All posts from: March 2009
The pollyannas are beginning to show their faces again after Bank of England figures yesterday showed a surprise 19% rise in new mortgage approvals between January and February. The total was the highest since last May.
The Association of Residential Letting Agents (ARLA) was playing the glad game too yesterday too with a survey showing that more landlords are buying property than selling it for the first time in two years.
But house builder Bellway wins the pollyanna prize with its annual results press release this morning. It said its visitor numbers and reservation levels in the first 11 weeks of 2009 were improved on the last five months of 2008.
But that rather curious comparison - visitor numbers traditionally surge in the spring - reveals a real determination to look on the bright side. The fact that reservations are only running 13% below last year’s levels was seen as good news because it could have been even worse.
And Bellway’s result concealed plenty of other stats to keep any Eeyore out there happily miserable. ‘Virtually every’ private reservation last year relied on sales incentives, the group wrote off £66.3m on the value of land and other assets and house prices are down 25% on their peak and up to 40% depending on the location and site.
The other surveys also had some Eeyore factors. More than one in five ARLA members reported that at least one property on their books was being repossessed each week.
And the February mortgage approvals total was still 44% lower than in February 2008. The most level-headed analysis this week came from Richard Donnell of Hometrack after its monthly survey showed a slowdown in the rate of house price falls plus rises in the number of sales agreed and the percentage of asking price achieved.
‘While market conditions remain extremely tough, and the economic outlook is far from rosy, the net result is that agents are currently marking down prices less aggressively than they were in the autumn when the turmoil in world markets was at its peak,’ he said. ‘This situation could well reverse in the near term as much still depends upon improved consumer confidence, a gradual recovery in mortgage lending and greater stability in the economic outlook.’
Things may have stopped getting worse but it does not follow that they will automatically get better. With forecasts of another million unemployed and another 75,000 repossessions this year, a persistent shortage of lending and continuing expectations that house prices have further to fall, it’s still a struggle to always look on the bright side.
It may be small-fry by comparison with Northern Rock and HBOS but the failure of Dunfermline Building Society raises yet more worrying issues about the UK housing finance system.
The first assumption to be blown out of the water is that building societies are more prudent than banks.
Risky commercial loans are thought to have been the major factor in its demise. However, sub-prime mortgage acquired from GMAC and Lehman Brothers are believed to have been another.
Only a year ago its chief executive was claiming: ‘Dunfermline Building Society is a financially robust, profitable and well-capitalised institution and has absolutely no exposure to sub-prime lending.’
The second assumption to go is that when one of them gets in to trobule other building societies will ride to the rescue.
Efforts have been underway for some time to organise the sort of deal that saw the Derbyshire and Cheshire societies bought by the Nationwide just six months ago.
They failed. Under the deal announced this morning, the Nationwide will take over the savings book, the prime mortgage book and the head office.
The commercial loans and the acquired loans, which are thought to be a mixture of buy to let and self-certified mortgages, are being taken over by the taxpayer.
Which is confirmation that a third assumption, already shaky, has now gone too.
This is that the sub-prime crisis is related to the American housing market and not ours.
Last week it emerged that the toxic loans we are insuring for HBOS include not just the dodgy US-linked mortgage securities it bought but all of its buy to let and high loan to value UK loans too.
All that would be bad enough - but the undermining of a fourth assumption looks like even worse news for the housing sector. This is that financing social housing represents a secure, good value business for lenders.
Dunfermline was a leading lender on social housing in Scotland. The Nationwide is one of the biggest social housing lenders in the UK.
And yet Dunfermline’s £500m social housing lending book is being transferred not to the Nationwide but to a new institution called DBS Bridge Bank, a ‘bridge bank’ owned by the Bank of England, pending a sale.
Nationwide’s statement on the Dunfermline acquisition this morning said that: ‘This transaction excludes high risk assets: commercial loans and some residential loans were not transferred.’
At first sight, that implies that it now considers the social housing loan book a ‘high-risk asset’. The idea that social housing loans need to go with the bad bits of Dunfermline like buy to let and self-certified mortgages rather than the good bits like prime mortgages would blow yet another assumption out of the water.
The situation is thankfully not that alarming. The BBC’s Robert Peston reports this morning that social housing was not included because it did not fit with Nationwide’s other operations. That seems hard to believe given that it is already one of the biggest lenders to social housing.
The truth seems to be more that Nationwide could not agree a price with the Treasury - but the implications and consequences of that are still worrying.
First, lending on social housing is not worth as much to banks and building societies as we all think. Second, the transfer to DBS means that private finance is now public finance - work that one out. Third, a deal to restore it to the private sector only seems to make sense for an existing lender to social housing - reducing competition in the sector still further.
Tenants of landlords who get repossessed must feel like they have become characters in a Franz Kafka novel.
Losing your home when you’ve done nothing wrong and paid your rent on time is bad enough. Having to know that any letter that drops through your door addressed to ‘the occupier’ could in effect be an eviction notice is even worse.
But being aware that up to 8,000 people could be in that situation this year must surely mean that the joint campaign launched today by Citizens Advice, Shelter, Crisis and the Chartered Institute of Housing is pushing at an open door.
Any of them could face the same situation as a woman who arrived back from holiday with her two kids and tried to get in to the Surrey flat she’d rented for the last 10 months. The locks had been changed and a notice was stuck to the door announcing that a repossession order had been made. She had to wait for two hours for someone from the bank to turn up and was then given ten minutes to collect a few possessions, including her son’s GCSE work. She made repeated visits to the lender asking when she could get in to collect the rest of her belongings only to be told that they were ‘unable to contact the necessary person’.
A tenant in her position will be in a slightly better position from April 6 - but not much better. Rather than a letter addressed to ‘the occupier’ at least 14 days before any court hearing, the lender will have to send a notice within five days of receiving the date of the hearing. But it will still be addressed to ‘the occupier’ and the tenant will still have no rights.
And that’s it - despite everything the government has done to improve the position of owners facing repossession. Housing minister Margaret Beckett seemed badly briefed about the real position through a stinking cold on the Today programme this morning.
In the second half of 2008 there were 2,300 buy-to-let repossessions. The four organisations estimate that figure could rise to 8,000 in 2009. However, there are also an unknown number of cases where owners have rented out their home without informing their lender or getting its consent - tenants in that situation have even fewer rights.
The four organisations want changes in the law to give the courts discretion to defer possession for a limited period, taking into account the circumstances of tenants - including whether there are children or vulnerable people in the household and their economic circumstances. There is already a procedure used by lenders who do not want to repossess a home whereby they can ask the court to appoint a receiver of rents.
They also want improved procedures to make tenants aware of possession cases, including notice from the courts and the lender, information on where to go for advice and marking a message such as ‘your home is at risk’ on the envelope.
The Council of Mortgage Lenders responded sympathetically to the campaign, especially to the call for improved procedures. It looked forward to ‘working with the government and advice agencies on effective measures to help the modest number of tenants affected’ but did not comment on the need for changes in the law.
Banks and building societies that chose to give buy-to-let mortgages did so knowing that the homes would be rented out. That means they have a moral responsibility to the tenants who were effectively repaying their loan - and the law should be changed to ensure that they meet it.
Ever since the credit crunch first hit in September 2007 the case for more government investment in housing has been overwhelming. Now it seems it will never happen.
Reports this morning say that Gordon Brown has all but ruled out the idea of a new fiscal stimulus in next month’s Budget. The best that we can hope for, according to aides quoted in the Financial Times, is ‘targeted measures’ that will not come anywhere near the extra £6bn called for by the 2020 Group.
While investment through the Homes and Communities Agency is set to peak in the next two years, that was according to spending plans set before there was any hint of a credit crunch, let alone a collapse of private house building, a fall in the housing market wrecking housing associations’ finances and a surge in repossessions and social housing waiting lists. An organisation that was meant to deliver growth is instead having to salvage as much as it can from the wreckage.
The contrast with what happened in the last housing market downturn could not be greater. The 1992 housing market package made £577m available to housing associations to buy up 18,000 unsold homes. The equivalent at today’s house prices would be more than £3bn.
This time around the government has announced a series of measures culminating in November’s pre-Budget report. However, none of it was new money - instead £775m was brought forward from 2010/11 to be spent this year and next.
Without a fiscal stimulus that means investment will start to be cut in just over a year’s time. And forecasts say that, whoever wins the next election, spending will fall off a cliff from 2011 onwards.
In the meantime, increased grant rates will mean fewer rented homes. The downturn in the property market means fewer low-cost ownership homes and scanty profits available to cross-subsidise the rented programme.
To my mind, a fiscal stimulus still makes obvious sense in housing terms. Depending on how it was designed, it could make perfect financial sense too, since homes built for rent now could later be sold at a profit and buying land and assets in a downturn surely represents long-term value for money.
But the cavalry is not coming. Which makes reform of the public borrowing rules for local authorities even more important than it was before and devising a way to persuade institutional investors to make a major move into residential property even more urgent.
The report by Liberal Democrat MP Matthew Taylor had recommended a trial of new planning rules in one or more of the National Parks limiting change of use of full-time homes to part-time occupation as second homes or holiday lets.
It was hardly a radical recommendation - many of the national parks are already doing much the same on new homes - but it was the least that people in scenic areas of England were demanding. Only last week the issue hit the headlines when vandals daubed slogans on new luxury homes in one Dorset village.
The government’s own rural advocate, the Commission for Rural Communities, says that lack of affordable housing is ‘the single most pressing issue faced by rural communities’.
‘In many rural areas it has now become almost impossible for the local postman, farm worker or teacher to be able to buy a home,’ said CRC chairman Stuart Burgess. ‘Despite the recession and falling house prices, tighter lending and a requirement for higher deposits mean that for many rural people an affordable home remains a distant dream.’
The government accepted almost all of Taylor’s recommendations apart from the one on second homes. According to the Communities and Local Government department statement: ‘The review itself acknowledged the real issues of practicality such a policy may face, and the government believes there are more innovative ways of providing the affordable homes that rural communities need without interfering with the legitimate rights of second home owners.’
The report did indeed acknowledge ‘real issues of practicality’ but concluded that there was a case to be made for limiting further conversion of full-time homes into second homes and holiday lets in the most stressed areas. As I read it, that would leave people free to buy properties that are already second homes - just not free to out-bid locals for new ones.
Seen from Westminster the rejection of that idea may seem to make some kind of sense. But seen from villages where up to half of homes are empty most of the year and which can no longer support basic shops and services, the government’s refusal to even consider a trial looks like craven surrender to the leader writers of the right-wing press.
Depending on which housing costs are included ‘inflation’ either fell to zero last month or it rose to 3.2%. The difference comes down to whether you pay a mortgage or a rent.
It’s little wonder that people feel confused when they try and relate the official inflation rate to their own circumstances. Mortgage payments fell an astonishing 34% in the year to January - and have fallen again since. Private rents are also falling according to anecdotal surveys. But council rents are still due to go up 3.1% next month even after the government’s u-turn and housing association rents could still rise by 5.6%.
I used the personal inflation calculator on the BBC website to find out the difference, using the same crude estimates of monthly household spending combined with more accurate estimates of average mortgage and rent costs.
The results were startling. The average home mover, with a £117,000 mortgage, had a personal inflation rate of -6.4%. The average first-time buyer, with a £97,000 mortgage, saw a rate of -5.2%.
However, inflation was +3.5% for a local authority or housing association tenant with a rent of £300-£350 a month. That leaves them facing an inflation rate 10% greater than homeowners - and that is before the latest round of mortgage rate cuts.
[UPDATE 12:00 Doing the same sums using the updated February inflation figures produces an even greater disparity. Annual inflation is -8.9% for the average home mover and -7.4% for the average first-time buyer but still +3.1% for social tenants.]
The consumer prices index (CPI) is the one the Bank of England uses when it sets interest rates. The CPI should be 2%. When it rises to more than 3% or falls to less than 1% the Bank has to write a letter of explanation to the Treasury.
So, given that the Bank has just cut interest rates by 0.5% for three months in a row, it must be the one close to zero? Er, no actually it’s the one that has just risen from 3.0% to 3.2%.
The retail prices index (RPI) is the one that fell to zero. The difference is largely explained by the fact that it includes housing costs whereas the CPI does not.
The September RPI rate is used to set council and housing association rents. In September 2008 it was 5.1%, hence the need for a government u-turn. By this September it could have fallen as low as -4%, leaving housing associations with a huge potential headache.
The contrast between home owners and tenants has arguably never been as stark as it is now. The difference in their personal inflation rates will only grow bigger as further mortgage rate reductions and next month’s rent increases feed through. Little wonder that some tenants are demanding a rent freeze.
Home owners in work have seen a dramatic improvement in their financial position in the last six months. Tenants in work are seeing their rents still rising and, as we enter the uncharted territory of deflation, could also see pay freezes and even cuts.
One after another cherished government targets are falling by the wayside. Now house builders and surveyors say one of the boldest ones - zero carbon new homes by 2016 - is unrealistic and unviable.
In its response to the consultation paper on zero carbon, the House Builders Association says the costs of that and other initiatives such as lifetime homes are putting too much pressure on the industry and that building rates could remain low for decades - which in turn threatens government supply targets.
And the RICS tells the government that it is not realistic. It says that building zero carbon homes is currently to expensive and ‘it would be unrealistic too expect all homes to achieve these standards’. The government should instead set a new target of building all new homes to 70% less carbon.
While the ultimate aim should still be a 100% reduction in emissions from new homes, its external affairs director Gillian Charlesworth argues: ‘We believe that, given the financial constraints caused by the downturn, Government should be aiming to maximise reductions in carbon emissions in a cost effective manner. RICS wants to see achievable solutions. Resources should be allocated to lower cost measures that will provide maximum insulation to homes. This would be a pragmatic solution towards reducing our carbon footprint, given the current recession.’
Both make some sensible points about technical aspects of the consultation but backtracking on the 2016 target would surely send out all the wrong signals about the government’s policy on climate change in the week that its chief scientist warned that climate change and a rising world population will leave the world facing a ‘perfect storm’ of problems by 2030.
Questions still seem to be resolved about the treatment and generation of renewable energy and the government still needs to tackle the fact bigger problem of carbon emissions from existing homes. However, the government would do far better to listen to the constructive responses of groups like the RIBA and UK Green Building Council.
Squeals of outrage from estate agents, mortgage brokers and the Daily Telegraph are pretty good arguments in favour of mortgage regulation as far as I’m concerned.
But yesterday’s Turner review put off a decision on the lending limits that were getting them hot under the collar until September, when the Financial Services Authority (FSA) will publish a separate paper on the arguments for mortgage regulation that will also look at second charge and buy to let lending
The review should leave nobody in any doubt about the role that excessive lending played in the boom. Total mortgage debt in the UK rose from 50% of GDP in 1997 to more than 80% in 2007. Although UK sub-prime lending was on nothing like the scale seen in the US, between 2005 and 2008 in particular loans were made to families who would never have qualified before. Buy to let grew from nothing to 26% of lending in 10 years. And the funding came from a massive expansion of securitisation.
Mortgages of greater than 90% loan to value (LTV) only increased slightly in the peak boom years between 2005 and 2007 but the proportion of loans greater than 100% doubled from 3.9% to 7.4%. Meanwhile, the number of loans worth more than 3.5 times the borrowers’ income grew from 20% to 30%.
As the review comments: ‘Both some customers and some providers relied imprudently on the assumption that ever rising house prices would reduce the risks otherwise inherent in high LTVs. Some customers assumed that there would always be a supply of new remortgage offers to allow refinancing when initial low interest rate periods ended; and some providers assumed that initial LTVs would fall rapidly over the contract to reduce their risks.’
On the face of it the arguments for regulating high loan to value loans and income multiples seem overwhelming - especially since it does not mention the widespread collusion between buyers, brokers and lenders to accept exaggerated or self-certified incomes. They would protect borrowers and banks alike and put a brake on rapid credit growth and excessive house price rises, which both feed back into bigger booms and bigger busts.
Turner sees two main arguments against restrictions on lending:
- they would disadvantage first-time buyers who cannot rely on family money to pay initial deposits. ‘In both the UK and the US, rapid growth in mortgage credit was seen as driving a democratisation of home ownership.’
- people denied high loan to value mortgages might end up relying on more expensive credit cards instead.
Yes, first-time buyers would be disadvantaged in the short term but restrictions on lending would gradually bring house prices back within reach. And, as Turner argues, restrictions on loan to value could even be varied according to the availability of credit and the state of the housing market.
With no restrictions on lending, government support for home ownership merely adds fuel to the fire of higher house prices until eventually boom turns to bust. ‘Democratisation’ is not much use if the right to vote/own is accompanied by a repossession order.
In a regulated market, government support for home ownership would make sense. The funding could even come from taxing the inherited wealth of the housing ‘haves’ - and that would simultaneously reduce the gap between first-time buyers with family help and those without.
The main obstacle in the way of that is political. Is any leading politician brave enough to say that lower house prices are a good thing? That mortgage regulation is a key way of achieving that? And that the low taxation of housing by comparison with other forms of investment was a major cause of the boom and bust?
The time to make those arguments is now - when the electorate can see the consequences of excessive lending all around them. By the time the FSA gets round to acting on the proposals it makes in September and the politicians are focussed on the next election the moment could be gone.
I’m all in favour of cutting down on jargon. My eyes glaze over at the thought of service users, coterminosity and holistic visions. But I wonder if the Local Government Association may have bitten off more than it can chew with the list of banned words it launched today.
The list is the latest stage in the campaign against meaningless terminology that the LGA launched last year. But how, for example, will local authorities be able to work with their ‘stakeholders’, sorry, other organisations with big gaps in their vocabulary?
Will they turn up for a meeting with Sir Bob Kerslake only to tell him that ‘single conversations’ with the Homes and Communities Agency are out. He may be after ‘meaningful dialogue’ but they will only be allowed to give him a ‘talking to’.
How do they expect any ‘leverage’ with poor Hazel Blears when her favourite topics like ‘cohesive communities’ and ‘citizen empowerment’ are off the agenda?
And when the inspectors from the Audit Commission come calling will they be hissed at when they say ‘benchmarking’, ‘baselines’, ‘best practice’, ‘outcomes’ or even ‘inspectorates’?
Much as I sympathise with the campaign (‘horizon scanning’ anyone?) I suspect it’s going to be an uphill struggle - even within the LGA’s own offices.
Only two days ago, the traitorous members of its safer communities board were raising ‘cross-cutting’ issues about young people and commending ‘a holistic community safety perspective’.
Two weeks ago authorities like Lancashire, Greenwich, Tower Hamlets and Hackney were linguistically betraying their association by accepting ‘beacon’ awards.
LGA leader Margaret Eaton said today that: ‘The public sector must not hide behind impenetrable jargon and phrases. Why do we have to have ‘coterminous, stakeholder engagement’ when we could just ‘talk to people’ instead? We do not pretend to be perfect, but as this list shows, we are striving to make sure that people get the chance to understand what services we provide.’
But perhaps she should have a word with her speechwriters. Back in November she was telling a conference on preventing violent extremism: ‘The LGA’s ambition is to see an empowered local government sector creating and leading strong, safe and cohesive communities that are resilient to the threat of violent extremism.’
The core message, sorry, main point was that: ‘We need councillors to lead mainstreaming by setting a broad strategic vision for their council that is not constrained by policy silos.’
When the Conservatives start pushing for increased rights for private tenants, you know something’s up.
Shadow housing minister Grant Shapps wants a package of measures to protect tenants of repossessed buy-to-let landlords including immediate implementation of an increased notice period of five to seven weeks for repossession hearings. He says tenants are the ‘forgotten victims’ of the recession and says up to 10,000 of this year’s 75,000 repossessions could involve tenants.
The Conservatives would also work with lenders to allow tenants to remain in the property under licence pending sale, ask them to extend the notice period between the repossession order being made and eviction and encouraging the courts to allow tenants to be heard at repossession hearings.
But the practical impact of bringing forward the increase in the notice period by a few weeks and working with lenders would surely be limited. And isn’t easier eviction for private tenants a key tenet of Conservative housing policy? Six-month assured shorthold tenancies introduced under the 1988 Housing Act were a key precondition for the subsequent boom in buy to let.
The Association of Residential Letting Agents (ARLA), which invented buy to let, criticised the Tories for ‘failing to understand how the rental sector works’.
‘Though ARLA, of course, welcomes any additional support for tenants in these tough times, the proposal to bring forward the planned extension of repossession notice to tenants will, in effect, be almost worthless because it comes at the wrong side of the repossession being granted,’ said operations manager Ian Potter.
‘Tenants will receive up to seven weeks’ notice of an order being sought but that assumes that a repossession will be granted – and if it isn’t, and tenants walk away from the property, they will have walked away from a legally binding contract. It would be far more beneficial if the extended notice was granted after a repossession had been granted, which would allow tenants good time to find another property.’
ARLA says it would be better to insist that local authorities make more use of empty dwelling management orders and to encourage more lenders repossessing buy-to-let property to let tenants stay and use the rent in receivership procedure.
Neither of those proposals would do much to help the unknown number of tenants who can be evicted if landlords have rented out their property without telling their lender.
Tenants need to check whether the landlord really does have the lender’s consent to rent and that check should also be a basic part of a letting agent’s service. However, as ARLA complains today, the recession has led to a flood of unregulated estate agents into the rental sector with little experience of the complex legislation.
However, the proposals won’t do much to help buy-to-let tenants either. Even after the increased notice period, they will have to know that any letter that drops through their door addressed to ‘the occupier’ could be in effect an eviction notice.
Without getting into the wider debate about security of tenure, this may be an obvious point but any buy-to-let lender made their loan knowing that the property would be rented out. Seems to me that the quid pro quo for that should be that if they repossess it they should have to sell it rented out too - or at a minimum give the same notice that a landlord would have to give under the tenancy.
Such a move be would smack of the sort of regulation that lenders, the Conservatives, and ARLA (apart from mandatory licensing for letting agents of course) oppose. But all of them were perfectly happy to take the credit (and/or the profit) as private renting and buy to let boomed - and they should not be allowed to leave tenants to take the consequences of the bust on their own.
It’s only March but I reckon that the contest for PR disaster of the year is already over. And the winner is…Arena Housing.
The Liverpool-based housing association sent out leaflets to its tenants showing a lamb in a sunlit field surrounded by daffodils - complete with the message ‘ARE YOU FOR THE CHOP THIS SPRING? PAY YOUR RENT ON TIME’.
One anonymous tenant drew comparisons with The Godfather and The Sopranos in the local paper: ‘The Mafia and other criminals who wish to intimidate their victims have traditionally used a coded message of an animal about to die, or dead.
‘Arena Housing is one of the largest providers of social housing in the North West. They have a particular duty to support the vulnerable and elderly in their care. Instead of caring they have today adopted an attitude of confrontation with their tenants by sending to all, including those who have a perfect payment record, a threatening picture card.’
Thankfully the leaflet did not quite go as far as horses’ heads or fish wrapped in newspaper, but it still prompted a grovelling apology from Arena on its website. It said it had sent out 500 copies to tenants and also put copies in its reception areas.
‘We acknowledge that we got this wrong and the leaflet should have never gone out. We would like to apologise for any offence caused and the leaflets have been withdrawn with immediate effect.
‘There have been three complaints, but before these we had already recognised we had made a mistake. We will write to everybody who received it to explain our error and publish an apology in our newsletter. Staff on the ground have been advised to let people know it was a mistake, and our internal procedures have been reviewed to ensure this doesn’t happen again.
‘Again we sincerely apologise.’
Housing associations and local authorities alike have been getting tough on rent arrears with eyecatching posters for years but Arena’s chastening experience could - and should - prompt them to think twice. What may have been acceptable when the economy was booming will look very different to tenants facing unemployment or short-time working - and rent increases at a time when inflation is about to fall below zero.
I wonder, for example, if Arena is still entirely happy with its winter 2008 campaign. The one that featured a snowman with a suitcase and the slogan ‘PAY YOUR RENT ON TIME. DON’T BE LEFT OUT IN THE COLD THIS WINTER.’
Can housing associations step into house builders’ shoes and deliver more new homes? Not if new figures out today are anything to go by.
The stats on new orders in the construction industry reflect the slump in private housing, with orders over the last three months down 55% on a year ago. So much, so obvious, but they were actually up a modest 5% on the previous three months.
But orders for public and housing association homes have also fallen off a cliff. The total for the last three months was 45% down on a year ago - almost as great a fall as in the private sector - and 43% down on the previous three months.
New orders reflect work that is in the pipeline and work their way through into construction output and then into housing starts and completions. So the signs are alarming for next year.
It wasn’t meant to be like this. The Homes and Communities Agency (HCA) was meant to usher in a new era of house building to help meet the government’s target of 3m new homes by 2020.
Instead, the HCA’s first two months (December and January) saw the lowest new orders for public housing in any two-month period since 2000. The housing budget then was still suffering from Labour sticking to Conservative spending plans in its first two years. 2000 as a whole was the second worst for new public housing orders in the last 25 years whereas 2009 is meant to be one of the highest.
While one month’s figures might be dismissed as a blip, clearly something worrying is happening when they send out the same message three months in a row. It’s possible there may have been a hiatus as the Housing Corporation gave way to the HCA and that all those plans we keep hearing about will come through soon.
It’s also possible, as I’ve mentioned before, that the fall in new investment is the result of funding being diverted into buying unsold homes from the private sector (and from housing associations themselves).
The HCA itself puts the fall down to the market downturn, with work stalling on mixed sites of private and affordable homes that are funded through section 106. However, those orders have already been placed. We are talking here about schemes that are only just going on to the drawing board.
The fall in orders coincides with the sudden change in lenders’ attitudes to housing associations in the wake of the collapse of Lehman Brothers in October and with the mounting realisation that associations will be forced to write down the value of land acquired at the peak of the market and their development model is ‘broken’.
But it’s becoming clear that it’s more than just the cross-subsidy of rented homes through shared ownership that no longer works. New mechanisms are needed - and urgently - to turn increased government investment into bricks and mortar.
Dismissed as ‘madness’ by a leading economist a week ago, there’s more bad news for shared ownership this week with a distinctly underwhelming assessment from lenders.
An article in the latest news and views from the Council of Mortgage Lenders looks at the overall position on low-cost homeownership and concludes that there are four key challenges:
* the wide range of schemes and the complexity of many of them
* undesirable features in some schemes that limit the underlying security of the property and undermine lenders’ ability to support them
* the small scale of some schemes and the cost of installing systems and training staff in them
* lack of reliable information on the risk and customer profile and the volume of transactions.
Homebuy Direct, the new scheme that allows people to buy 70% of a property and get the remainder as an equity loan split between a housing association and the developer, gets CML support but it warns that ‘so far, a relatively small number of lenders have formally agreed to participate in the scheme’.
That’s worrying given the extent to which housebuilders like Barratt seem to be relying on it for sales next year.
But it’s even more worrying that we are talking about the most popular scheme with the banks. The CML says that lenders prefer shared equity to shared ownership because the equity loan protects both them and the buyer from negative equity.
The banks effectively have to lend twice on shared ownership - once to the housing association to build the home, then to the family buying it. Until the crash, shared ownership and subsequent staircasing receipts were the engine of growth for associations but mortgages are now in short supply. ‘The small size of the market overall, and of individual loans, deters some lenders, and the number of firms participating is small,’ says the CML.
It complains that shared ownership is more complex than shared equity because there is no clear process for dealing with a borrower who cannot keep up with their payments. ‘That can lead to difficulties between the lender and the housing association in working out a solution if the borrower defaults. ‘
The CML also admits that a significant proportion of lenders in the Homebuy market are now requiring a deposit from borrowers - while some are cautious about lending on flats or new-build property.
As Labour MP Gordon Banks said in an adjournment debate in parliament this week, that makes a nonsense of the scheme. ‘If a 30 per cent. state-funded and industry-funded shared equity scheme is available, it is no good for the lender to demand a 25 per cent. deposit on the remaining 70 per cent,’ he said. ‘That defeats the purpose.’
The CML says that even lenders with an appetite for low-cost home ownership - which means shared equity not shared ownership - have become ‘much more reluctant to consider anything approaching a 100% loan-to-value ratio’.
All of which makes me think that the National Housing Federation may be being too optimistic in its estimate that housing associations will build up to 45,000 homes for rent and low-cost homeownership in England in 2009/10. (And that’s the good news in its gloom-ridden forecast that total housebuilding in England will be just 70,000.)
And it increases the need for a rethink of what low-cost home ownership in general and shared ownership in particular are for. As the CML points out, homeownership has already declined from 70% of the population in 2006 to 68% now.
‘Does the government now actually believe that the rental sector is the expanding tenure of the future, and that home-ownership will continue to decline in the medium term? Without more research into the outlook for different tenures, it is difficult to see how lenders can take a strategic view of the low-cost home-ownership market.’
The biggest tribute that I can think of to Alan Walter is that the campaign that he chaired and worked for so tirelessly may need a new name.
In the days when most of the housing and political establishment seemed united in the belief that council housing was a thing of the past and that the future lay with stock transfer and housing associations, the name Defend Council Housing (DCH) summed up the message precisely.
Walter, who has died at the age of just 51, was determined to work against that consensus. The odds must have seemed overwhelming at the beginning. Once the Labour government had abandoned its early rhetoric about reviving council housing and come out against any change in the public borrowing rules, the stage seemed set for council after council to transfer their stock. Even where local politicians and tenants were instinctively against the idea the pragmatic choice appeared to be to vote in favour of extra resources to do up their homes.
DCH convinced the unions and increasing numbers of backbench Labour MPs with its arguments for a fourth option for council housing. Three years running the Labour conference voted for it too, only to be ignored by ministers. But DCH kept up the pressure and arcane aspects of local authority finance were turned into popular campaigning issues.
The tide turned in council housing’s favour tentatively after Tony Blair gave way to Gordon Brown and then decisively after the credit crunch turned the housing market boom to bust and revealed how reliant housing associations were on property sales. Suddenly local authorities were cast as the saviours of affordable housing rather than as relics of the municipalist past.
Back in the early noughties, when many pundits were predicting the death of council housing, you’d have got pretty long odds on the prime minister making a speech pledging to remove all barriers to local authorities building homes once again or the head of its main housing agency telling councils to prepare for the public borrowing rules to be changed. Yet both happened only a few weeks ago.
As DCH said yesterday: ‘It has been a collective effort of many, and Alan played down his individual selfless efforts, but he inspired and led in a way that contributed the binding glue of this collective.’
The debate is no longer just about defending council housing but creating it too. Alan Walter deserves much of the credit for that - even though I think he would be the first to say that the campaign has not won yet.
Do they hit their working tenants hard in the pocket by imposing rent increases of 5.6% (last September’s RPI plus 0.5%) when they know that inflation is now zero and the guideline rent increase for council tenants is 3.1%?
Or do they protect their tenants only to pile more pressure on their balance sheets knowing that the same RPI formula could force them to cut their rents in 2010/11 (because this September’s RPI could be as low as -4%)?
The TSA ‘underlined its commitment to ensuring that in these challenging economic times all social tenants receive an appropriate degree of protection on rent increases, whilst ensuring the financial viability of their landlord’.
But its statement amounted to a repeat of its previous guidance to associations ‘that the rent formula permits a maximum rate of increase’.
The TSA went on: ‘It is for landlords to set their rents within this maximum taking account the impact on tenants and future tenants and landlords’ financial commitments, which include their commitments to invest and raise service delivery for the homes they currently own and their commitments to build much needed new homes.’
Meanwhile it would continue to work with the government on 2010/11 rent levels ‘both in terms of its potential impact on tenants’ bills and the viability of Housing Association’s business plans’.
After the National Housing Federation’s long campaign to preserve associations’ ‘private’ status and independence from government interference it can hardly complain that the decision is being left to individual boards.
But I for one don’t envy them it. If they can spare time from considering their land write downs, how do they balance the interests of their tenants and their balance sheet? What do they do about the problem looming next year? What will they do about their chief executive’s pay? How will they answer tenants’ complaints that they are paying more than council tenants?
Some sort of two-year deal that protects finances and tenants alike seems sensible - and that seems to be what the TSA is hinting at - but will it be possible?
Impairment. Even the word is chilling. But it seems that housing associations are going to have to get as used to it as house builders.
Inside Housing’s revelation that 50 associations are planning to make impairment charges in their 2008/09 accounts indicates that their financial situation has deteriorated even more since lenders’ attitudes hardened in the wake of the collapse of Lehman Brothers in September.
One of the more gloomy chief executives I spoke to in the Autumn predicted a rash of write downs on landbanks but I don’t think even he would have predicted them on this scale. He also said that the big issue would be the banks using loan covenant breaches as an excuse to renegotiate loan books but thought that would happen next year if the situation did not improve - not be a real possibility this year.
As Crispin Dowler reports, associations can at least take some comfort from a ruling by auditors that they need not treat write downs in the same way as house builders because they are not short-term businesses. Some relief given that house builders’ write downs are expected to run to £1.6bn this year.
But it would be a mistake to assume the worst will be over when they finally decide what to include in this year’s accounts. According to the independent forecaster Capital Economics residential land prices fell 35% in 2008. But it is forecasting they will fall by 45% in 2009 and another 10% in 2010.
Past history does not offer up much comfort either. According to a book on the last boom and bust quoted on Brian Green’s Brickonomics blog: ‘Housing firms had to write-down land bought from 1987 to 1989 by between 70% and 80%.’
For 1987 to 1989 read 2006 to 2008? I couldn’t help thinking of that when I read Chris Wilson of KPMG’s take on the current situation. ‘During 2006, 2007 and 2008, the value of land was still rising - and that was exactly the time when housing associations were enthusiastically running around trying to buy land for more houses,’ he said.
Don’t despair, estate agents! At least you’re not as badly off as the Estonians.
On the day that the Bank of England cut interest rates to just 0.5% - a level inconceivable a year ago - a new survey of the European housing market by the RICS reveals that house prices fell across the continent in 2008. Only Greece, Holland, Italy in Switzerland saw small rises.
The UK saw the second biggest decline, with its 16% fall only beaten by the 22% seen in Estonia. France came third and Ireland, where prices were already falling in 2007, fourth.
The price falls were not confined to the countries that saw the biggest previous increases. Germany has seen its market drift downwards over the last few years thanks to its much larger rental sector and plentiful supply. However, the 2.2% price fall seen by the Germans in 2008 was actually an improvement on 2007.
Lack of mortgage availability was the key driver behind the price falls, according to the RICS, but the financial crisis hit different countries in different ways and at different times.
However, the UK is not alone in its painful readjustment from the lending and borrowing binge. In Ireland mortgage lending reached 135% of personal disposable income in 2006. The Netherlands had one of the highest mortgage to GDP ratios in the world and funded a quarter of recent lending through special purpose vehicles. Spain was Europe’s largest user of capital market to fund lending.
Significant over-supply of new homes is also a factor in the downturn in countries like Spain and Ireland, while countries in Eastern Europe like Hungary and Poland face an additional problem of currency devaluation while many mortgages are in foreign currencies.
Sweden went through something like this crisis before when a housing market crash in the early 1990s caused a financial crisis and eventual nationalisation of the banks. Prices then fell by 30%. They boomed for ten years until late 2008 but are now slowing rapidly.
As for those UK estate agents, figures from the Halifax (HBOS/Lloyds/the taxpayer) this morning make more glum reading. The bank raised hopes that the worst might be over when it revealed a 2% rise in prices in January. However, the February index shows a 2.3% fall. The Halifax index has seen only six monthly falls of more than 2% since it began in 1983 - and three of those have been in the last six months.
Bizarre? Confused? Not fit for purpose? Premature? Mishandled? Difficult to believe?
You don’t have to be a supporter of Boris Johnson, or agree with his housing policies, to find the ministerial criticism of him yesterday a little overdone.
I’m not exactly a huge fan of his First Steps plan to extend homeownership to all households earning up to £72,000 (all basic rate taxpayers) or of his plans to shift the emphasis of funding in London from renting to shared ownership. Both are pre-credit crunch relics of our dangerous obsession with homeownership.
But I do remember him proposing both in his manifesto to become London mayor almost a year ago - and being elected on it. And powerful, independent mayors being a Labour idea.
And I also remember the government almost following suit a few weeks later by making all first-time buyers with a household income of less than £60,000 eligible for subsidy that was previously restricted to key workers.
The plans Johnson actually announced yesterday seemed in line with government policy. Allocating £93m to kickstart five stalled development sites seems sensible. And the £42m of support for London & Quadrant’s Up2You programme is not just restricted to households below the government’s £60,000 threshhold, it also offers a choice between owning, shared ownership and sub-market renting.
A beaming Boris was even pictured at the launch yesterday alongside Sir Bob Kerslake of the Homes and Communities Agency and David Montague of L&Q.
Within hours though, Margaret Beckett was telling MPs that ‘the proposals in question were not put forward for proper scrutiny and agreement in advance, which does seem a rather chaotic way to continue’ while Iain Wright was telling them that ‘his proposals about affordable accommodation seem bureaucratic, burdensome and counter-productive, and I certainly think that the £72,000 limit is not fit for purpose and is somewhat elitist’.
Meanwhile their Communities and Local Government department was saying it was ‘disappointed’ and that Johnson had acted ‘prematurely’ with the funding announcement by the HCA’s London board, which he chairs.
Could this be the same CLG department criticised today for its mishandling of HIPs and difficult to believe plans on eco towns? Two policies the CLG select committee said were ‘victims of the Department’s weaknesses in engaging and enthusing its delivery partners’?
Does it matter if government funds are used to buy unsold homes rather than build ones?
Surely the bottom line should be the output of affordable homes and, if they can be snapped up at bargain prices from struggling developers, all the better? So long as housing associations are careful to turn down badly designed stock that could lead to long-term maintenance problems what’s the problem?
Then I saw the latest figures for orders for new construction and I started to wonder. These stats are the earliest indication of projects in the pipeline and they show that orders for public housing collapsed at the end of the year - falling even faster than private housing. November’s total was down 50% on last year and December’s down 60%.
So on the face of it social housing investment has halved since the Homes and Communities Agency started work. It may be just a coincidence since we are talking about a period that followed the new low in the credit crunch sparked by the collapse of Lehman Brothers. It may be a statistical blip.
The Homes and Communities Agency says that: ‘It is largely to do with the market downturn, for example public housing is often on section 106 mixed sites of both private and affordable housing, where the scheme overall has stalled due to market conditions. We are currently working on a number of measures to maintain existing schemes and to restart where necessary those that have stalled.’
That’s undoubtedly true but surely the problem with section 106 has been around for well over a year? What changed in the last two months of the year. What if something else is to blame?
On October 20 the first deal was signed under the Housing Corporation’s national clearing house system for unsold stock. Sanctuary Group would buy 335 homes from Bloor Homes with the initial £200m tranche of a fund to buy unsold stock. On January 6 an £18m deal was signed with Bovis to buy 379 homes.
But those publicly announced deals do not tell the whole story. The Homes and Communities Agency says that by the end of December it had bought 4,800 unsold homes at a cost of £160m. Meanwhile, it confirms that the £200m is not a cap: ‘We have always said that we would look at further deals if there is more demand or bids which come through and that’s still the position.’
Parliamentary answers reveal that the total was 4,949 by the end of December - 3,572 for social rent and 1,377 for low cost home ownership. In addition, 2,700 of the homes were flats and the average grant per unit was £12,223 for low-cost home ownership and £41,115 for social rent.
Over the same period the Housing Corporation/HCA were also helping housing associations with an unsold stock problem of their own. The Tenant Services Authority’s January 2009 survey revealed that associations have 10,060 unsold homes, including 4,560 that have been unsold for more than six months.
The total unsold stock was only a slight increase on the 9,655 recorded in the October 2008 survey but only because 3,996 shared ownership homes were converted to rent (2,236 of them for intermediate rent, the rest for social rent). Associations also managed to sell 3,868 homes.
Combine the two initiatives and you have almost 9,000 unsold homes being converted to rent in the last three months of last year.
So grant is being diverted away from new construction to buy unsold stock. But if it means more social rented homes at a discount and it’s helped out housebuilders and housing associations at the same time, what’s the problem?
According to the HCA. ‘We do not consider it to be a significant factor, as we’re talking about a fraction of the NAHP budget for this year. The far bigger factors are the market conditions overall, which is why it’s important that we look at housing and regeneration, and allocating our investment, as a whole. In terms of buying unsold stock it still equates to more new social and affordable housing, of the right type and in the right place, and it provides a cash injection to the housebuilding industry.’
That may be true but is it really so insignificant? I can see several problems:
1) 9,000 homes in three months is not insignificant. Total NAHP output in 2007/08 was 50,000 homes - so it is more than 70% of quarterly output.
2) As things stand, the cash to pay for it is not additional (like the 1992 housing market package) but comes out of the 2008/11 budget. Every home bought is one less built - this at a time when the HCA is having to raise grant rates so that the budget goes less far anyway.
2) It may be a cash injection for housebuilders like Bloor and Bovis because it enables them to shift stock they can’t sell. The alternative would be to cut their prices still further - so government money is directly benefitting their balance sheets and keeping prices higher than they otherwise would be.
3) But it is not really a cash injection for housebuilding. Each home built means 1.5 jobs, according to the 2020 Group of housing organisations, so using the money to build rather than buy would create 13,500 jobs. Very little of the work on site is done by the big housebuilders - it is done by countless small firms and self-employed workers who were the first to suffer in the recession. What’s the point in protecting the big companies for the upturn to come if the skilled workers have already left the industry?
4) Every new home not built is one less towards the government’s 3m homes by 2020 target. That may be unachievable but it was put there to help make homes affordable - diverting money from new build does the opposite.
5) Housing associations are going into this with their eyes open so they should be able to avoid the mistakes of the 1992 package, which left them saddled with poor quality stock that was expensive to maintain. But the unsold stock is still not designed as affordable housing.
6) What does it do for mixed communities? Logically, unsold stock is unsold for a reason - because it is in the least attractive locations.
All of that only takes us up to the end of December. It’s not clear how many unsold homes were bought during January and February but the start of 2009 has not seen any improvement in house sales generally.
And it does not include HomeBuy Direct, the £400m scheme to help up to 18,000 first-time buyers with an equity loan of 30% co-funded by the government and developers.
Housebuilders understandably see it as very good news indeed as it will underpin their sales for next year. Barratt has 3,000 HomeBuy Direct sales earmarked with an approximate sales value of £520m. But how many of those homes will be unsold stock? And how much would they have had to discount the price by without government support?
This is a finely balanced argument and the fact remains that buying unsold stock more cheaply than you can build it makes short-term financial sense. However, the budget being used to pay for it is not new money. As the Communities and Local Government committee chair Phyllis Starkey argued last week: ‘We are particularly concerned that the government is borrowing from future budgets now with apparently no idea how it is going to restore that money at a later date.’
It’s time for some clear thinking on buying unsold stock - and a major allocation of new money in next month’s Budget.