Housing in London: challenges and solutions

Transcription

1 CML Housing Finance Issue Housing in London: challenges and solutions London faces the housing supply shortfalls and affordability constraints that characterise much of the UK but its unique demographics, migration flows and tenure patterns combine to bring these into starker relief. London also needs to find longer-term solutions to the funding model for affordable housing and the impact of the Universal Credit Benefit cap. With responsibility for housing policy now sitting with the Greater London Authority, the need for the London Mayor and UK government to blend regional and national policies brings an additional dimension to policy-making. We have identified several key actions to address London s housing challenges, and look forward to working closely with the Mayor and central government to deliver workable and sustainable solutions for London. The Mayor should publish his London Strategy, with fully developed proposals for: A funding model for new affordable housing in London from April 2015 Building on existing models to expand home-ownership, through low cost shared equity/shared ownership options Continuing to support home-owners in difficulty through a continuing and workable mortgage rescue scheme for London Improving standards in the private rented sector in a way which does not undermine much-needed buy-to-let investment The UK government should: Ensure welfare reforms work for Londoners, not only by providing much-needed transitional discretionary payments but also by increasing affordable and social housing supply in the first place. Develop proposals for guaranteeing housing association debt in a way which does not undermine existing pricing in the capital markets. Author John Marr Senior policy adviser Editor Bob Pannell Chief economist Background This paper: Provides a snapshot of prevailing housing market conditions in London Highlights the particular housing challenges for London November

2 CML Housing Finance Considers key policy responses from government and the Greater London Authority (GLA) Considers the contribution that lenders can make, supporting home-ownership, the private rented sector through buy-to-let and Registered Providers (RPs). London snapshot unique and different London is a global city. It comprises a rich diversity of peoples and cultures; it rivals New York as the world s leading financial centre. London is a city of contrasts, with great wealth and prosperity, generating nearly a third of the UK s GDP, while also harbouring poverty and social exclusion. London is also fundamentally different from many of the UK s other major cities. It has different governance arrangements. With its democratically elected mayor having a strategic role across the city on a broad range of matters including housing, planning and infrastructure, London is more akin to an autonomous city-state. London s particular demographics, its marked price and wage differentials, its acute housing need, its ability to draw people from across the UK and further afield all add up to a city where national housing challenges are thrown into much sharper focus. London s population in 2011 was around 8.2 million, according to the census results from that year released earlier this summer 1. This is an increase of 12 per cent from The latest census also shows London was the fastest growing region across England and Wales where the population has increased to 56.1 million overall. Growth projections suggest London s population will reach 9 million in London has around 3.3 million households, and this is expected to grow by around 18% to just under 4 million by The mortgage market in London The most recent data from our Regulated Mortgage Survey (RMS) provides this snapshot of the mortgage market in London: 1 ONS News Release of 16 July 2012 Census result shows increase in population of London as it tops 8 million at 2 ONS 2011 sub-national population projections Intelligence Update at 3 Gleeson, J (2011), A Growing City, London: Greater London Authority, at 2 November 2012

3 Housing in London: challenges and solutions Table 1: London s share of regulated mortgage lending, %, year ended September 2012 Number Value All First Time Buyers 17% 28% First Time Buyers (excluding right-to buy) 17% 28% Right To Buy 7% 13% Home movers 11% 19% All loans for house purchase 14% 22% Remortgagors 12% 20% All regulated lending 13% 21% Source: RMS The value of regulated mortgage lending in London over the last 12 months was 26 billion. London therefore represents a high share of all loans for house purchase and particularly high share of first-time buyer activity, compared to the UK. Reflecting its importance, we will from now on be publishing quarterly press releases on mortgage lending in London, alongside our current releases on the Scottish and Welsh national markets. Why is London so different? London differs in many respects from the rest of the UK. Its tenure profile is different. London has a much lower rate of home-ownership (50%), a considerably greater reliance on the private rented sector than elsewhere (26%) and a reliance on social housing (24%) that is comparable with the north east and Scotland. Chart 1: Tenure profiles of UK regions, % of total stock, 2010 Source: DCLG November

4 CML Housing Finance In London, the private rented sector is the only tenure that has grown relative to the entire housing stock over the past decade. Home-ownership rates in London peaked as early as 2000, and have since dropped more sharply than elsewhere, falling more or less continuously by a cumulative ten percentage points from their peak. While this trend started before the credit crunch, it appears to have intensified in recent years. Social housing has also fallen away, albeit by just a few percentage points. Chart 2: London tenure patterns, 000s of dwellings Source: DCLG Notes: 2011 figures are CML estimates In absolute terms, London s total housing stock has expanded by a little over 200,000 units over the past decade. We estimate that the stock of owner-occupied housing has contracted by 179,000 units. The social housing stock has fallen by 18,000 units, as RPs growth fails to match the shrinkage of local authority housing. Meanwhile, the private rented sector stock in London has expanded by 427,000 units. While this is a 90% increase over the past decade, it does in fact represent a slower growth of the private rented sector in London than most other parts of England (except the south east and south west). As can be seen from Chart 2, London s stock of private rented housing has exceeded that for social housing since Demographic and affordability factors So what has driven the dramatic shift in London s housing tenure patterns? 4 November 2012

5 Housing in London: challenges and solutions In many respects, developments in London are symptomatic of what is happening across most parts of the UK - and all that is different is that London starts off with a much lower rate of home-ownership than elsewhere. But demographics also have an important role. London has a dynamic population. A stylised characterisation would be that London attracts substantial inward migration of younger people, both from overseas and from other parts of the UK, and large numbers of older people moving out to other parts of the UK. Chart 3: Age profile of head of household, 2008 Source: DCLG These flows contribute to the relatively young age structure which London has. As Chart 3 shows, London differs significantly from the rest of England, in having a relatively high proportion of younger adults and fewer elderly. One consequence is that London also has a large natural rate of increase in its population, which adds to the pressure on its housing stock. These large inward migration flows whether from overseas, students or job seekers - contribute to a significant transient population for whom the private rented sector is well suited. In addition, international inward migration will include the extremes of rich and poor, both fuelling prime house prices in central London and exacerbating the need for social housing. House purchase transactions Residential property turnover in London has more or less kept pace with the UK market overall since the late 1980s. November

6 CML Housing Finance A modest downwards longer-term trend, perhaps associated with the greater relative size of its private rented sector, has been partially reversed by a somewhat brisker pace of transactions than elsewhere since the credit crunch. There has been a clear north-south divide to the housing market over the past few years, with London s housing market, generally speaking, notably healthier than elsewhere. Average prices have grown by 5.2% over the last year 4. In September 2012, the average mix adjusted house price in the capital was 394,000 compared with an England average of 241, House prices in most parts of the UK peaked in the second half of 2007, and then fell by about a fifth, before steadying from early-mid 2009 on the back of the policy of aggressive monetary easing. Northern Ireland has been a notable exception to this, with house prices halving in value and only showing signs of stabilising this year. According to Nationwide, by Q2 this year London house prices had effectively regained their pre credit crunch high. Chart 4: Regional house prices post 2007, YoY % change Source: Nationwide BS, CML estimates Some of the resilience of London s housing market stems from the city s global status, with the 20% depreciation of sterling post credit crunch and the UK s reputation for 4 Office of National Statistics House Price Index 5 Office for National Statistics, House Price Index; June November 2012

7 Housing in London: challenges and solutions political stability, adding to the perceived attractiveness to international investors of central London property. But more generally, London has for many years demonstrated an apparent ability to sustain activity levels, despite the significant affordability pressures that elevated house price values imply. Over recent years, the Department for Communities and Local Government (DCLG) has reported on the ratio of lower quartile house price to lower quartile earnings by district. These ratios may be thought of as illustrating the position of individuals close to the margins of achieving home-ownership. Chart 5: Ratio of lower quartile house price to lower quartile earnings Source: DCLG Chart 5 underlines the markedly different positions of those struggling to buy in the London area, compared with other parts of the country another facet of the northsouth divide. A particular paradox of the London market, and one that is long-standing (it has prevailed since at least 1974) is that FTBs in London represent a higher proportion of overall house purchase activity than the rest of the UK. November

8 CML Housing Finance Chart 6: FTBs, proportion of loans for house purchase, % Source: RMS (2005 onwards), SML previously At first glance this seems counter-intuitive given the more stretched nature of affordability in London. While there is little regional variation in average FTB debt service ratios - mortgage repayments (capital and interest) are about 20% of pre-tax income across the UK - FTB deposits are typically somewhat higher in London at nearly 25%, compared with a national average that is nearer 20%. The first observation to make is that this is not a misleading metric. We know that house purchase activity levels in London are on a par with other parts of the UK and in terms of mortgaged activity, slightly higher. So it is not the case that existing homeowners are less inclined to move (for example, put off by high transactions costs), which could artificially distort the proportion of first-time buyers upwards. So what explains Londoners appetite to buy? One driver may be the conditioning effect of high housing costs in London, regardless of tenure. Londoners may have got used to a larger share of their disposable incomes going to meet their housing needs, and simply be more willing than elsewhere to stretch themselves to get on the housing ladder. Another part of the explanation is likely to be the greater incidence of young adults in the London area (see Chart 3). We also know from our Regulated Mortgage Survey that FTBs are typically a little older in London than elsewhere. The difference is not dramatic - less than two years older 8 November 2012

9 Housing in London: challenges and solutions than FTBs across the rest of the UK, but enough to make a difference at the margin in terms of gaining a promotion or building up savings. Chart 7: Unassisted FTBs 70% 60% 50% 40% 30% 20% 10% 0% FTBs: % unassisted by region Source: CML estimates Notes: see Londoners also get more help in buying than in other regions of the country. While more conservative lending policies of recent years have made it much harder to raise a large enough deposit, the impact has been more pronounced in London than elsewhere. We estimate that more than 70% of FTBs buying in London rely at least in part on the Bank of Mum and Dad. In terms of tenure aspirations, market research undertaken for us in March 2012 by YouGov shows that aggregate preferences for home-ownership short- and longer-term are similar to the national picture. Finally, an important characteristic of the London market is the pronounced variation in property prices across London. This may represent a significant shock absorber, as it affords huge potential for those wishing to buy, but who are priced out of one area, to transact in adjoining districts part of the familiar gentrification process. Housing policy in London Regional housing strategy and policy in London is now devolved to the Mayor and GLA, following changes implemented by the Localism Act in April The Mayor is now directly responsible for strategic housing, regeneration and economic development in the capital and has taken over the housing investment role of the Homes and Communities Agency (HCA) in London. This includes the delivery of the remainder of the current National Affordable Homes Programme in London, along with the FirstBuy November

10 CML Housing Finance shared equity scheme, which is called FirstSteps in London. A proportion of the additional FirstBuy funding announced by the government in September is devolved to London, although the precise amount is still to be determined. Also from April 2012, the Mayor has assumed responsibility for mortgage rescue schemes in London. The Mayor is responsible for producing a statutory London Housing Strategy. Currently, this is still in draft form, having been issued for public consultation which ended in March The final version is awaited, although the Mayor s vision to empower people and transform places through increasing supply is welcomed. It is now expected that the Mayor will bring forward for consultation key packages of proposals which will together form his overall strategy. Home-ownership in London In the first package of proposals which has been published for consultation, the Mayor s Housing Covenant homes for working Londoners, aims to improve the intermediate home-ownership market for low to middle income working households. This includes measures to stimulate new building activity, new products and new supply including new ways of funding intermediate housing, provided they have a proven track record of success with customers and mortgage lenders. Other proposals in the housing covenant include separating the financial product from the property to enable customers to ensure that they find the most appropriate financial package to support themselves into home-ownership without having this dictated by the particular property they purchase. While we support the principle there may be limitations for borrowers in how far they can go down the mortgage route without finalising the property they wish to purchase. The November 2011 national housing strategy Laying the Foundations included NewBuy, a government backed scheme to assist buyers of newly built homes and flats up to 500,000. The inclusion of flats in the scheme is of particular benefit to buyers in London, where there are fewer family houses. Laying the Foundations also included a revamped version the Right to Buy (RTB) scheme, with enhanced discounts. The scheme also includes one-for-one replacement whereby each social home sold is replaced by one at affordable (not social) rent. A Hometrack report in February 2012 highlighted that in London it would require 1.6 RTB sales to replace one property sold through this scheme. This suggests that the one-forone replacement element of RTB in London is not viable. Sales of RTB have not increased as the government would have hoped. This is probably a combination of the 10 November 2012

11 Housing in London: challenges and solutions quality of properties eligible for RTB and the areas in which they are situated together with the ability of borrowers to afford the repayments, even with the increased discount. These issues will be exacerbated in London. On sustaining home ownership, the Mayor has still to bring forward detailed mortgage rescue proposals for London. The Mayor assumed this responsibility from the HCA in April, with a budget of 19 million. Although the Mayor could re-allocate these funds to other priorities, we do not think he should do so. While arrears and possessions remain lower than in the recession of the 1990s we believe this is an important part of the safety net that not only directly helps borrowers most at risk of losing their homes but also encourages other borrowers to come forward and seek help. As the economic backdrop remains depressed and interest rates will rise again in the future, there is a strong case for maintaining MRS. We welcome the recent government announcement to extend MRS in England to the end of March 2015, but note that this extension does not apply to London. We believe that it should and, further, that government should provide for MRS (including for London) in the next CSR. In order to improve uptake of the scheme in London, we believe the Mayor should consider raising the MRS price cap limits, which currently preclude too many vulnerable customers. Looking at the Q3 Nationwide House Price Index, the average property value in London is far closer to the MRS price cap (where the average property value is 98.7% of the cap value) when compared with the east midlands (89.7%) or the south west (90.9%). The private rented sector and affordable housing in London The Mayor is expected to bring forward proposals which could include rent to save products which enable tenants to build equity for house purchase through their rent payments. This would enable Londoners who are currently locked out of homeownership to gain equity in their home without the need for a mortgage or deposit and provide landlords with tenants who have a long term commitment to the home they live in. Previous similar initiatives do not have a proven track record and it will be important to consider how a scheme could be made to work effectively in London. To improve standards in the PRS, the Mayor is expected to bring forward proposals on landlord accreditation and consistent regulatory enforcement by local councils. At a national level, the report of the Montague Review in August 2012 examined how best to encourage greater investment in rental properties and sought to explore the factors that might encourage institutions to invest in new homes for rent. It called for November

12 CML Housing Finance planning reforms, including flexibility to relax affordable housing requirements when developing new market rent schemes. The Housing Stimulus Package of 6 September 2012 announced the removal of affordable housing planning obligations for stalled sites, and included a commitment to build an additional 5,000 homes for market rent in line with the Montague Review proposals. The package extended the FirstBuy scheme with further funding. This will also allow London to extend its First Steps programme, although the amount devolved to London has still to be determined. The government also announced proposals to allow it to underwrite the debt of housing associations where they undertake new full market rent developments. This suggests more effort is now being directed to market rent development in London with consequent affordability challenges for lower income households. However, we still await full details of how this will work. The Mayor has signalled he will engage with Registered Providers to ascertain the extent to which the Affordable Rent programme can continue from April 2015, and explore the range of mechanisms to finance new affordable housing. Without increasing supply of social and sub-market rent homes, we believe this change in development emphasis could mean housing becomes less affordable for Londoners in some areas of the capital. There are a number of other challenges for funders of registered providers which we highlighted in a briefing paper published in June 2012, including ensuring that the changes to Universal Credit do not undermine lender or investor confidence. London s particular challenges Increasing supply to meet demand: Quite simply, London needs more homes. There were 20,040 new homes built in London in , just 17% of the total of all new homes built in England for that year 6. New housing starts in London rose in Q2 of 2012, but new home registrations and new construction orders have fallen 7. Even in 2008, the GLA estimated that London would need an estimated 32,600 homes every year to keep up with demand 8. 6 CLG Housing Statistics Live Tables and HCA completions data 7 Ibid 8 GLA London s Strategic Housing needs assessment, November 2012

13 Housing in London: challenges and solutions The latest statistics on affordable housing starts and completions funded by the HCA and the GLA were released by DCLG on 16 November The key points were that, between 1 April and 30 September 2012, there were 3,735 affordable housing starts on site and 11,432 affordable housing completions 9. In London, based on HCA data, the Affordable Homes Programme has so far delivered over 16,000 affordable rent homes and nearly 6,000 affordable home-ownership homes, taking around 35% of the available programme funding 10. Schemes such as NewBuy and initiatives to re-negotiate planning obligations on stalled sites are helping to increase supply, although it will take some time for firm data to come through as to the extent of the improvements. The supply and cost of land are also key factors which make new developments more expensive in London. Planning constraints and the limited availability of large sites increase cost and complexity for developers; London s growth continues to be constrained by the green belt. Tackling affordability: In London, affordability is a key constraint across all tenures. The cost of home ownership; of private renting; affordable and social renting all continue to rise with demand as supply falters. The cost of renting in London is still significantly higher than average rental costs in England. In 2012, the average housing association weekly rent was (26.7% higher than the England average); the average private sector weekly rent was (71.8% higher than the England average). Numerous reports and analyses have highlighted the growing extent of the problems facing Londoners. Even as recently as 23 October, the National Housing Federation s Home Truths report 2012 claimed that London s housing market was broken at every level and represented the gravest threat to the success of the city. The report highlighted acute supply shortages and spiralling housing costs, particularly rents. This in turn would place the housing benefit budget under severe upward pressure. Welfare reforms will have a disproportionate impact on London: commentators and analysis across the sector are clear in showing that the benefit cap will have a 9 DCLG Table 1012 Affordable Housing starts and completions funded by the HCA and the GLA April to September at 10 HCA affordable homes programme data 11 HCA NROSH+ SDR data Valuation Office Rent Officer data 2012 November

14 CML Housing Finance disproportionate effect on London. Transitional arrangements and discretionary payments are not a permanent solution. The IPPR report Affordable Capital highlights this extensively. The National Audit Office report Managing the impact of Housing Benefit Reform highlighted the impact of Local Housing Allowance changes on affordability of accommodation in the private rented sector. London needs a funding model for new affordable housing which is sustainable and certain. The current arrangements expire at the end of the current spending review period in March 2015; registered providers and their funders need certainty now about how their development programmes will be funded from April The lure of London to overseas investors: A recent report London for Sale? provides a valuable analysis of London s private housing market and shows that over 60% of premium new homes in central London are currently being bought by overseas investors; anecdotal evidence suggests most are kept empty. This removes stock from the housing market and is also a loss of revenue to the Treasury through tax loopholes which make such investment attractive. The report suggests a new approach is needed which seeks to direct this investment into positive areas such as new affordable housing rather than capitalising on the asset values of new and second-hand luxury properties. What should be done, and why: the CML s view We believe there are clear actions for the Mayor and for Government. The Mayor should Complete the picture; publish the full strategy: London needs a single comprehensive housing strategy which blends national and London policy. The full and final version of the strategy is awaited, and the Mayor should publish this without delay. In particular, the Mayor should develop and elaborate his proposals for A funding model for new affordable housing which works for London: In his draft strategy, the Mayor committed to work with the sector in developing the successor to the current affordable housing funding model. Proposals should be brought forward for early discussion with the sector, including Registered Providers and their funders, to provide more certainty as we move forward to the next Comprehensive Spending Review. Continuing mortgage rescue in London: As in the rest of England, we believe the scheme should be extended in London to the end of March 2015, and that the government should provide for MRS in the next CSR. In order to improve 14 November 2012

15 Housing in London: challenges and solutions uptake of the scheme in London, we believe the Mayor should consider adjusting MRS price cap limits. Improving the PRS in a way which dos not impose onerous costs on landlords or risk undermining the buy-to-let sector. Recognise the limits of innovation; keep it simple: In the drive to bring forward new initiatives to increase supply or tackle affordability, whether through low cost home ownership or new initiatives, the needs of mortgage lenders and commercial investors are often overlooked. In our experience it is clear that there are limits to innovation, particularly at a time when mortgage lending remains constrained. Our overriding message is that simplicity, standardisation and scalability are key to ensuring that innovative solutions work for London. Although it is encouraging that some of the Mayor s Housing Covenant proposals recognise the need for approaches with a track record of success with mortgage lenders, others such as separating the financial product from the property might be an innovation too far. Government should Ensure welfare reforms work for Londoners: the benefit cap is widely recognised as having a disproportionate effect on Londoners. Transitional arrangements and discretionary payments will never be more than a sticking plaster solution. The government needs to take on board emerging findings from the current demonstration projects and be prepared to modify proposals where it is clear they will lead to unintended consequences. Develop guarantees for housing association debt in a way which does not undermine existing pricing in the capital markets or disadvantage the positions of existing funders in the sector. The government and the GLA should work constructively with lenders and investors on innovative but deliverable solutions to London s housing challenges, recognising our contribution as part of the solution, not part of the problem. November

16 g Finance Copyright 2012 Council of Mortgage Lenders. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic or mechanical. Photocopying or other means of recording are forbidden without the prior written permission of the publisher. The Council of Mortgage Lenders North West Wing, Bush House, Aldwych, London WC2B 4PJ Telephone: Fax: Every effort has been made to ensure the accuracy of information contained within the report but the Council of Mortgage Lenders cannot be held responsible for any remaining inaccuracies. The opinions expressed in this report are the responsibility of the authors alone and are not necessarily the views of the Council of Mortgage Lenders. ISSN: November 2012