Posted by: Jules Birch08/05/2012
The maths involved in the CLG committee’s new report on the financing of new housing supply is depressingly simple.
Add newly arising need to cope with population growth (232,000 homes a year on the latest estimate) to the backlog of existing need (1.99 million households in 2009), then take away the completions in 2011 (109,000) and you are left with a huge gap in provision. Even if private housebuilders succeed in increasing their output from last year’s miserable 82,000 to the maximum they managed over the last 20 years of 150,000 (a very big if) the gap will still be huge and the backlog will still be growing.
So it’s little wonder that the committee admits there is ‘no silver bullet’ in its report, that it ‘suggests that potentially radical changes of policy and alternative sources of finance will be needed if housing supply is ever to reach levels of demand’ and that while it welcomes the housing strategy as a start it is sceptical about many of the glib solutions offered by Grant Shapps.
The report follows extensive hearings with witnesses from across the UK housing world and beyond, including a visit to the Netherlands to see if there are lessons to be learned from the Dutch approach to housing. The idea is that bridging the gap will require an increased contribution from all of the familiar sources and some that are unfamiliar too.
On private investment, the government already has a review of the barriers to housing’s version of Waiting for Godot: institutional investment in built to let. Yet while there was backing for the idea from a wide range of witnesses, there was still doubt about what Nick Jopling of Grainger called the three main barriers of ‘scale, suitability of stock and yield’. For all the innovation, for example by Manchester and its pension fund, and all the talk of using public land and waiving section 106 requirements, the yield problem remains. In other words, house prices are too high in relation to achievable rents.
Other options for private investment include institutions backing moves by housing associations into private renting (or even social renting too) and further exploration of ideas for a Housing Investment Fund for housing associations and co-operative housing. Despite scepticism from Shapps, the committee also likes the idea of a Housing Investment Bank.
However, on the private rented sector, the committee heard warnings of ‘large scale disinvestment by landlords’ because returns are too low without capital appreciation (those house prices again). One possible solution might be tax simplification linked to professionalisation of the sector, another might be the British Property Federation’s idea of Housing Zones designated by local authorities with local tax reliefs.
On affordable housing delivery, there’s plenty of scepticism from the committee about whether affordable rent can be sustained beyond 2015 and whether (as Shapps claims) it will really have no impact on the housing benefit bill. Significantly, the committee calls for ‘a rebalancing of subsidy arrangements away from housing benefit can back to bricks and mortar’, which would put the priorities of the last 30 years into reverse.
However, the committee also expresses concern about two other government policies that could threaten affordable housing investment. Plans to give developers the power to force local authorities to reopen section 106 agreements are ‘contrary to the government’s professed commitment to localism’. And as for plans to introduce direct payment of housing benefit to tenants ‘there is a clear risk that these arrangements will have a detrimental effect on providers’ capacity to invest in new housing supply’ and the committee says the government should only proceed ‘when any issues identified by the pilots have been fully resolved’.
On housing associations, the committee is enthusiastic about retail bonds but more sceptical about proposals on historic grant. It notes warnings that writing off the grant could increase borrowing costs and converting it into equity would create a for-profit sector. There is also the Dutch experience of giving associations financial independence from government: a mix of positive points about financial performance and more negative ones about associations straying too far from their core role and the risk taking that resulted in the largest Dutch association losing £2 billion in a derivatives deal.
The committee welcomes housing revenue account (HRA) reform for local authorities but says the government should lift the cap on borrowing and allow the trading of headroom between authorities. Both of these ideas have been rejected by Shapps so far. More radically the committee says the government should look again at reform of the public sector borrowing rules (supported by Conservative Westminster City Council) and at easing restrictions on councils’ use of bond finance (supported by Birmingham City Council, which was Conservative-led until last week).
And the MPs are also highly sceptical about claims by Shapps about the right to buy. ‘We are not convinced that the government will deliver on its plans for “one-for-one” replacement of additional properties sold under the new proposals, especially if the discount cap is set as high as £75,000,’ it says. ‘We are also concerned that the proposals will lead to a reduction in the country’s social housing stock, with social housing being replaced by homes for Affordable Rent.’ Instead it wants ‘like for like’ replacement of social rented homes, with extra government funding if necessary, and says individual local authorities should be able to apply for an exemption from the right to buy where they can demonstrate that housing is limited an d cannot easily be replaced.
On owner-occupation, the committee notes a number of concerns about NewBuy: that it will simply reduce the mortgage finance available elsewhere; that it could lead to negative equity for buyers; and that it excludes smaller builders. There is support for Shapps’s plans for self-build, with the committee noting that something on the scale of the programme it saw in the Netherlands could result in up to 150,000 homes over five years, but that there are still barriers to overcome with lenders and local authorities.
As that quick survey hopefully shows, the committee’s report ranges far and wide over every conceivable way of financing new housing supply (with the exception of quantitative easing for housing). It should be essential reading for anyone involved in all sectors of housing because we are going to need a contribution from all of them to stand even a chance of bridging that supply gap.
The committee argues, probably rightly, that there is no ‘silver bullet’. However, what it does not identify, after collecting together all the ordinary bullets, wooden stakes and strings of garlic on offer is the identity of the vampire. To my mind, the big problem wearing fangs and a black cape is that house prices (and rents) are too high. Financing new housing supply would be an awful lot simpler – and cheaper – if it happened alongside measures to put that creature of the night back in its coffin.
From Inside edge
Housing commentator Jules Birch puts the latest news in context