Communities and Local Government CommitteeWritten submission from the Council of Mortgage Lenders

Introduction

1. The Council of Mortgage Lenders (CML) welcomes the opportunity to submit written evidence to the Communities & Local Government (CLG) select committee. The CML is the representative trade body for the whole of the residential mortgage lending industry. Our 109 members currently hold around 94% of the assets of the UK mortgage market, and include commercial banks, mortgage banks, building societies and non bank specialist lenders.

2. In addition to lending for owner occupation and private renting, CML members have lent over £60 billion to housing associations across the UK for new build, repair and improvement to social housing.

Housing Supply

3. There is overwhelming evidence that we are failing to keep pace with the housing supply needed. In 2004, the Barker review recommended a step-change in supply to 240,000 new homes per annum and in 2008 an assessment by the National Housing and Planning Advice Unit showed that a minimum of 240,000 homes would be needed annually to keep pace with demand. Similar projections have recently been made by Shelter and The Institute for Public Policy Research (IPPR).

4. With just 102,730 new homes built in 2010 neither of these projections show any sign of being met in practice. This figure is more than 15,000 less than the previous year and fewer than were built in the last year of the former administration.

5. Although house-building is at a record low, housing need continues to rise. It is predicted there will be 4 million additional households in England by 2025 as a result of population growth, demographic change and social change. In its recently published report “Build now or pay later? Funding new housing supply” the IPPR predict that the worst mismatches between supply and demand will be in the greater south east, with particular pressure on social housing.

6. Overall, IPPR has estimated that, building on government projections for household growth, provided the economy recovers at a reasonable rate, and assuming we build as many new homes in the next 20 years as we have in the past 20 (that is, on average, 160,000 per year), we will have in England 750,000 fewer homes than we need by 2025. With growing evidence of affordability pressures in both home ownership and the private rented sector, the demand for social housing is expected to continue to grow.

Private Sector Funding to the Social Housing Sector

7. The challenging conditions for the mortgage market continue and the supply of funding for mortgage and commercial lending is still markedly constrained. The housing association sector is increasingly turning to the capital markets as a source of funding. From 2005 to 2008 this made up less than 5% of all private finance, however the latest data from the Tenant Services Authority shows that this is now 37%. Institutional investors place great importance on cash flow underpinned by direct payments and the view of rating agencies is key to the continued success of this type of investment. This means that decisions on welfare reform and universal credit, in addition to the affordable rent programme discussed below, need to be taken with this backdrop in mind to ensure that the private sector can continue to fulfil its important role in funding social housing in the future.

Grant Funding and the Affordable Rent Programme

8. The government’s affordable rent proposals have made a significant impact on the supply of social housing. In July the HCA announced the results of the latest bidding round and forecast that the £1.8 billion allocated would produce some 80,000 affordable homes. This results in average grant rates of less than £23,000 which is a very significant reduction on the previous three years average of £65,000 for rented homes and £35,000 for low cost home ownership schemes.

9. This drastic reduction in grant rate has been achieved due to a number of factors, not least the expectation that rents for new homes, and a good proportion of relets, will increase to near market levels ie up to 80% of market rents. For housing providers this results in higher levels of borrowing and hence higher loan gearing, and more risk.

10. There are other factors that have contributed to the reduced grant rate of the Affordable Homes Programme (AHP). It is evident that housing providers made every possible contribution they could to the programme in order to ensure that they continued to maintain their development partner status. This includes maximising the cross subsidy they expect from other property sales, market renting or other business activities, and putting in free or heavily discounted land.

11. We believe that the levels of cross subsidy achieved in this programme are not likely to be sustainable for future years. Market conditions mean that contributions arising from Section 106 planning agreements are likely to reduce and some of the land contributed by housing providers came from previous years when economic conditions were considerably better. As such we believe it would be unwise to predict that grant levels could stay at the current AHP level in the long term.

12. With, or without the other cross subsidy contributions, the financial gearing of housing associations is bound to increase. Their ability to deliver further rounds of AHP homes is questionable and could result in “survival of the fittest”. The communities minister, Andrew Stunell MP, has acknowledged that there are difficult questions about the scheme’s viability beyond 2015, recognising that housing associations’ assets “are not inexhaustible”

13. A recent report from PricewaterhouseCoopers and housing association L&Q adds weight to our concerns. The report, Where next? Housing after 2015, suggests that even with substantial business efficiencies allowed for, housing associations will need to borrow around £15 billion by 2015 to build 150,000 homes and meet stock reinvestment and refinancing commitments. It says the sector’s capacity to continue developing will diminish swiftly and it would be very difficult for housing associations to manage a further large affordable housing programme under the same rules.

14. Other forms of subsidy or financial contribution are being considered. Ministers are encouraging developers to build on government land under a “Build Now, Pay Later” deal. Under the scheme, house builders pay for the land on which they develop only after they have started work on the new homes. This may produce some stimulus for the normal house-building market but without specific valuation discounts it will have limited impact on the provision of affordable homes.

15. A few weeks ago the Prime Minister reiterated the commitment to use public land for housing supply under “Build Now, Pay Later”, and announced plans to increase the discounts available to council tenants under the Right to Buy, and some housing association tenants under the Preserved Right to Buy. While we welcome the commitment to use surplus receipts to fund replacement homes we believe that “one for one” replacement may prove ambitious and for the reasons set out above government should not rely on AHP grant rates being replicated.

16. For housing associations the new funding arrangements will not only increase their loan commitments and financial gearing but it will bring greater risk to their business activities. Over time they will see more of their tenancies at “affordable rent” levels and this will be coupled with more variations in tenure. As noted above, other pressures will arise as a result of housing benefit changes and particularly the reduction in direct payment of rent to landlords which could arise from the changes currently under consideration in the House of Lords in the Welfare Reform Bill. The latter poses a considerable threat to the funding of the sector where there are already signs of reduced investor confidence.

October 2011