Financing of new housing supply

Supplementary written evidence from the Mill Group

A dditional written evidence on how Government can help innovation – in response to oral evidence given by David Toplas , CEO of Mill Group.

1. I was struck by the comment of the Minister in his subsequent oral evidence to the Committee that he had a willingness "to support new ideas", but when asked "What do you need?" the usual answer given is " nothing " .

2. Mill Group would like to amplify its request of Government that Government support is needed to support the market initiation of new models of housing investment.

3. Government has to find long-term sustainable sources of finance, without exposing the Exchequer to £billions of risk, subsidy or off balance sheet funding. Institutional investors could do this but to-date has not, largely as existing models of investment do not provide adequate returns.

4. New models have been developed but are having difficulty in getting initial support to prove the concept. Institutions are very unlikely to invest in unproven models, particularly if these are focused on providing relatively low levels of investment return over a long term.

5. Government endorsement and financial support of all worthy new models into the market via financially limited pilot schemes could break this impasse and speed the adopting of new models and the arrival of substantial levels of institutional investment. Government’s investment would be returned after the pilot’s successful conclusion.

6. Government has encouraged mortgage lenders with the New Build Indemnity Scheme (now the NewBuy Guarantee Scheme) to provide sufficient finance to enable those with 5% deposit to buy new homes.

7. We suggest that the NewBuy Guarantee Scheme precedent is a useful example of Government support for a new private sector model and ask that Government provide a similar financial encouragement to institutions to provide investment finance to enable consumers to buy homes and simultaneously initiate a new investment market for institutions.

Illustrative Proposal for Co-investment support

8. This illustration mimics the NewBuy Guarantee Scheme under which the risk of loss is shared between the consumer, the finance provider (i.e. lender in the NBGS) with recourse to a 3.5% second loss layer (in NBGS provided as a deposit from a housebuilder) after which the Government has a 5.5% remoter level of risk. Other risk layering arrangements can and should be explored.

9. The provision of a Government underwrite would encourage investors to come forward in an analogous way to lenders. The legal structure difference between debt and equity is not in point as both providers of finance are at risk of capital value decline and consumer default.

10. Illustration

(i) The first 5% of loss and the next 3.5% would be combined as a first loss layer for the consumer and investor to share

(ii) 95% of the next layer of loss would be recovered from the Government indemnity, with 5% being borne by the consumer and investor

(iii) Any further losses would be suffered by the consumer /investor

(iv) The "loss" would be determined by either actual default of the consumer and realized value on sale, or an assessment of value at say 8 years, after which the Government indemnity would fall away

If the specific risk profile of the NewBuy Guarantee Scheme is mimicked, public money will only be at risk if there is decline in capital value of over 8.5% over the period of the indemnity.

Background

11. Co-investment can:

· Generate new money in substantial amounts for the housing market, NBIS will only reallocate finite liquidity that lenders have available. New money will fill the gap in mortgage availability.

· Increase new build sales and bring forward developments with commitments to purchase arrangements.

· Make Right to Buy affordable and accessible.

· Take pressure off the rented sector and so sustain affordable rents.

· Regenerate communities by supporting a balanced mix of tenures.

· Reduce overcrowding by accelerating the time it can take aspiring adults to move into home ownership.

· Empower home buyers by offering long-term security of tenure in return for the rights and responsibilities of home ownership.

· Offer a fast-track route into home ownership without debt of negative equity, giving home owners time to save up for a deposit while living in the home they want to buy.

· Above all, it will in the short-, medium-, and long-term provide the solution to the shortage of housing supply.

12. Mill Group has created the opportunity for £30 billion of new money to be invested in the residential market that will have a massive impact on new housing supply over the next 5 years and beyond.

13. Mill Group needs the Government to recognize that innovation has to be nurtured through its development stages if it wants to reap the rewards new ideas can generate.

14. Our proposal is that Government also creates a New Build Investor Indemnity Scheme (NBIIS) which will mirror the NBMIS.

15. Consumers can then have a choice over whether they take a debt offer with its consequential negative equity risk, or a co-investment offer without negative equity risk and a smaller share of house price growth upside.

16. So while we do not ask for legislation changes, (Co-investment operates within existing law) and are not looking for contributions through taxation or subsidy, we are saying that we need Government’s active and public support to establish this new housing tenure.

I very much hope this further note is helpful and am more than willing to provide further information should the Committee require it.

February 2012