Written evidence submitted by Northern Housing Associations [RTB 116]

Exec Summary

• This report has been produced by Altair on behalf of a group of Northern Housing Associations (HAs); in response to the proposed right to buy extension (RTBE).
• These Northern HAs support the government in its desire to encourage aspiration for social housing tenants, and of creating new ways into homeownership.
• As part of this commitment to prosperity for their tenants and the communities in which they work, Northern HAs want to ensure that the implementation of the right to buy extension (RTBE) allows them to continue the work of developing and supporting sustainable mixed communities.
• As such there are a number of processes they feel could usefully be embedded into the implementation of the RTBE to ensure its success:
• Prompt discount repayment; with 100% compensation: Timely and complete compensation will support the building of replacement properties; and also provide capital for new development programmes.
• Extension of RCGF: Greater flexibility in the use of RCGF will support HAs in replacing properties sold.
• Buy back mechanisms for RTBE properties: This will prevent the creation of ‘ransom properties’ which prevent much needed estate regeneration.
• Centrally / regionally administered affordability test and financial advice: This will ensure all prospective homeowners understand the cost of homeownership and can afford the commitment. Central administration will reduce costs to individual HAs and ensure a consistent expert advice is given.
• Use of a cost floor: A cost floor will help protect HAs from making losses on the sale of RTBE properties with lower net book value. This will mean that HAs are not dis-incentivised from investing and improving the condition of their stock.
• Flexible discounts: Would allow social housing tenants the opportunity to buy a more suitable home on the private market. This could stimulate sales and encourage private development within local communities.
• First refusal on resale: This will provide HAs the opportunity to buy back stock in areas they already manage; to guarantee efficiencies of scale and consolidated housing provision.
• Exemption from sales claw-back clauses: Allowing HAs to retain the full RTBE receipt will provide them with the capital required to build replacement homes.
• Consider exemption of rural housing from RTBE: Restrictions on building in rural areas makes the provision of replacement homes very challenging. Exempting rural properties from RTBE will protect the provision of affordable homes in these areas.

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1              Introduction

2              Effect of RTBE on the availability of affordable homes

3              Prospective homeowners under RTBE

4              Replacement of homes sold

5              Recommended mitigating actions

Appendix I – List of DCLG Workshop Attendees

Our report will be addressed to the Directors of Wulvern HA on behalf of a group of Northern HAs.  We stress that our report is confidential and prepared for the addresses only.  It should not be used, reproduced or circulated for any other purpose, whether in whole or in part without our prior written consent, which consent will only be given after full consideration of the circumstances at the time.

If the report is released to a third party without prior consent from Altair, we do not acknowledge any duty of care to the third party and do not accept liability for any reliance placed on the report.

1                    Introduction

1.1.1        This submission has been prepared by Altair on behalf of a group of Northern Housing Associations (HAs); the objective of the paper is to outline how the right-to-buy extension (RTBE) will affect HAs operating in the North of England.

1.1.2        As part of the development of this submission, Altair hosted a workshop between eight northern HAs and the Department of Communities and Local Government (DCLG), a list of attendees is provided at appendix 1. The issues raised and discussed in this meeting provide the key source of qualitative evidence in this paper. We have worked with five HAs to complete financial analysis of the likely impacts of the RTBE and how these may be mitigated.

1.1.3        This submission is focussed on the impact of RTBE for HAs in the North. There are further concerns for Northern HAs that have not been addressed in this paper, for example the issue of fraud, which will be a concern for organisations throughout England.

1.2              The Northern Context

1.2.1        Differences between the economy in the North and South of England are well documented; affecting jobs, employment and other social outcomes. While this split in the English economy will impact on the implementation of many policies, it is of particular relevance to the RTBE; differences in the housing market raise unique concerns for HAs in the North. The stark difference in house prices is made clear by data from the Office of National Statistics, which shows that average house prices vary by as much as £355,609 between Northern and Southern regions (chart 1 below).[1]

1.2.2        The profile of Northern HAs also varies from the rest of England, with 55% of HAs resulting from stock transfers (LSVTs), compared to 46% in the rest of England. As LSVTs are financed differently to traditional associations; and have transfer promises that still need to be fulfilled this may heighten the adverse impact of RTBE on their business plans. Equally many tenants of LSVTs may still have a preserved right to buy, which means that the RTBE will introduce fewer new eligible tenants than for traditional HAs.

1.3              Commitment to Homeownership

1.3.1        The Northern HAs support the Government’s desire to encourage aspiration and prosperity for social housing tenants. They back the principle of enabling these tenants to progress into homeownership. However, they have some concerns about how the proposed RTBE will function in practice. These are outlined in this paper.

2                    Effect of RTBE on the availability of affordable homes

2.1              Introduction

2.1.1        A key area of concern for Northern HAs is how the RTBE may reduce the number of affordable homes[2] they are able to supply. There are two key areas that may affect the availability of affordable homes;

• Future: Sales under RTBE reducing the financial capacity of Northern HAs to develop in the future.
• Current: Sales under RTBE not being replaced, reducing current overall stock numbers – this is addressed in Section 4.

2.2              Impact on Development Programme

2.2.1        In the last year Northern HAs acquired more than 8,500 new homes (HCA statistical returns, 2013-14). This development capacity is, in many cases based on borrowing against existing assets.

2.2.2        A number of organisations in our sample have raised concerns that the RTBE may reduce the financial capacity available for development; through a number of processes;

• Erosion of Asset Security: If Northern HAs are unable to replace properties; or take time to do so (see Section 4) this may reduce the asset base they are able to borrow against to fund a development programme. This is likely to reduce the number of homes that can be developed. It may also impact on their credit ratings and the cost of borrowing.
• Cost of varying loan securities: Where properties that are subject to RTBE have loans secured against them, HAs will be required to switch the security to other properties. Not only is this likely to incur charges both in terms of legal fees and administrations costs, it will also reduce the unencumbered stock available to borrow against.
• Loss of rental income: Unless replacement was instant, there will be lost rental income on properties that are subject to RTBE. This reduction of income for Northern HAs will impact on overall turnover and surpluses and therefore their ability to finance new development. Our modelling suggests that if one year of rental income was lost for each property sold, the average annual cost in lost revenue to the Northern HAs in our sample would be £548,340.

2.3              Impact on Regeneration Schemes

2.3.1        Regeneration schemes not only improve / replace existing poor condition stock; they often supply new homes through in-fill and by increasing density. RTBE may reduce the viability of regeneration for HAs in two ways:

• Net Book Value (NBV): Investing in properties or undertaking regeneration reduces the net book value of a property as the cost of works to the home are paid off. Where investing in a property will reduce its NBV below the market value HAs will be at risk of making a loss if the property is purchased under RTBE. The low market value of properties in the North will exacerbate this issue for Northern HAs. To avoid these losses Northern HAs may reduce their investment in properties and stop undertaking or scale back investment in regeneration projects.
• Ransom Properties: Where properties have been sold on a regeneration estate; they will have to be purchased by the HA before they can be redeveloped. Homeowners may, in effect, hold the development to ‘ransom’ by refusing to sell, or through demanding inflated prices for their property.

2.4              Possible actions to minimise the reduction in the supply of affordable homes

2.4.1        To mitigate the impacts described above Northern HAs would like to see the following actions implemented:

• Prompt Discount Repayment: The timely repayment of the discount to HAs will be critical to ensure cash flow for development, and to enable the prompt replacement of properties required to provide security. Providers feel that compensation needs to be at 100% of discount. If received promptly, so replacement can mitigate rent loss; RTBE sales could provide an upfront capital receipt, boosting cash-flow and funding for development.
• Extension of Recycled Capital Grant Fund (RCGF): At present grant returned to HAs from the sale of RTB homes, has to be spent within three years, otherwise it is lost to the HA and cannot be used to fund future development. An extension of the time to spend RCGF would allow greater flexibility in funding development programmes from RCGF. More flexibility on how RCGF is spent would also be welcomed.
• Buy Back Mechanisms: To avoid RTBE ‘ransom properties’ preventing much needed regeneration; RTBE sales agreements could include an explicit buy-back clause that would allow HAs to purchase the property at market value, if necessary for redevelopment.
  

3                    Prospective homeowners under RTBE

3.1              Introduction

3.1.1        The Communities and Local Government committee are interested in the likely outcomes for prospective homeowners, who are eligible for RTBE, this includes

• Their ability to buy their own homes, and keep up mortgage repayments
• The availability of financial education and advice to prospective homeowners about the costs associated with homeownership

3.1.2        This section addresses a number of areas relating to these and other issues for prospective homeowners.

3.2              Eligibility and Affordability

3.2.1        It is not clear at present what the eligibility criteria for RTBE will be, however modelling from our sample indicates that on the basis of current RTB criteria;

• 45% - 55% of tenants will be eligible
• 20% - 25% of tenants will be eligible and are not claiming housing benefit.

3.2.2        This indicates that a large proportion of stock may be impacted by RTBE. Housing benefit claims have been used as a rough estimation of affordability for tenants. Northern HAs are concerned that eligible tenants under RTBE may end up as marginal homeowners; and that this may lead to a ‘bubble’ of repossessions when equity payments become due.

3.2.3        To mitigate this, it is suggested a robust affordability check is put in place, similar to that on other homeownership schemes. At present the HAs in our sample do not have affordability checks for RTB in place, but would support a centralised scheme; similar to ‘helptobuy’ for shared ownership.

3.3              Alternative affordable routes to homeownership

3.3.1        The issue of affordability in homeownership could be addressed by introducing alternative low cost homeownership products into the RTBE. This is likely to be a form of shared ownership; although rather than traditional shared ownership model it could be a ‘fully flexible tenure’ model; which allows the purchase of smaller 10% equity shares; with downward stair-casing and a ‘buy back safety net’. This would support tenants into homeownership; raise capital for new development; but also maintain rental income for HAs.

3.4              Financial awareness

3.4.1        As part of Northern HAs on-going commitment to supporting their tenants, many provide financial support. However, at present the organisations we spoke to do not have a dedicated resource providing financial awareness to prospective homeowners.

3.4.2        While there is a clear need for this kind of advice to form part of the RTBE scheme; as above, Northern HAs feel that this should be provided by a central agency that administered RTBE affordability amongst other aspects of the process. This has the advantage of providing consistent, specialist information to prospective homeowners; which many organisations may not otherwise have the capacity to provide.

3.4.3        At present, one Northern Association advised us that they need one FTE at £30,000 to manage the administration required on their current RTB applications; and they expect the amount of work to increase significantly following the introduction of RTBE. Identifying additional capacity to provide high quality tailored financial advice may be challenging for Northern HAs and also duplicate resources.

4                    Replacement of homes sold

4.1              Introduction

4.1.1        A key area for the implementation of RTBE is whether homes sold under the scheme will be replaced on a like-for-like basis so that there is no net loss of affordable homes; and to ensure the RTBE encourages homebuilding.

4.1.2        We worked with four Northern HAs to model the likely impact of RTBE on their business plans, and their capacity to replace homes. While this does not represent a statistically significant sample, it is indicative of the picture that has emerged from our conversations with Northern HAs.

4.2              Financial Modelling

4.2.1        Northern HAs[3] that supplied information estimated that even with full compensation for the discount, the valuation of properties would still be significantly below the cost of replacing them with new build units. In the table below the average shortfall on each property was estimated at £24,500.

4.2.2        Each organisation also provided information with estimates of how many units they would sell under RTBE in its first year of operation. The HAs supplying data varied considerably in their estimates of the number of units that would be sold. This was due to variances in both the types of tenants and properties. However, all estimated that the highest number of sales would be in the first few years. The estimates of numbers sold in year 1 is shown below.

4.2.3        A combination of estimates of the shortfall per property, and the number of properties that might be sold in the first year gives an estimate of the total subsidy required in order to replace the exact number of properties sold. The average over the Northern HAs which supplied this data was £2,925,000 additional subsidy in year one of the RTBE.

If additional subsidy is not available, then the table below shows the estimated net loss in units due to sales in year one. This shows that an average of 23 units per HA would be lost in the first year of the Right to Buy extension.

4.2.4        Our modelling therefore suggests that it is unlikely that Northern HAs will be able to replace RTBE homes on a like for like basis; instead the predicted replacement rate is approximately 80%.

4.3              Difficulties particular to the Northern Context

4.3.1        As outlined above, house prices in the North of England are significantly lower than in the South. It is this, and the quality build standard used by HAs, that means that the valuation of stock to be sold is lower than the cost of replacement.

4.3.2        Northern HAs have also identified that a larger proportion of their stock is held in rural areas compared to other HAs in England. Due to rural planning restrictions, building replacement properties in these areas can be very difficult and slow. Therefore, while replacement may be possible in another area; maintaining supply of affordable homes in rural areas of the North of England may prove difficult.

4.4              Possible actions to ensure the replacement of homes sold

4.4.1        Northern HAs want to ensure the replacement of homes sold under RTBE, so as to maintain the supply of affordable homes; and the delivery of the opportunities affordable housing provides. As such there are number of possible mitigating actions:

• Use of a Cost Floor: Currently the RTB scheme limits the discount available to tenants so that the purchase price of the property does not fall below what has been spent on the property in the last 15 years. This protects the investment made in the property. For Northern HAs a cost floor that prevented properties being sold below their NBV, would address the imbalance between the actual cost of properties and their market value, and provide sufficient funds for replacement.
• Flexible discounts: Rather than providing discounts on the purchase of social homes; which are designed for rental and often managed as part of an estate or block, tenants could be provided with the equivalent of the discount as a deposit to locate a property on the open market. This would boost the northern property market and incentivise private development.
• First refusal on resale: Retaining the right to buy back properties when the RTBE homeowner no longer wishes to live there will allow HAs to maintain sufficient stock density to achieve management efficiencies of scale. So as not to disadvantage a vendor, a time limit for the HA to purchase the property could be included.
• Exemption from sales clawback clauses: Many LSVTs have clauses as part of their transfer agreement that mean they have to return 50% of the RTB receipt to their associated local council. If this continued under RTBE it would mean half the income received from sales; and therefore halve the number of replacement properties that could be developed. An exemption to sales claw-back clauses is therefore essential for LSVTs to deliver replacement properties.
• Consider exempting rural housing: Given the difficulties outlined above in replacing rural housing; it may be appropriate to exempt rural housing from RTBE, as in the present RTB scheme.
  

5                    Recommended mitigating actions

5.1              Recommendations

5.1.1        This report has outlined a number of ways in which RTBE is likely to affect Northern HAs; the table below summarises the recommended actions that may minimise these impacts:

August 2015