Response. Reinvigorating the right to buy. Contact: Adam Barnett. Investment Policy and Strategy. Tel:

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1 Response Contact: Adam Barnett Team: Investment Policy and Strategy Tel: Date: February 2012 Ref: RE.IN.2012.RE.01 Registered office address National Housing Federation, Lion Court, 25 Procter Street, London WC1V 6NY Page 1

2 Introduction The National Housing Federation is the voice of affordable housing in England. We believe that everyone should have the home they need at a price they can afford. That s why we represent the work of housing associations and campaign for better housing. Our members provide two and a half million homes for more than five million people. Each year they invest in a diverse range of neighbourhood projects that help create strong, vibrant communities Housing associations have around 620,000 properties where their tenants have the Preserved Right to Buy (PRtB). The Federation and its membership are supportive of enabling the aspirations of tenants to own their own home when they can afford to do so, but we are concerned about the potential impact on the overall supply of affordable housing. The reinvigorated right to buy must not be at the expense of offering other families in need of the opportunity to rent an affordable home. We welcome the chance to respond to the consultation on the Government s reinvigorated right to buy (RTB). We are happy for our response to be published. To support our consultation response, we have surveyed over 100 of our members with stock to which the PRtB applies and established a member advisory group to discuss the proposals. This represents about two-thirds of housing associations with PRTB properties. Key Points Key Recommendations Only national pooling of receipts can deliver one for one replacement. Local pooling will not realistically deliver the one for one replacement, but will place an additional and unfair financial burden upon local authorities Every additional home sold should be replaced within 3 years if the Government opts for a local model they should require that local authorities use receipts within 3 years. Otherwise, the supply of affordable homes could be reduced in a time of rapidly rising housing need A flat national cap does not work. House prices vary too much across England. A flat national cap will either be too low for tenants in high value housing markets to buy their house or too high for low value places to generate enough funding to replace homes. The sector has the appetite and expertise to deliver the one for one replacement, but the Government also needs to step up to the plate and give housing associations the right operational environment to make it a success. Implement national pooling we recommend that the Government pools receipts via the HCA and GLA as this is the only mechanism that could deliver 1-1 replacement Adopt a system of regional caps we recommend that Government varies the cap according to regional house prices. Remove unnecessary restrictions we recommend that Government allows housing associations to deliver replacement homes outside of the Affordable Homes Programme Page 2

3 Consultation Question 1: We would welcome views on the proposals for caps, discounts and eligibility Percentage Caps We welcome the Government s decision to not increase the percentage caps. In our Right to Buy survey, members stated that high discounts would create a real risk that the PRtB receipt would not cover lost rental income. We are pleased that the Government has opted for an increase in the discount by value rather than by percentage. A flat national cap The Federation has indicatively modelled the number of tenants with the PRtB who could afford to buy their own home with the enhanced 50,000 cash cap. Our modelling uses data on tenants incomes from the Existing Tenants Survey of 2008 commissioned by the Tenant Services Authority, with incomes uprated to reflect 2010 levels and assumes that house prices are the lower quartile average for each region. The modelling also uses an affordability measure of 3 times average single household income 2.5 times average income for dual income households to judge whether households are able to exercise their PRtB Our modelling demonstrates that the flat 50,000 national cap does not work. It is too low for tenants in high values areas to exercise their right to buy and too high for low value areas to generate enough funding from sales receipts to replace homes. The table below, drawing on our indicative modelling, shows the number of PRtB tenants that may be able to buy their own home under the proposed 50,000 cap: PRtB tenants able to buy their own home % of PRtB tenants able to buy their own home North West 23,424 63% East Midlands 15,397 60% West Midlands 11,929 51% Yorkshire and Humber 10,394 71% East of England 8,284 48% North East 7,175 59% South west 5,636 23% South east 4,697 10% London % England 87,751 14% Page 3

4 As the previous table demonstrates, a much smaller proportion of tenants are able to buy their own home will be in London, the south-east and the southwest. For example, only 814 or 1.2% of all PRtB tenants in London will be able to afford to buy their home. Furthermore, these are precisely those areas of the country where sales receipts are needed to increase if the reinvigorated right to buy is going to generate sufficient funding to build new homes. Contrastingly, the proposed 50,000 cap has the potential to significantly reduce the supply of affordable housing in parts of the north and the midlands. The risk here is that, despite the potential for a surge in sales receipts, it will simply not be enough funding to build replacement homes, because of the low property values. For example, a 100,000 home would only generate 50,000 in sales receipts. After allowable deductions have taken place, the net sales receipt will simply not be large enough to fund a replacement. One housing association in the north-west estimates that sales will need to be 40% higher, under the proposed cap, just to generate the same income levels. On the basis of the evidence, we recommend that the government should adopt a simple system of regional caps. These should be based on average house prices. On the basis of the evidence, the 50,000 cap needs to be higher in London, the south-east and south-west, but lower in the north and the midlands. Eligibility The existing eligibility criteria strike a reasonable balance between preventing abuse of the system and limiting the rights of tenants to buy and re-sell their own homes. The provisions in the Housing Act (2004) help ensure that only local people benefit from the right to buy discount. We therefore support the proposals to keep existing eligibility criteria. Consultation Question 2: Do you agree that the information currently provided to prospective Right to Buy purchasers is sufficient? If not what else should be included? We believe that the provision of information to potential home buyers is very important. This is especially the case for RTB homes. RTB mortgages generally have more payment problems than other forms of housing. The Financial Services Authority Mortgage Market Review found that 40% of current RTB mortgages had a record of payment problems 1. 1 FSA, Mortgage Market Review, December 2011 Page 4

5 The information currently provided needs to focus more on the financial implications of home ownership. For instance, the information needs to make clear that, as homeowners, tenants will be responsible for paying for repairs and maintenance. It may also be helpful to include the estimated average costs of homeownership. The information could also be improved if it included more information explaining the practices of unscrupulous agencies promoting the right to buy. It could make tenants aware of the dangers in entering into an agreement with such companies. Consultation Question 3: Are there further steps that could be taken to ensure that tenants who purchase under RTB know about and understand the implications of home ownership including their obligations on becoming a leaseholder? The Federation and its membership believe that the provision of information without advice is unlikely to be effective. Some of our members have reported that information is often not properly understood by prospective RTB buyers. Best practice from our members suggests that face-to-face meetings, such as through home visits, are often effective ways to ensure that prospective RTB home buyers clearly understand the financial and legal implications of buying their home. Consultation Question 4: Assessments of the impact on rural affordable housing at the proposed changes to the RTB discounts. We welcome the proposals to retain the existing restrictions on rural properties. The existing provisions strike the right balance between ensuring that rural affordable housing remains, upon re-sale, in the ownership of local people and also allows prospective RTB buyers in rural areas to secure a mortgage. Consultation Question 9: We would welcome your views on the proposed approach to projected receipts The proposed approach to projected receipts is based on insufficient data. The published estimates of right to buy sales data does not include information on right to buy sales from housing associations. This is a more significant gap in authorities that have transferred a significant part or all of their housing stock to housing association, because the majority of RTB sales will be through housing associations. To ensure that the Government is able to produce a robust assessment, the Federation would welcome further engagement with DCLG officials to ensure the Government has up to date information on right to buy sales. Page 5

6 Consultation Question 11: Do you have any comments on the proposal to not amend Section 131 of the Housing Act 1995? We welcome and strongly support the proposal not to amend the cost floor rule (Section 131 of the Housing Act 1995). The cost floor rule means that the level of discounts can be reduced if a home has been recently bought or built by the housing associations or money has been spent on improving, repairing or maintaining it. This is very important to protecting the financial position of housing associations, because it ensures any money invested in a home over the last 15 years is secured. Consultation Question 12: We would welcome views on the calculation of allowable deductions We agree that the local authority should be able to deduct housing debt, transaction and administrative costs and local authority assumed income. It is important that right to buy sales allows local authorities to meet their HRA business plan commitments and service their debts. We would have also expected a similar treatment for housing associations. However, this is not required, because contractual agreements, contained within transfer agreements, are already in place between housing associations local authorities that cover these issues on a scheme by scheme basis. Consultation Question 13: Which model for delivery of replacement housing do you consider the most appropriate, and why? Past experience demonstrates that the right to buy policy has had the potential to significantly reduce the supply of affordable housing. Between the introduction of right to buy in the 1980s to the present day, the supply of social housing has decreased, in overall terms, by 1.2 million homes 2. The Government must select the delivery option that best ensures the one for one replacement is delivered. We consider that national pooling is the most effective option. Only a national model can realistically deliver one for one replacement, which we believe is critical to making the model a success. The model is more financially viable and therefore more deliverable than the other options. Even by the Government s own assessment, the other models would not realistically support one for one replacement. 2 DCLG Housing Statistics Table 104 Dwelling Stock by Tenure, England (historical sales) Page 6

7 Whilst we have sympathy for the localist models, they simply would not be able to generate sufficient funds for making the one-to-one policy financially sustainable in many individual local authority areas. Whilst some areas in London and the south-east of England may be able to out-perform the policy and deliver more than a one for one replacement, it is likely that the policy will not be deliverable for the rest of England. Instead the localist models would place an unfair and undeliverable financial burden upon many local authorities in a difficult fiscal environment. Instead, if receipts are pooled nationally, housing associations and other providers will be able to access sufficient funding to deliver housing schemes at sufficient scale to make the one for one replacement a success across the whole country. Under such a model, the Government may also ask the HCA and GLA to consider the need to replace the additional homes sold within broad housing market areas. Funding could be allocated according to the number of right to buy sales in each broad housing market area. This would ensure a link between where a home is sold and where it is replaced, but it would also give providers the flexibility to deliver across a much bigger area. Importantly, national pooling of receipts can also help make one for one a success in low value areas. Under the national model, local authorities and registered providers - operating in low value areas - would be able to bid for sufficient funds from HCA to fund replacement homes in their areas, rather than rely on a severe shortage of funds (if the funds were pooled at the local authority level). However, if the Government does decide to opt for a local model, then they should require that for every additional home sold a replacement will be provided within 3 years. This will ensure the supply of affordable homes is not decimated during a time of rapidly rising housing need. This would also bring the regulations on using right to buy sales receipts in line with Recycled Capital Grant Fund regulations that also stipulate a 3 year limit. Consultation Question 14: How can housing associations and councils be further encouraged to use receipts from Preserved Right to Buy sales to support provision of replacement homes? We welcome the recognition that housing associations are independent business. Our members are fully committed to making the reinvigorated right to buy a success. Members have indicated an overwhelming appetite to reinvest their receipts in building new affordable housing. However, the consultation document s proposed incentives will not work. Our engagement with members suggests that they will not encourage housing associations to use receipts. The incentives neither make up the funding shortfall that is likely to occur, nor do the incentives offer the sector new freedoms and flexibilities to make one for one replacement a success. Page 7

8 If Government would like to encourage housing associations to build more affordable housing, they should provide additional public investment for replacement homes. This is the most effective incentive. In our RTB survey, over half of members indicated that they would not have the capacity to replace homes with affordable rent homes. If housing associations did replace stock on a one for one basis, then they would be simply be sucking out their future development capacity and would be unable to build new affordable homes. For instance it could put homes already agreed under the Affordable Homes Programme at risk The Government also needs to be mindful about the potential impact of the right to buy on housing association borrowing capacity. If there is a high level of RTB sales, some housing associations may be unable to borrow to the same levels. This may prove an issue for some housing associations that are already highly geared. As a result, these associations may not be able to build as many new homes and may struggle to replace homes sold under RTB. Regardless of whether the Government commits additional resources, it should, at very least, and give housing associations the freedom and flexibility to make one for one a success. For instance, allowing housing associations to deliver replacement homes outside of the Affordable Homes Programme, if they choose to do so, would give the sector some extra flexibilities to make the one for one replacement more likely. Conclusion The Government s proposed changes to right to buy has set the housing sector a major challenge. There are serious risks that the proposals may not generate sufficient funds to build replacement homes viable. It is critical that Government takes active ownership of the reinvigorated right to buy and ensure replacement affordable homes are built within a reasonable timescale. Otherwise, we run the risk of reducing the supply of affordable housing when we are caught up within a national housing crisis. However, housing associations have the expertise and appetite to make the reinvigorated right to buy work. The Federation and its members are committed to working with the Government to discuss our proposals for the reinvigorated right to buy and making it a success. Page 8