The Basic Economic Mistake in the Montague Report

Montague - Its as bad as Beecroft

Where is the evidence that planning obligations on affordable housing should be abandoned, even if the coming review of viability for pre 2010 consents shows they are viable?

It contains the following section – which is a basic fallacy

 

• All housing other than social housing can be sold to owner occupiers by the developer – there are no restrictions on that
• The result is that all housing land prices tend to be fixed according to the price of owner occupied housing
• Developers wishing to build housing for rental will therefore compete for land with house builders that sell to the owner occupied market
• Because property can switch freely between the owner occupied and private renting markets, the opportunity cost of an investment in housing is the price it could achieve on sale to an owner occupier, not another investor

However the correct approach is as follows:

• All housing other than social housing can be sold to either owner occupiers or buy to let landlords by the developer – there are no restrictions on that
• The result is that all housing land prices tend to be fixed according to the price of whichever is most profitable at any one point in time – owner occupied housing or buy to let
• Developers wishing to build housing for one tenure will therefore compete for land with house builders that sell to the other
• Because property can switch freely between the owner occupied and private renting markets, the opportunity cost of an investment in housing is the price it could achieve on sale to another tenure, not another investor

Can there be any disputing this?  Why should Grant Shapps back so enthusiastically this report when it contains such a wopping error.

The result is that one tenure – buy to let or owner occupier will tend to crowd out the other at any one time, social housing (if the scheme is viable) has absolutely nothing to do with it- duh!

If people and investor were indifferent between renting and borrowing then economic theory tells us that a no arbitrage condition would set the same price for both.  We see different prices because people are not in different and because the type of stock built for rent and owner occupation are quite different.  indeed the overbuilding of stock for buy to let is one of the biggest reasons why it is less profitable.  Does this feature in the report – no – only one place for Montague – waste paper basket – I am indiferrent to the marginal utility of re-reading the report or recycling it.

 

Westminster Introduce Transferable Development Rights Affordable Housing Model

Inside Housing

 Under the model the land owner agrees to sell land for below market rate in exchange for an ‘affordable housing credit’ they can use against obligations for future schemes.

In the Westminster example, which is the first of its kind, commercial property company Land Securities sold a site to private affordable housing developer Pocket for £2.3 million less than its market value.

Fermoy Road

The Fermoy Road development includes 32 one-bedroom flats

Westminster Council agreed that this money could be held by Land Securities as credit against affordable housing obligations on future developments. The credit can be used in lieu of payments that might have to be made where it is not feasible to have affordable housing onsite.

Pocket specialises in building one-bedroom homes for sale at below market rate in London. It achieves this by maximising the use of space and avoiding some planning requirements, but was unable to do this in Westminster due to high prices.

The unusual planning model allowed Pocket to go ahead with the 32-home Fermoy Road development. The homes will be sold at a discount of 20 per cent on market rate to households that meet the income criteria used for the mayor of London’s first-time buyer scheme (those earning less than £61,400 a year).

Buyers are bound by a covenant that means the home must be sold on for 20 per cent less than market price – which in Westminster is from £300,000 for a one-bed home – and to a person who qualifies for affordable housing. Sales must be approved by the council.

Marc Vlessing, co-founder of Pocket, said the scheme could be a ‘massively important’ way of funding affordable housing developments in high-value areas.

‘We are talking to Hammersmith & Fulham, Kensington & Chelsea – talking to a number of lead boroughs – Camden – in which there are large developers with big affordable housing obligations, and where our credit model creates a new currency,’ he said.

Philippa Roe, leader of Westminster Council, said: ‘This new scheme lays the foundations of a new era in affordable housing in the capital.’

Experts on the development of affordable housing said although they were familiar with the principle of affordable housing credits they were not aware of similar schemes coming to fruition.

 

Lord Best – Build 100,000 Extra Care Homes a Year to pull Britain out of Recession #UKhousing

Guardian

Lord Best has a plan. Housing’s great crossbench advocate has come up with a new strategy that will, in his words, “solve all the country’s problems”.

Here’s what the peer proposes: building 100,000 retirement, supported housing and extra-care homes a year. The trickledown effect will, in one handy flourish, pull Britain out of double-dip recession while also solving the country’s acute and growing housing crisis.

The boost to the construction industry would, by his calculations, create between 300,000 and 500,000 new jobs. “That’s the engine of growth,” he told a gathering of housing and care providers in London this week. “Whenever we’ve had a recession, it was the construction industry [that got us] out of it. If the money goes into housing, it goes into jobs – and into making people’s lives better.”

Building 100,000 homes designed especially for the needs of an ageing population would also help to house 350,000 other people. By selling their under-occupied large family homes and downsizing to smaller, specialist properties, our older people could help a whole generation of potential first-time buyers who are priced out of the market.

Lord Best said many of these homes would have been untouched and undecorated for up to 35 years, and so would sell at the lower end of average market value and be affordable to families struggling through recession. “Nearly all of the 7.8m people of pensionable age have more than two spare rooms, making way for 350,000 family [members] with children.”

So does the model stand up, or is it a rose-tinted oversimplification of a more complex economic and social system?

The first stumbling block is the finances; where does the original investment to build the 100,000 properties a year come from, especially when the days of healthy public subsidy for housing are behind us? The construction industry is in lockdown, afraid of risk and rejecting too much speculative development even where evidence of local need is overwhelming.

One argument suggests that public funding could be found if health and social care budgets and strategies were pooled and rationalised, finding savings where preventative healthcare and support for older people generates efficiencies within the NHS. This is why specialist housing providers such as Anchor have been campaigning for a dedicated minister for older people who can consider how health, housing, social care and other services fit together.

Even if the subsidy was found, what about the cultural barriers? In the UK, attitudes towards homes are rarely practical, despite our predilection for using property as an investment portfolio rather than as the shelter it was designed to provide. Retired residents who have nurtured a family and watched them move on struggle to leave those memories behind….

There would be other practicalities: planning spats over what type of housing is needed, where and how it should look; diverting funding from the vote-winning NHS to other services to support growing numbers of extra care residents; finding the money for investment in training and skills for those 500,000 new employees.

Its a good plan but rather incomplete without

a) a plan to ensure mortgages can be granted to those purchasing the freed up stock – rather than at present only new homes

b) developing them as part of mixed and balenced communities, otherwise could simply worsen the dangerous aging population balence of many areas where there is a lack of housing for young people and older people are buying up the existing stock.

It would be better if this plan ran in parallel with plans for producing social housing and housing benefit funding as we have blogged about on here many times

 

Volume Housebuilders no longer want to build in Volume

Building has some interesting research

An analysis by Building of the most recent full-year results from the eight major publicly listed housebuilders, shows that while pre-tax profits rose by 161% in 2011 to £556m on the previous year, the number of homes built increased by just 3% to 45,018. Operating profits also rose 47% over the same period.

What is happening?  In large part the change is due to the large housebuilders, we can no longer call them volume housebuilders, have shifted to the high margin, small number of units, cherry picked, large houses, low risk, high end of the market and away from the high risk low cost end of the market.

The question is whether if with a resumption of confidence and mortgage lending they are able to resume volume building?

If they cannot, and with the heavy weight of sites on their balance sheets they paid way too much for they may not be able to, then if at some point we did have a proper ‘plan b’ of major investment in housing including social housing, we have to ask who can.  We need to start thinking about alterative volume housing delivery models now so they are ‘shovel ready’ when plan B does eventually come – as it might in a panic at very short notice.

Uks Largest Estate Agent Slam Shapps as Being More Interested in Headlines Than Housing

Mortgage Introducer

Grenville Turner, chief executive of Countrywide, said yesterday that the government had failed to fully engage with the housing industry.

It had also publicly backed schemes designed to boost the sector – before checking they would work in practice.

Turner said: “We wrote to Grant Shapps and said we sell one in ten houses in the UK, we understand you’re looking at the housing market, would you like to talk to us about our experience?

“The answer came back, no, not really. That’s the issue that we face – government not really wanting to know what the facts are.

“They want to know what their own initiatives are and try and push them forward.”

Turner said despite a dialogue with the Department for Communities and Local Government “there is this sense of grabbing headlines then trying to retrofit policy and procedure and pricing and then frankly move onto the next headline”.

He called on Shapps to sit down with the housing industry to develop innovations likely to make a practical difference.

A DCLG spokesman said Shapps had met “many organisations and held a number of summits with representatives” from the housing sector and added: “Senior officials from the department have also recently met with Countrywide and we value their input.”

DCLG Select Publishes report on new housing finance and supply

The Government must employ a basket of measures, covering all tenures of housing, if sufficient finance is ever to be available to tackle the country’s housing crisis, says the Communities and Local Government (CLG) Committee in a report examining the financing of new housing supply.

Launching the report, Clive Betts, Chair of CLG Committee said,

“For decades, successive Governments have failed to deliver sufficient homes to meet demand. The country faces a significant housing shortfall, and the financial crisis has amplified the problem.  232,000 new households are forming each year in England, and yet last year fewer than 110,000 new homes were completed.

There is no ‘silver bullet’. We have to muster all the resources we can.  The Government’s housing strategy has made a useful start and we hope many of its measures will provide a stimulus over the short to medium term. But we need more action if we are to see significant long term improvement in housing supply”

The Committee sets out four key areas for action, which, taken together, could go a long way to raising the finance needed to meet the housing shortfall:

  • Large-scale investment from institutions and pension funds
  • Changes to the financing of housing associations, including a new role for the historic grant on their balance sheets
  • Greater financial freedoms for local  authorities
  • New and innovative models, including a massive expansion of self build housing

Institutional investment

The Committee finds that large institutions and pension funds, which have only ever made a limited contribution to new housing, could provide a substantial source of investment.

“We should be looking to new forms of investment to help address the housing shortfall. Pension funds and large financial institutions have a blind spot when it comes to housing but could deliver a significant number of new homes for rent and achieve a steady return on their investments. Public sector bodies and housing associations must encourage such investment.  The Government should also look to establish a housing investment bank, to channel investment into housing. Expanding the Green Investment Bank to cover housing would be one way of achieving this,”

adds Clive Betts.

Housing associations

The Committee questions the Government’s flagship Affordable Rent model.

“We have a number of concerns about Affordable Rent.  How will it play out in different parts of the country? Will it prove unaffordable in parts of London?  Is housing benefit now expected to take the strain of paying for new affordable housing? Is this model sustainable beyond 2015,”

says Clive Betts.

The Committee calls on Ministers to set out proposals for the future delivery of affordable homes, and to consult on how housing associations should be financed in future.

“We must look to the long-term delivery of affordable housing.  We heard a number of proposals for the future financing of housing associations, including suggestions for the future use of the historic grant on their balance sheets.  This grant is potentially an untapped resource, and the Government must clarify how it can be used to best effect,”

adds Clive Betts.

Local authorities

The Committee concludes that local authorities have an important role to play, but may struggle to fulfil their potential because of centrally-imposed constraints.

“The Government should give councils greater freedom to decide on the best housing solutions for their areas.  Local authorities must also be allowed, within prudential limits, to safely increase their capital borrowing for new housing,”

adds Clive Betts.

New models

Finally, the Committee urges ministers to look to different models of delivery to help meet the housing shortfall.  It sees interesting potential in self build, where people manage the construction of their own homes, and points to Almere in the Netherlands as a useful model.

“Self build schemes could be a major new source of housing in England, but it will take substantial institutional change to realise this potential. Government, local authorities and lenders must work together to remove the barriers that currently restrict self-build and commit to getting pilot schemes underway very quickly,”

says Clive Betts.

 

Grant Shapps’s Right to Buy Con – Will a Pennny of Receipts be used to Build Replacement Council Housing?

Every single statement of the housing minister needs to be taken with a huge grain of slat.  He often claims for example that housebuilding is increasing when it is falling, of he doesnt have the latest figures on housebuilding to hand, when his department has just published them or he and DCLG SPADs have taken a week to spin around the bad news.

Possibly the worst offence though is over the expansion of the right to buy programme – to a £75,000 discount. Where the government claims a policy of ‘one for one replacement’ .

Local authorities will be able to retain the receipts for replacement housing – provided they can sign up to an agreement with Government that they will limit the use of the net Right to Buy receipts to 30% of the cost of the replacement homes….The council must also pay the Government an amount which reflects the income which the Treasury expected from Right to Buy sales prior to the new scheme,  Once these costs are deducted, the remaining receipts (the ‘net receipts’) are available to fund (and must be applied to) replacement affordable rented homes.

Proposals issued by the Labour government in March 2010 said councils would keep all right to buy receipts, as well as rental income & it was on this basis that negotiations for local councils to take on the housing debt were commenced.

In other words you take up to £75k off the valuation and then the Treasury keeps 70% of the receipts and from that small sum you have to build an ‘affordable home’ which the government has now defined as including housing at only 20% discount of market values, as opposed to the 70% discount typical with Council Housing.  So the replacement housing must be built with 30% of the receipts, for three times the rent and certainly not to ‘Parker Morris/SDS standards.  They will Hobbit Homes, or Shapps Slums as I am sure they will be christened.   There is no way any local authority can build one for one replacement council housing with this kind of deal.

A spokesperson for the DCLG has acknowledged that receipts would not be enough to deliver replacement homes in some areas but said that the one-for-one target was a national one.  Freedom of Information requests need to be submitted to find out the DCLGs region by region and authority by authority calculations of replacement rates and the debt dynamics of Housing Revenue Accounts.

But it gets much worse, as a deal with housing authorities saw them agree to take on £21.5 billion of housing debt, but in return the Treasury would not take a share of housing revenue accounts.  This deal however will breakdown if any of its variables are changed, and the assumption was that local authority receipts from right to but would be used to improve the existing stock and subsidies on right to buy would be at their previous levels.  These issues have caused squeels of protest from bodies such as the Institute of Housing and The Association of Retained Council Housing.

“Stock retaining authorities agreed to take on billions of pounds of debt collectively in exchange for local control of local resources. We have spent months consulting our communities, putting business plans in place and balancing the books based on debt and RTB levels. With just five months to go, that is now thrown up in the air.”

John Bibby, director of housing and community services at Lincoln City Council.

After allowing for current discounts and pooling of capital receipts the City Council received only £16,800 from the recent sale of a three bedroomed council house. “I would question how my council could build a new three bedroom house for £16,800 to replace the one sold under the RTB.

What is worse is that houses demolished before 2017 wont be included in the debt settlement.  This has prompted Nottingham and Birmingham councils to plan to demolish 2,100 council homes between them . ‘we propose to build less homes than we demolish‘ says Nick Murphy, chief executive of Nottingham City Homes.