Communities and Local Government CommitteeWritten submission from the Department for Communities and Local Government

Introduction

1. We welcome the Department for Community and Local Government Select Committee’s decision to hold an inquiry into the financing of new housing supply. This is a crucial issue and one which cuts across all aspects of housing policy—from development of new market housing, to investment in the private rented sector and delivery of affordable housing.

2. Housing plays a key role in delivering the Government’s objectives for economic growth and social mobility. Yet in previous years we have seen a sustained shortfall in the supply of new housing. The previous Government’s model of top-down housing targets did not deliver the housing this country needs. Indeed, house building fell to 103,000 in 2009–10, the lowest peace-time level since 1923–24.

3. This is against the back drop of increasing demand. The latest (2008-based) household projections show that the number of households will grow by an average of 232,000 every year1 until 2033. This gap between supply and demand has resulted in deteriorating affordability and an increased number of households on social housing waiting lists.

4. As a result we have seen young people having to rent for longer, unable to buy their own home until later in life and often reliant on family support to be able to do so. Rising house prices, and more recently large deposit requirements, have meant that more than three in four first time buyers aged under 30 need financial assistance to buy. The pressures of our ageing society mean we must also do more to increase the housing choice and support available to older people.

5. We therefore need a step-change in our approach to housing to ensure we are building the homes that this country wants and needs and supporting our plans for economic growth. The Department is currently working with colleagues across Government and with our delivery partners to develop and publish a Government Housing Strategy. This will be published later in the autumn and will focus on three core objectives across the housing market affordability; stability; and quality.

6. This submission sets out our response to the key questions which the Select Committee has indicated they want to explore. These issues will also be explored in more detail through the Housing Strategy and we will ensure a copy is made available to the Committee as soon as possible.

Response to Select Committee Questions

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?

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

7. This Government is taking a new approach to investment in and deliver of housing. We have moved away from the top-down approach of the previous Government, with a new focus on incentivising local areas and communities to welcome housing growth.

Supporting delivery of new housing

8. At the heart of this approach is the New Homes Bonus—a simple and powerful incentive, which rewards local authorities and communities who increase their aspirations for housing growth. Launched in April 2011, the New Homes Bonus match funds the additional council tax raised for the first six years for new homes and long-term empty properties brought back into use, with a premium for affordable homes.

9. The Department for Communities and Local Government has set aside almost £1 billion over the Spending Review period for the scheme, with the first cash payments totalling almost £200 million made in April 2011. From Year 2, 2012–13 we will pay an additional £350 for each affordable home over the six years. This means that the bonus available for an affordable home will be up to 36% more than for a similar market home,

10. We have also given local authorities the ability to receive a proper contribution from developers when they build new homes or businesses. The Community Infrastructure Levy allows local authorities to charge a levy on new development in order to raise funds to meet the associated demands placed on their area and so enable growth, The money can be used for a range of infrastructure provision, such as transport schemes, flood defences, health and social care, parks, green spaces and leisure centres.

11. Our reforms to the Community Infrastructure Levy in the Localism Bill include ensuring that neighbourhoods will have a meaningful say in how the impacts of new development are managed. We will direct a meaningful proportion of the receipts raised from new development towards managing the demands that are placed on the communities and neighbourhoods that host it. We will also give those communities the flexibility to address the matters that they identify are necessary to make development sustainable. Communities will in turn be more likely to accept and welcome development when they understand that they will not suffer loss of amenities or services as a result of hosting it.

12. To help finance the essential infrastructure to ensure that new housing growth is delivered, Government has announced the creation of a new £500 million Growing Places Fund. The fund will support economic growth by helping to unlock developments which will provide the jobs and houses we need.

13. The draft National Planning Policy Framework will also help support delivery of new housing. The Framework puts local people in the driving seat of decision making in the planning system. Communities will have the power to decide the areas they wish to see developed and those to be protected, through their local plan. The policies in the Framework will include rigorous protection for the Green Belt, for National Parks, Areas of Outstanding Natural Beauty and Sites of Special Scientific Interest, and give local people new powers to protect other green space that is important locally.

14. It is for these reasons the Government is abolishing regional strategies in two stages first by removing Part 5 of the Local Democracy Economic Development and Construction Act 2009 and secondly by revoking each existing Regional Strategy by Order. They have been ineffective—housing targets did nothing to incentivise new development, and put pressure on councils to review the Green Belt in 30 towns across the country. They alienated the public, undermined support for new housing and turned whole communities against the principle of development. It is the Government’s clear policy intention to revoke existing regional strategies outside London but this is subject to the outcome of the environmental assessments that we are undertaking on a voluntary basis. Decisions on the revocations will not be made until the Secretary of State and Parliament have had the opportunity to consider the environmental reports.

15. We are also working with the HMT, Financial Services Agency (FSA) and lenders to unlock mortgage lending, particularly to First Time Buyers. First Time Buyers are the engine of the housing market and we recognise that lack of effective demand from First time Buyers threatens the ability of house builders to respond to long term demand and is a source of profound frustration to aspiring first time buyers excluded by poor affordability, deposit requirements and increasingly under pressure from rising rents.

16. Government is working closely with the Financial Services Agency and lenders to create the right regulatory framework and allow the supply of mortgage finance to flow, whilst ensuring responsible lending and borrowing. The Minister for Housing has held a number of First Time Buyer summits, to support the development of innovative new approaches to help First Time Buyers get a foot on the ladder.

17. Since the first summit lenders have worked in partnership with Government, local authorities and house builders to explore new ways of supporting First Time Buyers and getting the housing market moving again. We have already seen several innovative schemes to support First Time Buyers announced by lenders and developers and new partnerships have been formed with local areas.

18. We are also providing direct support to First Time Buyers through the FirstBuy scheme, which will help almost 10,500 aspiring home owners by Spring 2013.

19. The Government recognises that the regulation of new home building has the potential to add costs, and has committed to reduce the sum of regulatory burden on house builders over the course of this Parliament. It is also looking closely at how other policies can be adapted so as to minimise the costs they add to new development. For example, the Plan for Growth announced a new approach to the Government’s commitment that all new homes will be built to a zero carbon standard from 2016; an approach which is expected to more than halve the cost to house builders.

Investment in affordable housing

20. The Government has invested around £40 billion2 of public money in the provision of social and affordable housing over the past 30 years. That investment has helped to provide homes for around 20% of households in England.3 Despite this level of investment, research suggests that around 1.9 million (9%) English households may remain in housing need.4 The provision of sufficient affordable housing remains a pressing goal. Further, building homes is a powerful driver of economic growth, creating jobs and thereby reducing the overall benefit bill.

21. We have committed nearly £4.5 billion investment in new affordable homes over the 2011–15 Spending Review period. However, the current fiscal environment means that the former funding model, with its heavy dependence on public grant, is no longer sustainable.

22. The new Affordable Homes Programme is predicated on providers levering more investment from the private finance markets, to reduce the amount of new Government funding needed per home. The key innovation is the introduction of Affordable Rent, allowing providers to set rents at up to 80% of market value (rather than the previous model which required providers to set rents at lower, “target” levels—social rent which averages 62% of market rent nationally). Allowing a certain proportion of new tenancies to be at Affordable Rent will give social landlords the flexibility they need to make the best use of their valuable social housing assets, but existing tenants will see no changes to their rights to lifetime tenancy and social rents.

23. This enables providers to borrow more against the higher income stream to help meet the cost of new supply. With the agreement of the Homes and Communities Agency (HCA), providers can also convert some existing social rent homes to Affordable Rent at re-let with the additional financial capacity generated being used to fund new supply. Grant remains the sum which bridges a viability gap, but the new model significantly increases the financial capacity of providers.

24. This marks a significant shift in the balance of funding for new affordable housing. Contracts are currently being finalised between providers and the Homes and Communities Agency, and initial agreements show that Government investment under the Affordable Homes Programme will be less than half previous rates. This means it will be possible to deliver more new affordable homes for every pound of public capital investment.

25. Social housing providers have risen to the challenge to deliver under the Affordable Rent model. Housing Minister Grant Shapps announced in July 2011 that the level of offers had exceeded expectations—146 providers, including housing associations, local authorities, and private developers, will deliver up to 80,000 new homes for Affordable Rent and Affordable Home Ownership with Government funding of just under £1.8 billion. We expect to provide up to 170,000 affordable homes by 2015, compared to the 150,000 originally estimated. Successful bids come from all areas of England, with about 9% of the homes in rural areas.

26. The new programme acknowledges the continuing importance of affordable home ownership—around 20% of new homes delivered will be on a shared ownership basis where this is a local priority, enabling households on a range of incomes to get a foot on the home ownership ladder.

27. The new Affordable Homes Programme will generate more homes and more jobs than a continuation of the previous programme would have done with the same amount of Government funding. These extra homes let at higher rents will have some impact on the housing benefit bill, but this is lower than it might otherwise have been because those moving into a subsidised Affordable Rent tenancy would generally have been housed more expensively in the private rented sector. The increase in any case will be outweighed by the economic benefits from increased housing supply and associated impacts from construction activity and the distributional benefits of increased social housing.5

28. The Select Committee asks what the role is of state lending or investment, as opposed to grant funding. The Government currently uses both grant funding and investment to support provision of new affordable housing; the Affordable Homes Programme makes grant funding available to supply new homes, primarily for affordable rent and shared ownership. Funding of FirstBuy is a form of investment in which the Government takes an equity stake in the new properties. These two forms of funding play complementary roles.

29. Developing new homes for rent requires registered providers to undertake significant long term private borrowing. Providing funding as grant can help therefore provide reassurance to social housing providers and their lenders; supporting appetite to develop and helping the sector to access more affordable credit. The grant therefore helps lever in significant amounts of private finance to fund new supply.

30. In the longer term, historic social housing grant is also routinely recycled within the sector through the Recycled Capital Grant Fund and Disposals Proceeds Fund. Recycled Capital Grant Fund gives Housing Associations the option to recycle grant themselves into affordable housing provision within three years, or repay it to the Homes and Communities Agency. An average of between £200–£250 million recycled capital grant fund is reinvested each financial year, with an average around 60% of that amount reinvested in new supply. The new Affordable Homes programme is designed to encourage providers to reinvest Recycled Capital Grant Fund promptly within the programme to support delivery of new homes.

31. Affordable Home Ownership is one area where, under some schemes, Government takes a direct investment stake. In the 2011 Budget, the Government announced a 20% equity loan scheme called FirstBuy, with half the equity loan provided by the Government and the other half by the house builder. Under FirstBuy, the Government and house builders are together providing around £400 million to assist first time buyers purchase new build property in England, Government investment as an equity loan means that on repayment the receipt is available for new homes or other forms of future investment. The Government and house builders share equally in any increase or fall in property value.

32. The Prime Minister recently announced the Government’s intention to raise Right to Buy discounts to make it attractive to tenants across England. Under the previous Government discounts were reduced to very low levels, which resulted in fewer people being able to take up this opportunity. We want to help people meet their aspiration for home ownership, whilst using the receipt to build more housing for Affordable Rent. Under this new plan, for every home bought under Right to Buy, a new affordable home will be built—over and above our existing plans. Details of our Right to Buy proposals, including the level of discounts to be offered, will be set out in the Housing Strategy which will be published this autumn.

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?

33. The public sector can play an important role in delivering new housing through support in kind—in particular by freeing up land held in the public sector for development. An estimated 40% of larger sites suitable for development are sitting within public sector land banks and it is clear that we need to maximise land release and ensure this is being used to support new homes getting built and new jobs created.

34. To accelerate the release of surplus formerly-used land and property, the Homes and Communities Agency and the four major landholding departments, Ministry of Defence, Department for Environment, Food and Rural Affairs, Department for Health, and the Department for Transport have published land disposal strategies setting out how they will bring this land forward. These have been scrutinised by Cabinet Committee to ensure they are sufficiently robust, and there will also be ongoing challenge by the Committee to ensure they are delivering. Support is also being put in place which departments can draw on to help accelerate release of their land. This includes Homes and Communities Agency support, and their on-line tools and specialist services such as the Advisory Team for Large Applications.

35. Land identified for release in the strategies has the capacity to deliver more than 60,000 new homes. This builds on the 11,000 homes that will be delivered by the Homes and Communities Agency’s land release, and is excellent progress towards the Government’s ambition to release land with capacity to deliver 100,000 homes over the Spending Review period, and support as many as 200,000 construction and related jobs.

36. To get development moving quickly, we will be looking to extend the use of Build Now, Pay Later models—meaning developers don’t have to find the money upfront for the land but can pay as the development gets underway, or homes are sold. This will help tackle cash flow problems which can act as a barrier to house building.

37. To make the land government holds work harder for us, we will now be working with smaller land holding departments, including the Home Office, Ministry of Justice and DECC to identify surplus public land that they hold with capacity for housing. And we will be considering public corporations with significant landholdings to identify the potential contribution they might make. Following the transfer of Regional Development Agency assets to the Homes and Communities Agency on 19 September further work will be undertaken to understand the potential housing capacity of this land.

38. We have also introduced a new Community Right to Reclaim Land, which helps local people ensure that public sector bodies do not unnecessarily hold underused land or property to encourage bringing these Brownfield sites back into use.

39. The Right comprises two elements; improved transparency by giving citizens on-line access to information to make it easier for them to see which public body owns what land, and improved accountability by reforming the Public Request to Order Disposal (PROD) process that enables any citizen or organisation to ask the Secretary of State to direct that a specified parcel of underused public land or property should be sold in the open market.

40. Public Request to Order Disposal has now been made easier to use, wider in its application and more robust in the testing of the evidence provided by landowners seeking to justify their actions. It also means that all major land-owning local government and many other bodies are now able to be held to account.

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? How housing associations and, potentially, Arms Length Management Organisations (ALMOs) might be enabled to increase the amount of private finance going into housing supply?

41. We have set out above the important role that private finance is already playing in the delivery of affordable housing. Whilst Government’s role in funding affordable housing in the longer term is a matter for the next Spending Review, a significant role for private finance is likely to remain.

42. Housing associations already make significant use of private finance to fund stock improvements and new development. The stable income streams from rents (with around 65% underpinned by housing benefit currently paid direct to landlords), strong regulatory oversight and Government’s financial commitment in the form of grant subordinated to secured borrowings have traditionally made the sector attractive to the lending markets, including bond investors such as life and pension funds.

43. With ongoing volatility in global financial markets and regulatory changes in the banking market, lenders are less willing to offer long term debt, As a result, developing associations have increasingly turned to the capital markets. During 2008–10, £2.8 billion of public bonds was issued by social housing providers at rates between 4.87% and 7.25%. Several of the largest developers issue own name bonds and enjoy strong credit ratings (generally Aa2) and associations continue to secure competitive margins on bond issues. Alternative types of bonds are also being explored by the sector—for example unsecured and retail bonds.

44. Arms Length Management Organisations (ALMOs) are wholly owned local authority companies set up to manage stock on behalf of their parent local authorities under fixed term contracts. As such, most Arms Length Management Organisations have no substantial assets or long term revenue streams to support independent borrowing. On-lending by parent local authorities is counted as local authority public sector borrowing. Access to private finance (borrowing not counted as public sector borrowing) would, as with any other local authority landlord, depend on transferring the stock out of public ownership and control. Future transfer policy is being considered as part of the Department’s housing strategy.

45. In addition, the recent emergence of Affordable Rent and the strength of the wider rental market have stimulated further interest from new types of providers in getting involved with providing social housing. Since 2010, profit-making bodies have been able to register with the Regulator as social housing providers and a number of companies have already done so—making them eligible to own grant-funded social housing. As a result, the Regulator is involved in discussions with a number of publicly quoted companies who wish to set up a social housing subsidiary. Subject to the passage of the Localism Bill, the existing regulator (the Tenant Services Authority) will be abolished and its remaining functions transferred to the Homes and Communities Agency on 1 April 2012. Government and the Regulator are working closely with a range of organisations, advisors, trade bodies and consultants to ensure that the new opportunities are well understood.

46. The ongoing viability of the sector is vital if it is to continue to attract private finance. Private Registered Providers involved in bids under the Affordable Homes Programme were assessed by the Regulator to ensure that they were—and were likely to remain—in compliance with the Regulator’s Governance and Viability Standard. Together with the Regulator and the Homes and Communities Agency, we will be monitoring delivery of the programme through the new Affordable Homes and FirstBuy Delivery Board to assess its impacts, making sure that objectives are achieved and that risks are effectively managed.

47. The Affordable Rent model has also brought greater focus to asset management strategies as a way of driving value for money. Providers already cross-subsidise development from their operating surpluses and some progress has been made towards improving operating margins. However, further improvement in operating efficiency has the potential to increase margins further and release more cash for investment in new supply. The Regulator will consult in late 2011 on a new Value for Money standard which will require providers to demonstrate that they are achieving value for money in delivering their objectives. The Government believes that greater transparency will also drive improved value for money. We have introduced a contractual clause for bids to the Affordable Homes Programme which requires providers, where they are receiving more than £3 million in grant, to publish expenditure over £500 related to grant-funded development. We also intend to consult on whether housing associations should be subject to the Freedom of Information Act.

48. The Government is also keen to encourage more large scale private investment in other forms of housing—particularly in the private rented sector.

49. To provide stronger incentives for investors, the Government announced at Budget changes to the stamp duty treatment of bulk purchases of homes. This means that larger scale investors could now pay a typical 1% instead of 5% on bulk purchases, as stamp duty is assessed on the average value of individual properties instead of on the overall value of the portfolio.6 This scheme tackles a tax distortion which previously favoured individual purchases over large scale investment.

50. The Government also announced a range of measures in the Budget to support the development and growth of UK Real Estate Investment Trusts (REITs), to make them more suitable for residential investment. These measures address both barriers to entry and investment for new and existing Real Estate Investment Trusts; and promote good business practice for existing and future Real Estate Investment Trusts. In line with the Government’s approach to tax policy making, HMT have consulted further on these measures before the Government publishes draft legislation for Finance Bill 2012. The consultation closed on 10 June 2011.

51. The Government is also very interested in exploring options for targeting Build-to-Let in the disposal of public sector land. The Homes and Communities Agency are investigating the economics of marketing a site specifically to include homes for rent. Different financial models are being explored (including who retains equity stakes in the development and for how long) as well as different markets and management models. Further detail will be published in the Housing Strategy.

52. We are also supporting the self-build industry and are keen to see this options considered as a more mainstream housing choice. One of the key barriers to growth of the self-build sector is access to finance. To help address this concern, the Minister for Housing has written to banks and building societies, calling on them to make more finance options available to those looking to build their own home.

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

53. Local authorities own 44% of the social housing stock in England,7 including housing managed by their Arms Length Management Organisations. They therefore have and will continue to have a considerable role to play in affordable housing as landlords as well as planning authorities. With their Arms Length Management Organisations, local authorities own 44% of the social housing stock in England.8 They therefore have and will continue to have a considerable role to play in social housing as landlords as well as planning authorities.

54. The abolition of the Housing Revenue Account subsidy system and a new system of self-financing should put councils in a better position to increase their supply of new homes. These reforms, which are being taken through in the Localism Bill, will mean councils with their own housing stock will be able to keep their rental income in return for a one-off adjustment of their housing debt (councils will only be asked to take on extra debt if their rental income will be able to service it after costs are met). When reforms come into effect in April 2012, councils will have an average of 14% more to spend on their stock than under the present system. They will also be able to plan more effectively over the long term on the basis of a reliable income stream.

55. Under the new Affordable Homes Programme, 26 local authorities were successful in bidding for support from the Homes and Communities Agency to build approximately 4,000 new homes (subject to confirmation of their borrowing capacity under self-financing and subject to contract), which demonstrates councils’ appetite for new building. We have agreed a process with the Department for Work and Pensions whereby local authorities offering Affordable Rent can access Housing Benefit above the Limit Rent, while at the same time ensuring value for money and guaranteeing new supply. This will help local authorities build more new homes with their own resources, as housing associations do.

56. Local authorities make their own decisions about whether investing in new stock is appropriate in their areas—appetite and ability to support debt generated, demand for new social rented housing, borrowing costs and timings of repairs and maintenance required will differ between areas. It should also be noted that, as part of national deficit reduction and debt management strategy, some councils may find their ability to build new stock is in the short term restricted by a borrowing cap.

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?

57. We will fully evaluate the Affordable Rent model’s impact on providers and funding in the coming months. The most recent survey by the Regulator (June 2011) showed that associations have loan facilities of £63.9 billion in place with £51.0 billion drawn (80%). However, the new model stretches provider borrowing capacity and there is therefore much interest in alternative ways of funding affordable housing over the longer term.

58. The role of the public sector in providing other forms of support, whether in equity stakes or through land provision, is also important. Local authorities are already able and encouraged to dispose of their land for less than best consideration where it meets local policy objectives and can do so innovatively, for example using Build Now, Pay Later models.

October 2011