrawn from direct supply support and shifted towards demand side subsidies. Municipalities develop their own programmes and housing companies are private entities, with a variety of shareholders. Private investment in social housing is promoted via tax concessions.

In Sweden, corporate tax exempt municipal housing companies have always been financed by capital market loans, which were sometimes backed by municipal guarantees and central government grants. In the past, interest rate subsidies were provided by the central government, but these have ceased.

2.3 These examples show some other options and highlight the importance of assessing the full range of interventions available to support housing supply. The key is identifying which options can be combined to finance additional supply, and more specifically affordable housing, in different locations and contexts within the UK.

3. What the role is of the public sector in providing support in kind—for example land or guarantees—as opposed to cash, and what the barriers are to this happening

3.1 Local authorities should create local ventures for large-scale strategic sites, taking title of land, promoting, granting planning permission, putting in infrastructure and parcelling out the serviced land. Such local ventures should be led by local authorities, but would typically require participation from other stakeholders such as land owners.

3.2 A local venture of this nature would be able to pull together a range of stakeholders with a financial interest in a development. Within its structure it could integrate planning, investment and development functions, and would have the ability to draw in the appropriate skills. This technique would generally not suit smaller sites, but could be appropriate for both substantial extensions to settlements and new settlements.

3.3 By undertaking activities related to planning permission, site assembly and the installation of infrastructure, the risk to developers would be substantially reduced. Reducing the risks for developers could allow a wider variety of development models to emerge.

3.4 A group of partners coming together to take a longer-term interest in the site would help to draw benefits into the community over a longer period. The involvement of local authorities would help to ensure democratic accountability to local communities, and would also be vital to ensure statutory functions such as planning could be properly integrated.

3.5 An effective public-private partnership supported the developed of a new settlement near Amersfoort in The Netherlands. A Joint Development Company was set up, with the Council and five private companies as shareholders. The companies included both those that had invested in land locally and those that had previously had positive involvement in Amersfoort. This Joint Development Company then raised €750 million from BNG (the Dutch municipal bank) repayable over 15 years, which then financed the infrastructure and other upfront cost.6

3.6 Local authorities should create revolving funds to support infrastructure development and, where relevant, land purchases. By taking a leading role in creating such funds, local authorities could draw in other sources of finance, such as from private companies. Local authorities’ aims would be well-aligned to use these funds in a counter-cyclical fashion, supporting local economies and building infrastructure at times when other construction work is slower, acting to support growth where there is market failure and to pump prime markets until confidence, and private sector growth and investment returns. Local authorities could also create loan guarantee schemes to support community-based housing solutions who may struggle to gain access to finance.

3.7 A key barrier to local authorities undertaking these kinds of role is the skills and capacity at a strategic level. Local authorities should prioritise having a senior role within the organisation with responsibility for inward investment and the securing of the common wealth of the area. In some authorities this role will already exist, in others it will need to be created or developed. In the past, this role would often have been handled by the Borough Valuer or economic development departments, working with the chief planning officer and engineer. Much of the country’s post-war reconstruction and early town centre redevelopments were managed by these three key people within local authorities. The chief planning officer role in local authorities is not, at present, a statutory post. It has been argued that remedying this situation would help to raise its status within authorities. Specifically, it would help to ensure that planning is more effectively integrated in corporate, operational and policy decisions of the local authority.

3.8 All chief officers should be required to take a broad view of common value, and be able to look beyond the narrow outcome of maximising cash returns from individual actions such a land sales, to ones that create long-term capital and social value in communities.

3.9 Placing this role within local authorities is vital, as authorities are uniquely well positioned to look at common assets and the physical realm. This should look to incorporate physical assets (such as land and property) and social capital. Chief officers should also have responsibility for communicating with other executive officers and councillors: it should be a corporate priority for the council itself to understand what the community’s assets are and to develop their community leadership role around this understanding.

3.10 In the longer term, stronger local authorities that are better able to draw investment into their areas will benefit central government, as they will make fewer calls on the central purse. Efficient local authorities should be able to develop local investment plans that maximise the use of public, community and private finance and assets, and thus ensure that calls on central government funds are calls of last resort.

3.11 Central government can make other changes that support local communities in delivering new supply. A different type of support can be provided through mechanisms to capture planning gain. Government should seek to develop mechanisms that would allow local communities to capture some of the planning gain, the increase in the value of land that occurs when planning permission is granted. Capturing some of the gain for the benefit of the community has the potential to contribute to supply, in part because it may lower opposition to planning permission, if the existing community can see that the local area will gain some of the benefit.

3.12 The government has announced that a land auction mechanism will be piloted, which is one possible mechanism for capturing planning gain. Details of this pilot have not been announced, but there are a number of different methods for capturing more of the planning gain.

3.13 Some planning gain captured in this way may be useful in establishing revolving funds for the creation of infrastructure, etc. More generally, if a local authority has acquired land through a land auction process, it may seek to establish models like the local ventures described above, to undertake infrastructure works and parcelling out of the land.

3.14 Some models used in mainland Europe could be considered in the UK. These typically rely less on taxation or levies and instead on a mix of equity investment in infrastructure by municipal banks and constraining the value of land received by landowners and developers, either to an agreed multiple of existing use value, or a fixed percentage of outturn sales value. These have advantages of certainty for landowners, represent a fair but not exploitative uplift in value, and might be preferable, as being less complex, with lower transaction costs and less vulnerable to avoidance strategies, than taxation.

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

4.1 Accessing long-term private finance is an important part of supporting the delivery of more new homes in both the private and social rented sectors. However, the availability of multiple sources of smaller amounts of finance is also important, as is the need to ensure that first-time buyers have access to suitable finance.

4.2 Government should investigate the barriers to adequate finance being available for a diverse range of housing models. A number of alternative housing models already exist in the UK or play a significant role in the housing systems of other countries. These may be able to play a more substantial role if they are given the right type of support or have barriers to their development removed. These models include:

Sweat equity, where people contribute their time and effort towards providing their own housing instead of financial equity.

Community land trusts, which seek to provide long term affordable housing for a particular community.

Self build, where individuals take a leading role in the design and/or building of their housing.

Housing co-operatives, which jointly own and democratically manage housing stock.

4.3 These housing models, and others like them, 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. There is the potential in the UK for many more residents to be attracted by the opportunity to develop long-term affordable housing in sustainable local communities. Building up the necessary social and financial capital to develop these models takes significant amounts of time and effort, and they are unlikely therefore to contribute large amounts of new stock in the near future. However, in the longer term, they have the potential to play a far more significant role. In the past this has often led to these models being marginalised and institutional barriers have made it difficult for them to increase.

4.4 It is important to ensure that those developing housing using innovative models can access finance. It may be appropriate for special lines of credit to be made available for co-operative and self-help housing, which occurs in other countries, for example through the German Federal Bank.

4.5 Some of these models can have wider social and economic benefits. Self-help housing schemes that train NEETs (young people not in employment education or training) to bring empty properties back into use can develop their skills, improving their employment prospects, at the same time as delivering much-needed housing.7

4.6 There is evidence that housing supply is linked to the number of transactions in the housing market.8 Government should investigate new mechanisms for helping potential first-time buyers in building up a sufficient deposit. The tightening of mortgage market restrictions means that obtaining a deposit is now perceived by consumers to be the major barrier to property purchase.9 This perception is supported by the fact that between the first quarter of 2007 and the same period in 2011 the median first-time buyer deposit as a proportion of income rose from 41% to 87%.10 Whilst approaches that increase households’ access to debt by loosening lending conditions are not desirable, ones that achieve it whilst making the borrowing safer are potentially sound.

4.7 For example, the government could ensure that any home meeting A, B or C on its energy performance certificate would be eligible for an additional loan from the Green Investment Bank; this might be able to act effectively as a deposit, with the repayments being affordable due to the savings on energy bills. (This might be structured over an extended period, and could range from, say, £5,000 for a C-rated home to £10,000 and £20,000 for B- and A-rated properties respectively.) By providing additional finance, a loan from the Green Investment Bank would assist with the deposit requirement, whilst also incentivising green homes.

4.8 Local authorities could create loan guarantee funds that support first-time buyers. Some local authorities are already developing this type of approach. In Germany, self-builders can access low interest loans of up to €50,000 from the government to help them build eco homes.11 Government should also be considering measures such as Local Asset Backed Investment Vehicles and the issue of infrastructure bonds that are repayable after around 20 years from the uplift in land values as a result of new infrastructure and related development.

5. How housing associations and, potentially, ALMOs might be enabled to increase the amount of private finance going into housing supply

5.1 Whilst we do not have detailed information in response to this question, we note that some housing associations (typically smaller ones) have relatively unencumbered assets. Further research is required to assess whether it is the case that some of these housing associations have the desire but not the skills and expertise to sweat those assets.

6. How the reform of the council Housing Revenue Account (HRA) system might enable more funding to be made available for housing supply

6.1 The reform of the HRA is a welcome step but more can be done to release funding for local authorities to increase housing supply. HM Treasury should move to the internationally accepted “general government” system of classifying public sector finance. The current public sector net cash requirement (PSNCR) system of classifying debt (previously known as the public sector borrowing requirement, or PSBR) is an implicit form of regulation, as it brings local authority borrowing for council housing within the public sector debt calculation and therefore requires tighter control by the centre.

6.2 Moving to the internationally accepted General Government Financial Deficit (GGFD) standard would remove local authorities’ trading activities, such as housing, from the national debt, significantly increasing their freedom to borrow against their housing assets to increase supply.

6.3 Although local authorities’ housing departments in England are to gain some freedom in their accounting in April 2012, this will be accompanied by the introduction of a cap on housing borrowing. The proposed change in the accounting standard would permit this cap to be relaxed, with prudent borrowing and asset management becoming the governing control focus for local authorities.

6.4 This move would also have the advantage of removing the risk that the debt of Registered Providers (such as housing associations) may become part of the national debt. At present housing associations are regarded for accounting purposes to be private bodies. However, because the state has a relatively high degree of control over housing associations it is possible that at some point the Office for National Statistics will revisit that classification and insist that they be considered as public sector for accounting purposes.

7. How effective the Government’s “Affordable Rent” proposals are likely to be in increasing the funds available for new housing supply, and how sustainable this might be over the medium to long term

7.1 The introduction of Affordable Rent has split opinion within the housing sector. Until the programme has been running for several years it will be difficult to make an objective assessment of its impact. It is vital that the programme is carefully monitored from its outset. This monitoring will need to consider the impact of the programme on a number of different levels, including the numbers of new homes being built, the quality, size and location of these homes, the longer term impact of the programme on housing supply and the impact on the revenue subsidy bill.

October 2011

1 Diacon, D, Pattison, B, Strutt, J and Vine, J (2011) More Homes and Better Places: Solutions to address the scale of housing need,
http://www.bshf.org/published-information/publication.cfm?lang=00&thePubID=25E04994-15C5-F4C0-99170AE24B5B0A84

2 ibid.

3 Pattison, B and Vine, J (2011) Housing Benefit Claimant Numbers and the Labour Market: Modelling and analysis,
http://www.bshf.org/published-information/publication.cfm?thePubID=4E36E822-15C5-F4C0-9910CF24FAAC301E

4 CECODHAS Housing Europe (2010) Financing Social Housing after the Economic Crisis, Table 1, page 15,
http://www.bshf.org/published-information/publication.cfm?lang=00&thePubID=7AD1065F-15C5-F4C0-99BAE15289421527

5 These examples are taken from: Financing Social Housing after the Economic Crisis.

6 Diacon, D, Pattison, B, Strutt, J and Vine, J (2011) More Homes and Better Places: Solutions to address the scale of housing need,
http://www.bshf.org/published-information/publication.cfm?lang=00&thePubID=25E04994-15C5-F4C0-99170AE24B5B0A84

7 Pattison, B, Strutt, J and Vine, J (2011) Self-Help Housing: Supporting locally driven housing solutions,
http://www.bshf.org/published-information/publication.cfm?lang=00&thePubID=2F9EC046-15C5-F4C0-991896202739F469

8 Meen, G (2003) Regional Housing Supply Elasticities in England,
http://webarchive.nationalarchives.gov.uk/+/http://www.hm-treasury.gov.uk/media/8/E/Geoff%20Meen.pdf

9 Diacon, D, Pattison, B, Strutt, J and Vine, J (2011) More Homes and Better Places: Solutions to address the scale of housing need,
http://www.bshf.org/published-information/publication.cfm?lang=00&thePubID=25E04994-15C5-F4C0-99170AE24B5B0A84

10 ibid.

11 ibid.

Prepared 4th May 2012