Written evidence submitted by EPIC Housing [RTB 087]

1. The type and quality of housing stock covered by the extension.

At March 2015, EPIC’s housing stock consisted of 920 flats and 93 houses. Though the majority of houses were acquired from April 2012 onwards, and are thus subject to the Cost Floor Rule, all EPIC stock is eligible for the Right to Buy (RTB) extension. In addition, EPIC do not possess any bungalows and/or elderly accommodation which remain exempt from the RTB scheme.

2. The geographical distribution of housing association properties covered by the scheme.

EPIC is located in Stoke-on-Trent which, during February 2015, had an overall average house price of £71,121[1], this was less than half of the UK’s average at this time which was £179,2821. Stoke-on-Trent has a high proportion of low-value housing stock and is ranked 9th most deprived city according to the English Indices of Deprivation 2010. The estate in which EPIC is situated, Bentilee, has a high proportion of social rented stock at 60% and a 40% economic inactivity rate.

3. The steps that could be taken to minimize the effect on the availability of social housing.

To minimise the effect on the availability of social housing, an alternative to RTB needs to be implemented. Similarly to RTB, EPIC’s You Fix scheme[2] helps working people on low incomes to purchase their own home. EPIC purchase a rundown/empty property and let it to the You Fix scheme partakers at below market level rent. The tenants are then required to complete works on the property of at least £5,000. At the end of an agreed period, the tenants can purchase the property from EPIC for the price that it was originally purchased for (plus any health and safety/legal costs etc.), so that any added value to the property as a result of the improvement works remains with the tenants. Unlike RTB, You Fix maintains current levels of social housing stock and tackles the issue of empty properties, which ultimately reduces criminal activity and makes neighbourhoods more desirable places to live. You Fix is a ‘something for something’ scheme, whereby tenants contribute by completing works on a property and are rewarded by paying below market rent before purchasing the property at below its renewed market value. On the other hand, RTB is a ‘something for nothing’ scheme, whereby a small proportion of the population are given an unfair advantage to help them into owner occupation at the expense of the public purse.

4. The ability of those eligible for the policy to buy their own homes and keep up mortgage repayments.

Based on common tenant types at EPIC, several mortgage calculations have been modelled in order to understand the number of tenants who will be able to obtain a mortgage and keep up with repayments. The below example mortgage calculations have been produced using the Nationwide Mortgage Quick Quote tool[3]. As you will see, the examples displayed here show that these tenant types would not be eligible for the mortgage amount that they would require to purchase their home through RTB.

Tenant A

- Lived in an EPIC house for 3 years (so is entitled to a discount of 35%).

- Aged 25 with 2 children.

- Employed full time on a temporary contract for 2 years earning £20,000 p.a.

- No credit card debt, personal loans, student loans, school fees, etc.

- Requires a mortgage over 25 years.

House market value:                                          £75,000

35% discount:                                          £26,250

Mortgage amount required:                            £48,750

Mortgage amount available:                            £24,900

Tenant B

- Lived in an EPIC flat for 5 years (so is entitled to a discount of 54%).

- Aged 35 and single.

- Employed full time on a permanent contract for 5 years earning £20,000 p.a.

- No credit card debt, personal loans, student loans etc.

- Requires a mortgage over 25 years.

- Based on service charge/ground rent of £1,000 p.a.

Flat market value:                                          £60,000

54% discount:                                          £32,400

Mortgage amount required:                            £27,600

Mortgage amount available:                            £16,400

5. Proposals for the replacement of the homes sold, including the proposal for funding replacement through the sale of council homes in high value areas.

Even though the government has promised to compensate housing associations through the forced sale of high value council housing[4] the compensation will not be enough to fully fund replacement housing[5]. This is because most social housing is purpose built and mostly located in estates which are valued lower than houses which are not within social housing estates. Often valuations, according to in-house data collected at EPIC, can be approximately 30% lower than for similar sized properties in private housing areas.

For EPIC the average flat is valued at around £55,000 with an average house at £78,000. To replace these with new housing would cost around £70,000 and £85,000 respectively. The HCA quality requirements can add a premium of around £10,000 to each newly purchased property – so a replacement flat will cost £80,000 and a replacement house will cost £95,000. Even if we get the full value of the gap between the sale price and the RTB discount we still have to find an extra £25,000 to replace the flat and £17,000 for the house.

EPIC must fill this funding gap from borrowing but we are only allowed to charge social rents for these properties. These rents are around £70 to £90 per week each. This amount is insufficient to cover the additional borrowing costs and pay for management and maintenance. In addition, the government does not offer any compensation for the transaction costs of selling the existing stock and buying or building new.

6. The availability of financial education for prospective buyers, including advice to prospective leaseholders about their responsibilities for paying for major works.

We are not certain about what is available locally. Stoke already has one of the highest repossession rates in England[6] and many of our tenants are in temporary jobs, on zero hours contracts or have existing debts.  Issues around leaseholders obligations require careful consideration.

7. What the effect on the availability of affordable homes will be, and whether any projections have been carried out.

It is difficult to predict the number of Right-to-Buys that will be exercised but we have used some of the NHF national projections and applied them to our own data. This gives us a working projection of about 90 properties being sold, which is about 9% of our stock.

One of the assumptions we are making in this is that the extension of the Right-to-Buy will have the same cost floor safeguards as the existing legislation. This means that we will be losing properties that will be valued at about £50,000 to £55,000. Recent acquisitions at this end of the market have cost us £75,000 to £80,000. So even if we were fully recompensed it is likely that we would only be able to replace every 3 sold with 2 new properties.

Added to the difference in physical replacement numbers would be the timing difference between properties being sold and replacements being purchased. The unpredictability of the Right-to-Buy sales would mean it would be risky to plan on a certain level of sales without any experience. It is also likely that funders would price in a level of risk in any new funding arrangements that we could put into place to get over the timing difference. In addition we would be unlikely to be able to support an extensive acquisition programme at the same time as experiencing significant Right-to-Buy sales without employing more staff.

In summary, we are currently projecting to lose about 9% of our properties and only being able to replace two thirds of them with a timing gap in between sale and replacement.

Proposals in the Budget

8. What the effects will be on housing associations of the cap on rents.

By the end of the fourth year of the reductions EPIC’s turnover will be 12.7% less than it would have been under the previous regime. This together with a projected 9% reduction due to Right-to-Buy sales will put severe pressure on our business plan. We cannot plan for this to be a one off. Government is trying to set a precedent with this proposed legislation by severely impacting on our operating environment with no consultation and with limited time to change our business model.

Plans to look at financing our acquisition plans with lending will now have to be shelved as funders will now be pricing in the risks associated with a sector that is having its income streams as adversely impacted as housing associations. This is likely to lead to increases in the cost of borrowing and expose us to a level of risk that would not be prudent at this time.

We are currently engaged in an exercise to examine our costs and trying to make savings as soon as possible. The two largest areas of our budget are staff costs and repairs.

The work potentially involved in the Right-to-Buy and subsequent acquisition programme will make it difficult to lose any staff and still provide an adequate level of service to our tenants. Our management costs are already below average and we had been driving them down in part by acquiring new properties and not increasing the staffing complement.

Budgets for repairs and improvements will need to be examined. Work currently being done around stock condition and forward planning of repairs to optimise our replacement plans will probably be put on the back burner. It will be easier to immediately cease our programme of improvements and planned replacement programme to focus purely on reactive maintenance and a policy of mend and make do. This may reduce costs in the short term but it will prove more costly in the long term and will not be good value for money. It will also put us and our tenants at risk of failure of major components that could be avoided with a fully funded maintenance programme.

9. What the effects will be on housing associations of changes in housing benefit for younger people.

The direct impact on EPIC of these changes will be minimal in that we currently only have three 18-21 year olds without children renting our properties whom are in receipt of housing benefit.  The main impact on EPIC would be:

1. If a tenant aged 18-21 lost their job and were unable to obtain alternative employment within the six month period that housing benefit continues to be paid.  The consequences of a young person being unable to secure alternative employment in the six month window would most likely be a loss of their home.

2. Difficulty in letting to 18-21 years olds classed as “vulnerable” if there are no clear criteria for anticipating whether housing benefit would be paid to the vulnerable tenant.  In the absence of clear guidelines, the default position is likely to result in unemployed 18-21 year olds being excluded from social housing, (even where they are vulnerable) if there is uncertainty from a landlord’s perspective as to whether the prospective tenant has the means to pay the rent or claim benefit to cover the rental payment.

10. What the effects will be on housing associations of other proposals in the Budget.

The proposals in the budget will severely diminish the development capacity of housing associations and introduce a huge element of risk and uncertainty into our funding model. In addition, the need to reduce operational costs is likely to cut into the quality of customer service and long term maintenance. The pay-to-stay proposal income is set at a very low level outside London which will affect many tenants and encourage RTB take up.

Welfare reform proposals

11. What the effects have been on housing associations of changes to the welfare system in the last Parliament.

Perhaps the most notable change in the welfare system that has affected housing associations to-date has been the ‘removal of the spare room subsidy’. This was launched in April 2013 and is commonly referred to as the ‘bedroom tax’. In April 2015, 143 of EPIC’s tenants were affected, owing – collectively - £9,000 in unpaid rent.

We estimate at least 70% of this number were also liable to pay a portion of their Council Tax liability. This is a further strand of welfare reform whereby, since April 2013, Council Tax support has been devolved to each local authority. The system adopted in Stoke-on-Trent has seen the majority of tenants being charged at least 30% of the full liability. Around 100 EPIC tenants have therefore been impacted twofold by recent welfare changes.

12. What the effects will be on housing associations of the proposed changes to the welfare system.

Many people who are dependent upon benefits will be unable to form households and will be unable to live in the private rented sector. The move to Universal Credit will undoubtedly increase rent arrears and the transaction costs of rent collection. We are concerned that more of our tenants will experience poverty, especially those who are unable to work.

August 2015