Housing and Planning Bill

Written evidence submitted by the Riverside Group Ltd (Riverside) (HPB 30)

1. About Riverside

1.1 This submission is made by The Riverside Group Ltd (Riverside). Riverside is one of the largest charitable housing association groups in the country, owning and managing over 53,000 homes.

1.2 The submission focusses on areas of the Bill where we have expertise and specific proposals (parts 1 and 4). Given that much of the detail will be set out in statutory instruments (or in the case of the right to buy, a voluntary agreement) most of our proposals relate to the content of these, rather than amendments to the face of the Bill.

2. Summary

2.1 Riverside supports a Starter Homes approach which provides new opportunities for first time buyers to access the housing market. However we recommend that clauses 3 and 4, requiring local authorities to promote the provision of Starter Homes (in accordance with regulations issued by the Secretary of State), are implemented in such a way that authorities are able to take a view about the type of affordable housing to be provided, appropriate for a particular site in accordance with local needs. Starter Home provision should focus on bringing additional land into the planning system, rather than replacing the affordable housing requirements on land already designated for residential development.

2.1 Riverside supports the voluntary right to buy deal (chapter 1), but the detail should now be set out in a contractually binding agreement which:

Guarantees full compensation (grant) to housing associations to cover discount payments

Enables the easy aggregation and flexible use of receipts to fund one to one replacement

Allows associations (where they chose) to limit sub-letting and apply reasonable affordability criteria to purchasers

2.2 The deregulation powers in chapter 3 should be used to reduce the short term regulatory burden on housing associations, however in the light of the recent ONS reclassification decision, a more fundamental and open review of the relationship between housing associations, regulator and the state is now required.

2.3 Any mandatory rent approach for high income social tenants (chapter 4) should be:

Based on an income threshold which represents a genuinely high income (£50,000 proposed)

Be administered by HMRC as part of the tax system

For new tenants only

3 Specific elements of the Bill:

Part 1: New Homes in England,

Chapter 1, Starter Homes

3.1 Riverside currently offers a number of products to assist first time buyers. By offering shared ownership through Riverside, and Help to Buy through Prospect and Compendium, we have helped households into owner occupation by reducing the initial cost of sale.

3.2 Riverside purchases over 100 homes per annum from private developers who have a Section 106 affordable housing requirement to fulfil. This requirement is usually a mix of affordable rent and shared ownership homes, depending on local authority affordable housing policies which are based on housing needs surveys. These must be robust in order that they can stand up to challenge through planning appeals. These planning arrangements subsidise the provision of affordable housing in that the amount that can be paid to the developer by a housing association is limited to the income that can be generated by the affordable housing. The developer in turn factors this into their purchase negotiations and the land price is settled on this basis.

3.3 Recent announcements suggest that ‘Starter Homes’ could be deemed ‘affordable’ for the purposes of complying with an affordable housing planning requirement. In the markets that Riverside currently works in, the potential income that could be generated by Starter Homes is likely to be comparable to shared ownership homes, but greater than affordable rented homes. This will enable developers to pay more for land, which could in turn tempt more owners to sell, although in the short term Starter Homes are likely to replace, not increase the amount of affordable homes generated under section 106 affordable housing requirements.

3.4 The Starter Homes model is different to shared ownership and Help to Buy in that these existing products do not gift any equity to the purchaser. Whilst shared ownership and Help to Buy bring down the initial annual cost of home ownership, the occupier must pay the full value of the property in order to become an outright owner. The gifting of equity to first time buyers will need to be considered very carefully by charitable housing associations in the context of the appropriate use of charitable assets.

3.5 The provision of Starter Homes also need to be considered alongside other home ownership products. On a commercial basis, a Starter Home is likely to be far more attractive to a purchaser than a home available through Help to Buy, where the purchaser has to purchase the remaining equity or pay a rent. This means that marketing Starter Homes alongside Help to Buy will be a significant risk. However for the developer, Starter Homes will not generate the same level of income on a commercial basis as Help to Buy. Therefore unless the provision of Starter Homes is subsidised by the Government (directly or indirectly through the planning system), take up by developers, including housing associations through commercial subsidiaries, is likely to be low where Help to Buy remains an option.

3.6 As a catalyst to bring new land and sites forward not previously designated for residential use, Starter Homes could create additional supply and create a better return on a commercial basis through supporting higher land values. However when developed alongside other forms of low cost home ownership, whether shared ownership or Help to Buy, there is the potential that the range of products could compete with each other, unless very careful thought is given to their deployment. We therefore recommend that clauses 3 and 4, requiring local authorities to promote the provision of Starter Homes (in accordance with regulations issued by the Secretary of State), are implemented in such a way that authorities are able to take a view about the type of affordable housing to be provided through the planning system that is appropriate for a particular site in accordance with local needs. Starter Home provision should focus on bringing additional land into the planning system, rather than replacing the affordable housing requirements on land already designated for residential development.

Part 4, Social Housing in England

Voluntary Right to Buy: Chapter 1

3.7 Riverside has supported the NHF in its negotiation of a voluntary RTB deal with Government, and was one of the first housing associations to ‘sign up’. We see this as providing an opportunity for many of our tenants to purchase their own home on favourable terms, whilst enabling us to tackle some of the undesired consequences of the original statutory RTB scheme including the lack of stock replacement, sub-letting into the private rented sector and unsustainable home ownership. A voluntary deal will provide greater flexibility for housing associations to operate a well-designed scheme.

3.8 Riverside has considerable experience of administering the Preserved Right to Buy (PRTB) for former local authority tenants and the Right to Acquire for qualifying tenants. Over the past 13 years we have sold nearly 2500 homes at a discount, and we still have nearly 9,000 tenants with the PRTB. We estimate that the voluntary RTB will extent the opportunity of purchasing with a discount to a further 19,000 tenants, and forecast that up to 15% of newly eligible tenants may take up the opportunity in the next 10 years, with a peak of sales in early years as latent demand is met. Looking at evidence of income, we estimate that fewer than 20% of tenants currently have an income that would support a mortgage for the property they currently occupy (given the likely level of discount available) however we are aware of the likelihood of a significant number of cash purchasers, helped by family members. This accounted for over 80% of our PRTB sales last year, although we would not necessarily expect to see this rate of cash purchase under the voluntary RTB.

3.9 The key to the success of the deal which will ensure that Government meets its twin objectives of increasing housing supply and promoting home ownership, is the payment of compensation to housing associations for the discounts enjoyed by tenants. We therefore welcome provisions in clauses 56 and 57 which enable the Government/GLA make grants to housing associations. However these clauses are ‘permissive’ and do not require grants to be made at any particular level, and so we would expect a firm commitment to provide grants to cover the whole of the discounts available to tenants to be made in the final agreement which will need to be entered between DCLG and HAs. Prior to discounted sales commencing, housing associations (many of which are charitable) need to have binding assurance that such grants will be forthcoming, and the terms on which they will be made available.

3.10 We would also expect the final agreement to incorporate terms about the re-provision of new homes, and we would urge Government to promote a flexible approach. For Riverside, one to one replacement will be very challenging – our average sale price under the Preserved Right to Buy in 2014/15 was £72k, with replacement costs (including land) running at £125k. We will only be able to maximise replacement if we can:

· easily aggregate receipts, free of geographical restriction. To meet re-provision timescales housing associations need to be able to create opportunity at scale, rather than base development on historic patterns of grant investment. Government needs to resist pressure for geographical ring-fencing of receipts/historic grant, and trust housing associations to re-invest strategically, given long-standing strong relationships with local authorities

· have the freedom to use receipts for re-provision across a range of tenures, including rent, specialist accommodation, low cost home ownership, homes purchased to meet the affordable homes requirements of s106 agreements, and homes from the ‘second hand’ market.

3.11 Our experience suggests that in a minority of cases, right to buy has not led to successful outcomes. Evidence shows that households who have purchased are 2 – 3 times as likely to be in mortgage arrears (Ian Cole et al for CLG Select Committee, 2015) and our own experience of managing a mortgage rescue scheme, has shown that the majority of purchasers originally bought under the RTB. In addition we have seen the sub-letting of properties purchased under the RTB in the private rented sector, and have estimated that 12% of stock sold on our estates is now let in this way (as high as 25% in some areas). This often creates significant management problems on estates.

3.12 To ensure housing associations are in a position to prevent inappropriate sub-letting and can promote sustainable home ownership to those who can genuinely afford long-term housing costs associated with both purchase and maintenance, the detailed voluntary RTB deal should:

· Permit the use of restrictive covenants requiring consent for sub-letting (not to be unreasonably withheld). These would fall away in the case of a mortgagee in possession.

· Encourage the use of an ‘affordability test’ (along the lines of the HCA’s affordability calculator for shared ownership) to ensure that a tenant enjoying the benefit of such a significant publicly funded discount, is at least in a position where they can sustain home ownership.

3.13 Clause 58 of the Bill allows to the Secretary of State to publish ‘home ownership criteria’ against which housing associations will be monitored by the regulator.

3.14 In developing such criteria, it is essential that the Secretary of State/Regulator consults with the sector and sector bodies, and does not seek to impose these criteria through the regulatory standards – in other words impose what would have been a statutory scheme through regulation. Any criteria should be developed within the spirit of a voluntary agreement, being flexible and outcome based.

Reducing regulation: Chapter 3

3.15 We welcome the powers given to the Secretary of State in clause 78 to reduce the regulation of housing associations though amending the Housing and Regeneration Act 2008. We note that this will be achieved through regulations rather than primary legislation, and would urge extensive consultation on specific proposals to redefine the relationship between housing associations, the regulator and Government.

3.16 The reclassification by the ONS of housing associations as ‘public, market producers’ for debt and accounting purposes, demonstrates the risks associated with changing the regulatory and legislative settlement for housing associations incrementally. We are reassured by the Secretary of State’s immediate statement committing Government to creating the conditions for a reversal of the ONS decision, but suspect this will not be straightforward, particularly given other ways in which Government is proposing to directly influence the income and assets of housing associations, not least through this Bill. These were not taken account in the ONS’s decision, and may ultimately push the sector even further away from a private sector reclassification.

3.17 Whilst we would encourage the Secretary of State to use the deregulatory powers set out in this Bill to reduce the short term regulatory burden on housing associations, for instance by removing elements of the disposals consent and grant recycling regimes to support right to buy replacements, in the longer-term we believe that a far more fundamental and open review of the regulatory settlement is required which directly involves housing associations, trade bodies, the regulator and lenders. Their requirements need to be very carefully balanced, not least those of lenders whose positive view of the sector has been underpinned by the current regulatory regime.

High income social tenants: Mandatory rents (known as Pay to Stay) Chapter 4

3.18 The introduction of a mandatory ‘Pay to Stay’ under powers established in Chapter 4 of the Bill will be highly challenging and it is essential that any scheme is designed to ensure that it does not introduce perverse work disincentives, nor prove administratively cumbersome.

3.19 On the face of it this policy seems fair, however we would seek to make specific proposals to ensure:

the income threshold is set at a level which is reasonable given the policy objective, and does not penalise low income working households or act as a work disincentive. The other alternative (less preferable) would be to introduce tapers.

the administration of the scheme is simple, and does not place an undue burden on landlords, who do not hold verified, real-time income information

the system is not introduced retrospectively for existing tenants

3.15 A recent sample survey of Riverside tenants has confirmed that the number who earn above the proposed thresholds, is likely to be very small, with as few as 2% of households earning above £30,000 outside London and less than 1% earning over £40,000 [1] in London. This is lower than a national estimate of 7% recently published by the Institute for Fiscal Studies, and is likely to be an underestimate given that this income data is self-declared.

3.16 However whilst the numbers may be relatively low, for those affected the impact is likely to be very high and vary significantly across the country. Comparing two local authority areas, Liverpool and Bromley, shows the difference an increase to market rent could mean for our tenants. At present a move to a market rent for a household at the £30,000 threshold living in a 3 bedroom house in Liverpool would result in a weekly increase of £35 (an increase of 38%). However for a similar family (now earning £40,000) living in a Riverside home in Bromley this would mean a staggering increase in weekly rent of £254, or 201%. This would mean that the household would pay around 50% of their gross income on rent, significantly above the accepted affordability threshold of 30% which is usually applied to net income.

3.17 An increase in rent of this scale would create a huge disincentive for tenants to increase their hours of work, improve their job prospects or take a rise in salary, particularly if earning close to the income threshold.

3.18 This simple example shows that the proposed thresholds are inappropriately low and can hardly be described as ‘high income’. To further illustrate this we have compared a gross annual household income of £30,000/£40,000 against the income distribution in Liverpool and Bromley for a household comprising a couple with two children (who would normally occupy a 3 bedroom house) using modelled data provided by the Cambridge Centre for Housing and Planning Research. This shows that in Liverpool, a household income of £30,000 lies at the 24th percentile of the income distribution (ie within the lower quartile) and in Bromley £40,000 per annum is at the 28th percentile. Treasury figures themselves confirm that at a national level, the gross median household income for a couple with two children is £27,000 per annum at the second decile of the income distribution, and £32,300 at the third decile. This suggests that £30,000 is probably around the lower quartile. In addition, it is worth reflecting that after 2020, when the new National Living Wage has reached £9 per hour, a gross household income of £30,000 would be achieved by one household member working 35 hours per week at the Living Wage and a second household member working 29 hours.

3.19 For these reasons we consider the proposed thresholds to be too low and would propose a flat £50,000 threshold (index linked to earnings), or alternatively a more sophisticated ‘equivalised’ approach where the threshold varies both by household composition and region. This would bring ‘pay to stay’ in line with recently introduced child benefit rules, where an income of £50,000 triggers recovery through the tax system.

3.20 An alternative would be to apply tapers so that rent gradually increases once household income exceeds the relevant threshold, although this would introduce considerable complexity into the system and any fair taper system would need to recognise that regional variations in incomes and rents operate on completely different scales.

3.21 The fair and efficient administration of a system will also be challenging and Government should seriously consider implementing ‘pay to stay’ through the tax system, given HMRC’s access to real time income data. A housing association/local authority administered scheme would prove administratively complex and expensive. Landlords do not collect and update real time income information, and would have no real means of verification. When the voluntary scheme was introduced earlier in the year, Riverside considered the cost of maintaining this information and estimated it could be around £125,000 - £300,000 per annum depending on scheme design.

3.23 Any system based on historic income (for example relating to the previous tax year) would be fraught with difficulty. With the rise of zero hours contracts, self-employment and irregular income, without appropriate safeguards it would be possible for a so called ‘high income tenant’ (determined by their income perhaps 18 months previously) to pay a punitively high rent until the point where they could demonstrate a sustained fall in income. For low income households this significant time lag between income and rent changes could lead to hardship, and perversely could result in significantly higher housing benefit/UC costs in the period during which a market rent is being charged, but income has dropped.

3.24 In addition it would not always be possible to increase rent quickly for a tenant earning over the threshold. Rent can only be varied annually in accordance with the tenancy agreement, and many ‘closed clause’ agreements have a cap on the annual increase embedded (in the case of Riverside a maximum of 10% pa). This would present a real practical difficulty in implementing a scheme for existing tenants without varying their tenancy agreements, which cannot be undertaken unilaterally.

3.25 Introducing a credible mandatory ‘pay to stay’ scheme is likely to prove controversial. Long standing tenants who have strived over many years to change their circumstances may perceive that they have been ‘punished’ (potentially heavily so) for improving their life situation in the past with no knowledge that they could be penalised in the future. They may have worked and brought up a family in what they consider to be their home, and yet still be well short of earning the level of income that would make home ownership a realistic prospect. Inevitably these tenants would feel aggrieved at the introduction of the scheme, and the negative PR generated could become a major distraction for Government.

3.27 For this reason it would be far more straightforward and fairer not to apply the policy retrospectively, but to introduce it to new tenants only from 2017, and only then after a period of thorough preparation so that appropriate systems can be put in place with new tenancy agreements to enable greater flexibility in rent variation. New tenants would be aware of the ‘deal’ from the outset and so would start their tenancy with a completely different set of expectations.

3.28 In the case of Riverside (and probably for most landlords), the additional income foregone through such an approach would be modest, particularly once offset against administrative costs.

November 2015


[1] These are the proposed income thresholds outlined in the budget

Prepared 17th November 2015