Centre for Cities

Time to rent

Looks like this month's Budget could include a big announcement on homes for rent, according to yesterday's Observer. The Chancellor is likely to encourage pension funds and insurance companies to invest in the private rented sector, with a £1 billion PRS fund of guarantees managed by the Homes & Communities Agency.

HCA chief Bob Kerslake was dropping hints on this last week, in Birmingham and London - I shared two platforms with him, and he mentioned the prospect of a PRS fund several times.

We're a bit too obsessed by homeownership in the UK. Our homeownership rate (68%) is the second highest in Europe, behind Spain (82%). By contrast, only 43% of Germans own their own home.

Most of us have for years been too desperate to get on the housing ladder. That seemed like a good idea when house prices looked set to rise for ever. But now, the British homeownership bug has left lots of first-time buyers in deep trouble.

More good quality homes for rent would give more young people more flexible housing options, until they are ready to buy. There's nothing wrong with renting until your thirties - I didn't buy my own place until I was 38.

Just 11% of UK households rent their home from a private landlord - the rest of us (about 20%) rent from a social landlord. In the United States, about the same proportion rent (33%) - but there, more than half of landlords are large companies or institutions such as MetLife. Here, most landlords are small-timers. See The Times for more facts and figures on renting.

We've been calling for a bigger, better-quality private rented sector for the last year. The Centre has published quite a few reports on the need for more rented homes, including this and this - also see my Comment is Free piece last March.

So why don't more of us rent already? The problem is that our private rented sector is dominated by small-time landlords, and inflexible tenancy agreements. Renting can be a lot of hassle, so tenants have tended to buy sooner rather than later. But with first-time buyers now needing a deposit of 20% on average, buying has suddenly got a lot more difficult. And that is now increasing demand for private rented homes.

The other problem is lack of investment. That's why we've been calling for more institutional investment in the private rented sector. So we hope that the Chancellor will include that PRS fund in his Budget. Getting the pension funds and insurance companies to invest will not be easy, but if anyone can help them do it - Bob can.

Eco-towns study

CLG has just published a financial viability study on the latest line-up of possible eco-town schemes. First, a quick re-cap...

Eco-towns were first announced by Gordon Brown, during his leadership "campaign" in summer 2007. The Government later promised 5 eco-towns by 2016, and another 5 by 2020. They sounded like a good idea at the time - trailblazers for new carbon-efficient communities, and part of the 3m new homes target.

But they've have had a rough ride so far - the longlist of schemes has changed a lot, the green credentials of the programme have been questioned, and the credit crunch has raised major questions about the viability of the programme.

We've been encouraging Ministers to avoid the numbers game, and pick only the very best schemes - even if that means only two or three. We also warned last summer, that the deteriorating housing market would spell trouble for eco-towns.

This viability study is part of the Government's consultation on eco-towns, which is due to end on 30 April. Ministers will decide on the final shortlist later this year. Each scheme will then need to go through the normal planning procedures, in the same way as any other development, before actual building can start. Most of the proposed schemes in this study aim to start building houses around 2011-13.

Eight schemes have been assessed in this study by CLG’s advisers (led by PwC). Three other alternative schemes have been added in, but these are not directly comparable. Together, the 11 schemes would build 77k homes over 20-30 years. But they won't all get selected, so the final number will be lower than that.

The study contains loads of health warnings - all developments are at an “early stage”, the conclusions are only “indicative” and “subject to change”, and should be treated with “extreme care”. The 30-year assessment assumes a relatively strong recovery in house prices, to (pre-2007) levels by 2011 - but admits this is highly uncertain:

“Due to the current unprecedented turmoil in the housing market, predicting future values and house price inflation as well as build costs is extremely problematic....Should house prices and demand not recover in the medium to long-term then this would have a significant negative impact on the viability of eco-town proposals.”

CLG is also concerned about the public cost of eco-towns. Last year, ex-housing minister Caroline Flint promised that all eco-towns would have excellent transport links. But this study makes clear that the Government has not yet endorsed the costs of any major new infrastructure associated with any eco-town scheme. Which suggests that the Treasury and DfT still need to make their mind up on eco-towns. 

The study rates each of the main eight schemes, according to whether they can generate sufficient value to cover the costs of development "without placing undue risk on the public finances”.

• Weston Otmoor (between Oxford and Bicester) is the biggest scheme, with 15k planned homes - it passes the viability test
• Pennbury (near Leicester) and Middle Quinton (near Stratford on Avon) both look promising, with no need for extra public subsidy.
• Two schemes are not currently viable - Rossington (near Doncaster) and St Austell (near the Eden Project) both have a significant funding gap.
• Three other schemes have some uncertainties - NE Elsenham, Ford Airfield, and Whitehill Bordon

If you've got any views on all this lot, you can email CLG at

ecotowns@communities.gsi.gov.uk

Gordon goes Back to Building Societies

Gordon Brown today called for "the reinvention of the traditional savings and mortgage bank" - a bit like good old  building societies, which (like Gordon) used to be very prudent.

Today's reaction to Gordon's Observer column has mainly been on the theme of stable doors and horses bolting. Which is fair enough. But so far, no-one has managed to make the link back to the conversion of our building societies into banks about 10-20 years ago.

I covered building societies in my first Treasury job (1996-97), so here's a quick potted history:

• Before 1986, mortgages in this country were provided mainly by building societies - not by banks. Building societies financed home loans in the traditional way through their savers and depositors, and were subject to strict rules on how much they could borrow from the wholesale money markets.
• The 1986 Building Societies Act changed all that - and injected new competition into the mortgage market, allowing high-street banks to issue regular mortgages.
• The 1986 Act also allowed building societies to convert into banks, so they could access those cheaper wholesale funds on the international money markets. Their members had to agree to the switch, but were enticed by big windfall payouts.
• Abbey National was the first UK building society to take the plunge into plc status. Lots more followed in the mid-90s, including Halifax, Alliance & Leicester, Bradford & Bingley, Northern Rock and Woolwich.
• The 1997 Building Societies Act deregulated the rules governing building societies, but did nothing to stop the process of demutualisation.
• The newly-demutualised banks then started dealing in mortgage-backed securities, i.e. packaging up their mortagage books and selling them on to institutional investors. Gordon got very interested in MBSs, and whether we should copy the US-style model of Fannie Mae and Freddie Mac. With house prices heading skyward, MBSs were a sure-fire bet....
• ...until the credit crunch, when mortgage-backed securities started back-firing.

I worked on the 1997 Act - it was rushed through just before the 1997 general election. I also spent days on end answering letters from aggrieved members of the public, who had failed to grab their windfall.

I've got a few comments on this:

• Both Tory and Labour governments presided over the demise of traditional building societies.
• The British public was only too happy to cash in at the time - loads of people opened accounts in the mid-90s, just to get their windfall. I don't remember many people worrying about the consequences.
• All of the building societies that converted into banks have since been swallowed up in subsequent mergers and takeovers.
• The mutuals sector - including credit unions as well as building societies - will be more popular from now on. And local authorities will start to do more mortgage lending.

Homes & Communities Agency goes live

The Homes and Communities Agency is now up and running. It's the new housing and regeneration delivery agency for England - with Sir Bob Kerslake at the helm, and 900 other staff. Here's their lovely new website - including Bob's vision for a single conversation with local authorities - and their corporate brochure.

The HCA now inherits the Government's target to build 3 million new homes, by 2020. That now looks impossible. But the long-term demand for new homes is still there. We think the 3m target should now be extended to 2025, to take account of the recent slump in new house-building. And the HCA should go for a larger share of high quality, private-rented housing.

From today, the HCA will need to respond to the big drop in housing activity. Bob said today that his response will be "investment led and counter-cyclical". At last week's Thames Gateway Forum, the Agency's director for London - David Lunts - set out a range of options, including buying up empty homes and putting them up for rent, and supporting more "rent to buy" schemes.

As a last resort, the HCA may even become a direct developer of new housing, if the market gets "really sticky" next year. Sir Bob has hinted that the English Cities Fund could be one possible model, with the HCA setting up joint ventures with the private sector to stimulate new housing. The chairman of ECF is one Sir Michael Lyons.

Thames Gateway: Sir Bob to the rescue?

The Homes & Communities Agency goes live on Monday. Bob Kerslake and his 900 staff will inherit a £17 billion funding pot (2008-11), to spend on affordable homes and improving communities across England. Which sounded like a great job a year ago, but is now a bit of a challenge.

As The Observer said last weekend, "if Bob Kerslake can't fix Britain's broken housing market, no one can". So we should wish him the best of luck. PS Bob's middle name is Walter - fantastic.

Bob spoke today at the Thames Gateway Forum, and was both upbeat and realistic about the prospects for the Gateway - the UK's largest regeneration programme. He pushed hard to get control of the Gateway, so the HCA will from next week take the lead in a vast 40-mile stretch of land, east of London's Docklands. £400m of the HCA's dosh will be spent there over the next 3 years.

Bob readily admitted that these are "difficult times", but sees the Gateway as an "extraordinary and fantastic opportunity" - with 600 sites waiting for development - and stressed that the Gateway is a long-term, 30-year project. He will be assisted by Paul Hudson - the HCA's director of Thames Gateway - and his deputy, Eamonn Boylan (former deputy CEO at Manchester). And by three regional directors - David Lunts (London), David Edwards (South East) and Terry Fuller (East of England).

Lunts set out some more detail, in a Forum session that I chaired this morning. He hinted that, if the housing market continues to worsen next year, the HCA might start building houses itself. This fits in with Bob's recent suggestion that the existing (broken) model of house-building will need to be overhauled. He wants to see more councils and smaller companies build new homes, and - like us - is looking for pension funds to finance homes for rent, and a growth in "rent-to-buy" schemes.

All of which is a far cry from last year's Forum, when Gordon Brown launched the Government's Delivery Plan for the Gateway - promising to build 160k new homes there by 2016. That was part of the overall 3m new-build target by 2020 - which now looks impossible, and will need to be revised - most likely, by extending the deadline beyond 2020.

Margaret Beckett didn't mention the 3m target when she spoke today. It looks like she is quietly dropping the 3m, for a more pragmatic approach. I hope so.

The HCA launch next week has been fast-tracked by Bob, from April 09 to next week - partly, I suspect, to head off the Tories - who don't like the prospect of a massive new quango pushing through new house-building.

Stewart Jackson (shadow Thames Gateway minister) today stopped short of scrapping the HCA, but said the Tories would carry out a "forensic audit" of the Gateway's £7bn budget and 160k homes target. He was pretty scathing about CLG's "weak leadership" and the multiple bodies and boards involved. And said that local MPs and councillors had not been sufficiently engaged. Cue very little applause from the audience....

Housing crunch

The recession is starting to hit home - literally.

Between April and June, 11k homes were repossessed - up 71% compared with the same period last year. The Council of Mortgage Lenders now estimates that 45k homes will be repossessed this year, up from 27k last year.

Which is obviously bad news for thousands of homeowners. But it's not as bad as the last downturn in 1991, when repossession orders hit 186k and the actual number of houses repossessed peaked at 75k.

Adam Boulton asked Hazel Blears about the housing market last Sunday. She said that homeowners at risk of repossession could ask their local council to buy back either all or part of their property. This was one of the measures in the Government's housing rescue plan, announced last month - a £200m scheme to help up to 6k families avoid repossession. But last night, Nick Robinson revealed that this scheme would not be in place until January at the earliest.

Meanwhile, the CML has just issued new arrears guidance to try and limit the number of repossessions, and make sure repo really is the last resort for lenders. But as the FT pointed out last week, this guidance is a voluntary code - not legally binding.

So although measures are being put in place to limit the number of repos, the numbers will continue to rise for the rest of this year - and into 2009.

In other housing news, The Observer reported last weekend that only "one or two" eco-towns are likely to materialise - from the original shortlist of 15. As I said in The Economist in July, eco-towns will only work if the Government picks a very small number of schemes. And in my article in The Guardian's Future of Cities supplement (earlier this month) I said: "Quality, not quantity should be the goal. The final shortlist should include only the best and most viable schemes. One excellent eco-town will be better than 10 dodgy ones."

New Housing Minister, Margaret Beckett, will make the final decision on eco-towns early next year. Here's her first big speech, to the Home Builders Federation - which didn't mention either eco-towns, or the Government's 3m housing target.

PS Former housing minister, Caroline Flint, is in next month's Marie Claire - with best mate Jacqui Smith. Apparently, they like doing karaoke together - Madonna and Cyndi Lauper are their personal faves...

Rugg Review of private-rented housing

Despite the downturn in the housing market, the UK is still too obsessed with homeownership. Earlier this year, we called for an expanded and improved private rented sector - especially for young people, who are not yet ready to buy. Since the summer, demand for rented homes has increased - but the quality of private landlords is still variable.

Today's Rugg Review into the Private Rented Sector (PRS) includes a number of welcome proposals to drive up the quality of privately-rented housing, and drive out the "very small proportion" of dodgy landlords. Here's the executive summary - and full report.

Almost 2.5 million homes in England are currently rented from over 500k private landlords. And the proportion of under-30 households renting has increased from 33% to 43% since 2001. The problem is that half of private rented homes fail to meet the Government's decent homes standard - worse than in either the owner-occupied or social housing sectors. Rugg's proposed new light-touch licensing system will require private landlords to apply for a permit to rent - which could be revoked if they fail to meet basic standards.

Rugg also says that the Government should encourage more good landlords and higher levels of institutional investment, to "grow the business of letting". We agree. We know from our own research that cities - particularly fast-growing ones like Bristol and Cambridge - urgently need more high-quality private-rented housing. A bigger, better PRS would boost worker mobility - which will be especially useful in a recession.

New Housing Minister Margaret Beckett has welcomed the Review - so has Tory housing spokesman Grant Shapps, and Shelter's Adam Sampson. So it must be on the right track.

Meanwhile, the Government's 3 million new homes target (by 2020) is looking ever more unrealistic. The new Homes & Communities Agency - which goes live on 1 December - should review the target, and include a higher proportion of new homes for rent.

It's HCA, not HACA

For some strange reason, some of you have starting abbreviating the Homes & Communities Agency to HACA - see this and this and paragraph 5.1.1 of this.

In fact, it should be the HCA - as CLG rightly calls it. Otherwise, Communities & Local Government would be called CALG. (You might well ask why CLG dropped "Department" from its title, but that's another story - and another acronym - DCLG - which people ended up pronouncing as "declog".)

Now, I have it on good authority that the HCA isn't very happy with the HACA acronym. Which I can totally understand. The Homes & Communities Agency has nothing to do with Haka - that scary Maori dance that the All Blacks do. And Bob Kerslake definitely wouldn't want to get confused with Jim Hacker.

As a former Treasury official, I know how much civil servants worry about acronyms. Let's give Bob's team a break, and go back to calling it the HCA. Thanks.

Housing rescue plan

Today's housing announcement was tricky for the Government. Do too little, and Ministers risked the wrath of vulnerable homeowners. Do too much, and they risked distorting the housing market.

Today's package tries to strike the right balance. It is basically aimed at limiting the number of repossessions, and encouraging first-time buyers to enter the market. Some changes are useful - like updating Income Support for Mortgage Interest, and more social housing.

But overall, this package will make only a small difference - given the scale of the problems in the mortgage funding markets, and the rising numbers of vulnerable borrowers. And it could, unhelpfully, entice first-time buyers into homeownership as house prices are set to fall further. Renting still looks a better option for many young people, in the short-term.

Here are today's five main changes:

• Temporary stamp duty holiday: From tomorrow until 3 Sep 2009, transactions of £175k or less will be exempt from stamp duty. The Treasury says this will cost £615m, which assumes a lot of house sales between £125-175k. That's 29k transactions per month @ £175k over the next year. But there were only 33k total mortgages taken out in July, so it probably won't cost as much as the Treasury says.
• Repossessions: £200m scheme will allow housing associations to help up to 6k families avoid repossession, via three different shared ownership models. There were 19k repos in the six months to June.
• First-time buyers: £300m shared equity scheme - HomeBuy Direct - for up to 10k first-time buyers, for households on under £60k. It will give them an interest-free equity loan of up to 30% of the house price, for 5 years. This was first announced in the Draft Queen's Speech last May. Take-up of these schemes has typically been low so far.
• Income Support for Mortgage Interest: From April 2009, this will be extended - kicking in after 13 (rather than 39) weeks, and the eligible mortgage limit raised from £100k to £175k. Adam Sampson at Shelter was pushing for this, but overall says the package is very limited.
• Social housing: £400m to deliver 5,500 more social houses over the next 18 months. As I reported last week, there's been a welcome increase in new social housing over the past year. This frontloaded funding should help maintain those numbers over the next year or so.

As the Council of Mortgage Lenders says, funding problems in the mortgage market remain the biggest barrier to a revival of the housing market. The Crosby Review is looking into this - especially the collapse of the mortgage-backed securities market, which is the main reason why mortgage finance is tighter.

Meanwhile, the OECD has downgraded 2008 GDP growth from 1.8% to 1.2% - and is forecasting negative growth for the two remaining quarters of this year. Reviving the housing market during a technical recession will be difficult...

UK population up, new house-building down

The UK's population is rising, but new house-building has fallen sharply. That's the joint message from the Office of National Statistics and CLG this week.

There's been lots of press comment today on the UK's latest population numbers. There were almost 61 million of us in mid-2007, up nearly 2 million on 2001 - mainly due to more net migration into the UK, and more old people.

Population growth has been highest in cities like Oxford (up 11% since 2001) and parts of London, e.g. Camden (up 14%). But other cities up North have seen their population decrease since 2001 - including Burnley and Sunderland (by 2%), and Liverpool (down 1%). Policy Exchange got a hammering last week for calling on cities like Liverpool to shrink in size. These numbers show that some of our Northern cities have been shrinking for a while - albeit at a slower rate now, than before.

Meanwhile, we now have confirmation of the recent fall in new house-building. Annual housing starts (in the 12 months up to June) are 12% down on a year ago, and annual completions are down 4%. These numbers are likely to get worse over the coming year.

One bright note. There's been a welcome increase in new social housing (up 56% compared to the second quarter of 2007) - due to increased affordable housing investment last year, and receipts from Section 106. But RSL starts will probably drop back, as the financial crunch continues.

Put these numbers together, and the message is clear. Overall, the UK population is growing - but new house-building is falling. This will raise more questions about the Government's 3m new housing target. More on that soon.