Communities and Local Government CommitteeWritten submission from Shelter

I. Summary

1. Shelter welcomes the committee’s decision to hold an inquiry into the financing of new housing supply, particularly the sections of the review that address the urgent need to secure funding for the delivery of truly affordable new homes.

2. As the leading housing charity, campaigning across all tenures to bring an end to homelessness and bad housing, we draw on the experience of our front-line advice and support services in the development of our policy and research expertise. Our clients face a large number of problems, including shortages of social rented housing; spiralling costs and poor conditions in the private rented sector; unattainable or unsustainable homeownership; and difficulties maintaining mortgage repayments. Ultimately these are all a symptoms of a critical lack of homes. A key factor behind this shortage is the lack of sufficient finance to support development, particularly in relation to truly affordable and stable housing.

3. Shelter is very pleased to see the Communities and Local Government Select Committee tackle the issue of housing finance, which is fundamental to the long term health of our housing market. It requires long term solutions and greater cross party consensus on the best ways forward. As a result, Shelter believes the Committee is uniquely placed to provide innovation, guidance and, most importantly, leadership to government, parliamentarians, civil servants and the wider housing sector on this issue of critical importance. We hope we can contribute to a set of recommendations that will help to shape a cross party debate and foster agreement about the way to achieve the increase in housing numbers, particularly affordable housing, that all of the major parties have called for.

4. This submission outlines some ideas, financial and otherwise, that may help to boost the delivery of affordable housing, including effective use of public land, the role of the planning system, incentives to promote institutional investment in the housing market, and non-grant financial tools such as investment guarantees.

5. However, it is unlikely that any one measure on its own can unlock the stalled housing delivery system and boost supply to the levels that are needed. Some of the ideas outlined below will work best, or indeed may only work, in combination. Shelter believes that new approaches to both land and finance will be required. Increasing the supply of either land or finance in isolation will not work: additional land supplied without finance will not be developed, and additional finance without land will simply inflate prices.

6. Shelter warmly welcomes the recent commitments made by the Prime Minister and Chancellor to increase levels of housing supply, and their recognition of the stimulus effect housing development can have on the economy. And Shelter similarly welcomes the Government’s commitment to making the planning system “increase significantly the delivery of new homes”.1

7. However, we have also made it clear that sufficient government investment is essential to delivering enough affordable homes. We were very disappointed to see that funding for new affordable housing was cut by over 60% in the last Comprehensive Spending Review, which made housing the biggest loser in a particularly tough spending round.

8. Reforms to the national Housing Revenue Account (HRA) subsidy system do offer potential for some councils to utilise revenues from their housing stock for new investment, provided they are allowed to do so. Shelter believes that all surpluses raised from housing stock, whether in rent or sales, should be ring-fenced for housing delivery and upkeep. We await with interest further details on how the HRA reforms will work in light of recent announcements on reviving the Right to Buy, but are pleased that the government has pledged that Right to Buy receipts will go to finance new supply.

II. Evidence

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

9. Supply across all tenures has not kept pace with growing demand for many years and has fallen to a historic low following the recent credit crunch. It shows little sign of increasing to the levels we require as we move out of recession.

10. With economic projections looking increasingly uncertain and growth falling behind the government’s own projections, investment in house building provides an opportunity for the government to stimulate economic growth. Each additional new home built creates 1.5 jobs in the construction sector as well as additional employment through supply chains linkages and the economic multiplier of construction compares favourably to other high value sectors.2 Given the significant capacity available within the sector it is extremely unlikely that additional public investment would displace private sector investment.3

11. House building also has beneficial effects on the supply side of the economy that could help raise the long term growth rate of the national economy including: (i) avoiding long term unemployment among construction workers (and particularly youth unemployment) which would result in people becoming increasingly isolated from the labour market,4 and (ii) improving labour mobility, with 5.6 million people reporting that housing costs prior to the recession had affected their ability to move for work. Of these, 2.4 million were aged 18 to 34.5

12. In order to realise these supply side benefits it is essential that any proposals for housing supply are firmly rooted in a proper assessment of the need for new homes. Local authorities and local communities must understand and respond to the need for new homes ensure that a shortage of affordable housing does not constrain the economic recovery in those parts of the country where need is most acute.

13. Shelter welcomes the government’s commitment to delivering new homes and the important cross party recognition of the stimulus effect this can have on the economy. During his Conservative party conference speech the Chancellor, pointed out that the delivery of 100,000 new homes could provide up to 200,000 jobs,6 whilst the Shadow Chancellor, spoke about the role the delivery of 25,000 new homes could play in stimulating the economy.7

14. It should be recognised that previous approaches to house building have focused on the quantity of units delivered, sometimes to the detriment of quality. New homes in the UK are now among the smallest in Europe and frequently fail to meet even basic assessments of design quality.8 All new homes should be built to last as long as the successful typologies of previous centuries, with excellent standards for internal and external space, environmental efficiency and design.

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

15. Overall public spending on housing has tended to remain at much the same proportion of total government expenditure over recent decades. But the balance within that expenditure has shifted over time from capital (or affordable housing supply subsidies) to revenue expenditure (in the form of housing benefit). Steadily rising rents compared to wages have driven the housing benefit bill upwards, while the chronic shortage of affordable homes is a testament to the under funding of supply by successive governments.

16. The last Comprehensive Spending Review cut capital grants dramatically. While Shelter believes this situation must be reversed, we also recognise that there could be a useful role for state lending in addition to grant funding.

17. Borrowing has always been key to residential development. The future rental payments and capital growth associated with new housing provide an income stream and asset base against which the cost of housing developments can be secured, making house building a good bet for lenders. Yet financial markets are currently failing to provide enough capital to supply the homes we need: in this context there is a strong case for state lending to replace private investors. And even in more normal market conditions, the public lending is a cheaper source of finance than private banks or markets.

18. A “National Housing Investment Bank” could attract investment funds and provide loans for the construction of low-cost housing.9 In European countries such banks have proved effective at leveraging public funds to channel private finance into both house building and improvements to the existing stock, a model that RICS have called on to be replicated in the UK.10 The government has partially adopted this approach through its Green Investment Bank: we would urge the committee to consider whether this model could usefully be expanded to include financing house building as well as green infrastructure.

19. Affordable housing is self-financing over the longer term, which is why much of the existing council stock is now debt-free. As original construction debts are paid down, it is right to ring-fence the proceeds for further housing investment. This maximises the long term efficiency of public investment, by providing new genuinely affordable homes that can enable more households to cover their own housing cost independently, reducing the need for employers (via wages) or the taxpayer (via Housing Benefit) to fund increasing rents.

20. Nonetheless, while the wider housing market remains unaffordable for so many households, there will always be a need for capital grant to support affordable supply. The appropriate balance between grant and borrowing will vary according to market conditions over time and across different schemes. For housing to be truly affordable for the long term it will need sufficient grant to keep the debt burden at a level that can maintain rents at or below what is affordable to people on low incomes.

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

21. In addition to direct public investment, there is a range of tools that governments can use to channel investment into housing supply. Some of these, such as planning gain, are well established, others could be put to greater use. Outlined below are a number of key areas where public sector action could help to stimulate housing delivery, which we would suggest the committee considers.

Local Plans

22. Planning has long been the most significant indirect form of public support for affordable housing. At its best, the planning system successfully channels investment into affordable housing by setting out clear, strong policies that affordable housing is a fundamental requirement, without which planning permission will not be granted. This mechanism works by sending a clear message to the market, which translates the requirement for affordable homes into lower land prices. But this only works if the market believes the policy will be enforced. If such policies are weakened, or perceived to be weakening, the market will quickly adjust land prices upward to absorb the extra profit that might be made from more private and less affordable development. Higher land prices make development more expensive and homes less affordable, and mean more subsidy is needed to deliver affordable housing.

23. Therefore reform of the planning system needs to ensure strong policies on affordable housing provision are in enshrined in Local Plans. This is especially true since, following the abolition of Regional Spatial Strategies, Local Plans and their associated policies will be the sole mechanism through which affordable housing is planned for.

24. Affordable housing should not be treated as a residual requirement but as a fundamental aspect of sustainable development. We are therefore concerned by the references to development viability in the draft National Planning Policy Framework11. These imply that land owners and developers could argue for affordable housing to be excluded from a site in order to achieve profit margins of a level that is “acceptable” to them. Allowing landowners to present requirements for affordable housing as threatening viability risks pushing land prices up further.

Planning gain

25. Over half of all affordable homes are currently delivered on planning gain sites, even since the economic downturn (the figure was 56% in 2009/10, down from 62%12). The value of the planning system’s support for new affordable homes is in excess of £2bn per annum. It is therefore essential that the reformed planning system continues to provide effective support for the delivery of affordable homes—and we are concerned that the draft NPPF may undermine this support.

26. To help local planning authorities secure the required level of affordable homes through S106 agreements, the NPPF should include a policy presumption that Local Plans contain both a numerical requirement for affordable housing and a percentage of units that should be provided in any market led housing scheme. This would not impose specific targets, but would require a simple public statement of local authorities’ policies.

27. To preserve the real value of the planning system’s investment, the NPPF must emphasise more strongly that affordable housing should be provided on-site and only exceptionally be provided off site or commuted. The provision of affordable housing on-site as part of market-led developments remains a critically important supply of land for affordable housing, and an important factor in creating inclusive and mixed neighbourhoods.

28. Where off-site provision is justified, the total amount of off-site provision required should be much clearer than “a financial contribution of broadly equivalent value”13 as the draft states. For example, if the affordable housing requirement in a Local Plan was 40% then, on a site of 60 homes, the on-site provision requirement would be 24 affordable homes. However, if the affordable homes were to be provided off-site, 40 affordable homes would be required, as this equates to 40% of the combined total of 100 homes on both the sites, when the original 60 are all market housing.

29. It is also essential that local planning authorities ensure that their Community Infrastructure Levy (CIL) charging schedules support the levels of affordable housing required in their development plans. As indicated by the Minister in the committee stage of the Localism Bill, there should be a very clear statement in the Framework that the CIL should not prejudice affordable housing.

Public land

30. It is often asserted that surplus public land is a vast potential source of new housing. Different parts of the public sector do hold considerable land assets, and in general it must be sensible to bring them into use wherever possible, and Shelter welcomes attempts to speed up their release. But surplus public land has a long history of failing to deliver on the promises made for it. Much of it is not in the right places, has contamination costs associated with it, or is otherwise under utilised for a good reason.

31. More importantly, public authorities are under legal obligations and financial pressure to secure best consideration for any assets disposed of in order to maximise investment in the services they provide—not to finance housing delivery. Health authorities, for example, need new and different incentives if they are to release land for development cheaply rather than maximise returns to fund health budgets. It also remains the case that there almost no holding cost of land—whether for public or private owners. There is therefore little that can be done to tip the balance of incentives in favour of rapid development when the option of later release at greater value exists.

32. These divergent incentives and financial pressures often preclude using public land to improve the fundamentals of development economics, leaving schemes on public land in the same position as commercial developments.

33. Releasing public land on a delayed payment basis, as under the “Build now, pay later” scheme announced in the 2011 Budget, may help to speed delivery of development schemes by reducing the upfront costs to developers and sharing some of the risk between public and private sectors. Just as with conventional land sales, there is an urgent need to ensure that such sites deliver sufficient quantities and proportions of truly affordable housing, and that the need to secure capital receipts for public land does not undermine this goal. Where appropriate, public authorities should also retain equity stakes in developments, to preserve a degree of control over future use and give the public a share in future value gains.

34. More effectively, local authorities regularly release land to housing associations at below market rates, in order to subsidise affordable housing delivery. However, it remains to be seen whether this straightforward means of supporting housing finance will survive the current squeeze on council finances and the cuts in affordable housing grants. Where local authorities provide subsidised land for development by housing associations or other providers, this should be predicated on securing positive housing outcomes—particularly provision of affordable homes.

35. An alternative approach is for public authorities to retain ownership of land and develop it in directly or in partnership. This may not constitute the “release of public land”, but it can provide genuine additionality. Direct development on public land ensures that the assets themselves, and the uplift in value that quality development brings, are retained for public benefit. Publicly developed housing can then be used by local authorities to meet their own, locally determined, housing priorities—whether for social, intermediate or private homes.

Investment guarantees

36. Government guarantees are an under-utilised tool. Where markets need to achieve scale before they can operate effectively, guarantees could help to give early investors the confidence to invest.14 The major barrier to the use of guarantees is often held to be Treasury accounting rules requiring 100% cover for any government guaranteed investment. Maintaining sufficient cover to adequately cover reasonable assessment of risk, rather than full theoretical exposure, could enable more use of public guarantees, and provide a powerful new tool for supporting development finance.

37. The promise of large scale institutional investment in private rented housing is one area that guarantees could be used for. Despite the strong capital growth residential property has delivered over the long term, this market has simply not materialised. One argument is that intervention is needed to help the market reach the scale it needs to be self sustaining. Investment guarantees would be the obvious policy instrument to achieve this.

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

38. Pension funds and other institutional investors have long been cited as a potential source of investment in rented housing, and the government has recognised the need for greater institutional investment into the private rental market.15 These measures would be welcome, but deeper market reforms will be needed to tip the balance of returns in favour of investment in long term income rather than speculative investment in capital growth.

39. 71% of private rented stock is owned by individuals, and over three quarters of landlords only have one property.16 Their income from rent is taxed as investment rather than trading income, restricting growth.17 Landlords operating to professional standards should be treated as professionals by the tax system and offered the same level of encouragement to grow as other small businesses, while being equally subject to effective regulation.

40. Large scale institutional investment in housing supply would clearly be welcome, if it can provide additional sources of financing for high quality homes, but we should not expect a revolution in housing finance to come from this source. Even in countries with much larger private rented sectors and significant institutional investment in housing, it remains the case that the bulk of landlords are small scale investors, and particularly individuals, much as in the UK. The exception is Switzerland, where institutions are required by law to invest in property—and even there institutions only hold 23% of the privately rented stock.18 Finally, there is no guarantee that large scale landlords will provide better services to tenants than smaller ones. As with any source of housing finance it is also critical that additional funds are channelled to new supply, and do not simply go towards inflating asset prices.

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

41. To date the revenue and capital receipts from council housing have not been sufficiently ring-fenced and this is part of the reason why local affordable housing has been significantly underfunded, both in terms of supply and upkeep. The national council housing finance system has prevented all the rents collected by local authorities being reinvested in the maintenance and management of housing stock, undermining the viability of the local affordable housing.19

42. Reform of the Housing Revenue Account (HRA) offers the opportunity to address this longstanding problem. According to PricewaterhouseCoopers the reforms: “will put councils in control of their housing assets—which are forecast to generate more than £300 billion of rental income over the next 30 years”. They add that: “Efficient operation of the HRA could lead to the build up of some £50 billion of new investment resources across the country, over 30 years (£25 billion in today’s money). Councils can now look at their housing as a real asset capable of generating additional investment resources”.20

43. In 2009 the Local Government Association estimated that if the system is reformed, up to 80,000 to 90,000 additional affordable homes could be built by councils over five years, which would also deliver approximately £35 billion additional investment to the English economy. Over a 10 year period, it estimated that 139,000 new homes could be built.21

44. Shelter therefore welcomes the government’s intention to dismantle the current Housing Revenue Account Subsidy System. We also believe strongly that the local ring-fence on councils’ Housing Revenue Accounts should be maintained and strengthened, to allow all revenue and capital receipts to be reinvested in maintaining existing council stock and building significant numbers of affordable homes in the areas where these are most needed. We have argued previously for the removal of “notional debt” from the national housing subsidy system altogether. Failing this, it is essential that councils be enabled to use what surplus they can generate within their HRAs to support new affordable housing provision.

45. Government rules have also prevented 75% of the receipts from the Right to Buy from being reinvested in building replacement stock or maintaining the housing that remains. Between 2004 and October 2009, revenue from Right to Buy receipts in England has totalled £6.2 billion, with £4.7 billion going to the Treasury for general spending.22 This has deprived local authorities of vital funds that could have been used help fund the supply of new affordable housing.

46. Shelter cautiously welcomes the recent suggestions from the Prime Minister that any new funds derived from the Right to Buy sales will be reinvested in properties available for “low rents for families that are currently stuck on the waiting lists”.23 However, we do have concerns regarding the definition of affordable housing that the government is using, as discussed below, as well as the more detailed financial arrangements underpinning the revived Right to Buy. We await further details from DCLG on the exact details of the new arrangements and the impact this will have on local authority and housing association financial models.

Local authority borrowing

47. An obvious barrier to direct public housing development is that it requires short term capital investment, which is currently in short supply. Borrowing to invest in housing supply is a way of meeting people’s housing needs, but it is also a prudent use of money. Affordable homes, unlike practically all other public assets, carry both an asset value and a predictable, long term income stream in the form of rents. Historically rental income on public housing has more than covered the cost of debt service, management and maintenance, which is why the national Housing Revenue Account Subsidy System now returns a surplus to the Treasury of around £2 billion per year.24

48. Local authority housing represents a large (and largely unencumbered) asset, giving local authorities the ability to raise finance at very low margins.25 Yet currently, public sector housing debt is included in the definition of public debt,26 and therefore subject to deficit reduction targets. The ability of councils and other public bodies to finance new house building could be improved by adopting the General Government Financial Deficit (GGFD) accounting rules followed by other European Union countries, which would give such borrowing the same accounting treatment as borrowing by housing associations.27

49. We understand that the Chartered Institute of Public Finance and Accounting is confident that, were councils freed to borrow on their housing assets, the provisions for prudential borrowing would continue to ensure that borrowing levels would remain sustainable.

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

50. The move to allow landlords to charge up to 80% of market rates as part of the “Affordable Rent” model is a concern for Shelter. In areas with high market rents, particularly London, 80% market rent would represent a significant increase on existing rents in the social sector. Such a significant rise could result in a system where “Affordable Rented” properties are out of the reach of many local residents.

51. Such significant increases in rents will almost certainly push up the housing benefit bill, as more tenants will need more state support in paying their rent. This could result in more and more tenants being caught in a benefit trap, and potentially jeopardise the use of any expected savings on the housing benefit bill to support capital investment in new homes.

52. If the new system is to deliver effective financing for new homes, it will need a suitable working definition of affordable housing to be in place. The existing definition, contained in Planning Policy Statement 3 (PPS3),28 defines affordability as “a cost low enough for [households] to afford, determined with regard to local incomes and local house prices”. The draft NPPF defines affordable housing29 as housing where “eligibility is determined with regard to local incomes and local house prices”. This is a nuanced but very important change. It could result in a bizarre scenario in which new homes are considered affordable if eligibility for them is determined by household’s income, even if the rents they are offered at remain unaffordable to the very same households.

53. In this scenario, the “Affordable Rent” regime may not be capable of funding homes that people can actually access or keep. The fact that the new “Affordable Rent” model will also be applied to existing units which come up for re-let is likely to result in a significant decrease in the availability of social housing at truly affordable rent levels in areas with acute levels of need.

54. Even if these problems can be overcome, there are very real dangers that the new model will not prove sustainable over the medium to long term. Housing associations have stretched their balance sheets significantly to deliver under the model, and are unlikely to be able to stretch them further in future. By taking on more debt some associations are coming close to the limit of their banking covenants, and doubt whether they would be able to participate in any second round of Affordable Rent after 2015, particularly if housing continues to receive low levels of grant funding.30

55. Some associations have put forward alternative models for financing development in a low grant environment. Ultimately, like the Affordable Rent model, these rely on increasing association borrowing on the back of higher rental incomes. With incomes falling, unemployment remaining high, and a growing crisis of affordability across all tenures it is difficult to see any approach based on ever increasing rent levels as anything other than an unsustainable rise in the housing benefit bill.

56. In conclusion, the need for new approaches to increase the supply of affordable housing finance is more urgent than ever. Despite challenging fiscal and market conditions there are alternative approaches to housing finance that merit investigation. Shelter warmly welcomes the committee’s inquiry into this crucial matter, and we would be glad to assist in any way that we can.

October 2011