Inquiry into the Economics of the United Kingdom Housing Market: Evidence Submission
1.1. Orbit Group is one of the largest Housing Associations in the country, owning and managing almost 39,000 homes, serving 100,000 customers across 121 Local Authority areas. Originally founded in 1967 we remain committed to improving the social, economic and environmental prospects of people and communities. We are a values-based business which makes a profit so we can deliver our mission of ‘Building Communities’.
1.2. Over the past few years Orbit and our customers have faced many challenges – a global recession, welfare reforms and the housing crisis – building communities that are sustainable is more important now than ever before in our history.
1.3. Despite the challenges Orbit continues to perform strongly and in 2014-15 had the country’s third largest affordable homes programme. 1,373 new affordable homes were brought into management last year, of which 342 were shared ownership properties. In the last 12 months we have launched a £250m bond, an endorsement of our financial strength and track record of delivery. We continue to focus on providing great services to our customers whilst ensuring that they provide excellent value for money.
What measures can be taken to increase the supply of reasonably priced housing in the UK?
a. Government schemes: How effective have Government schemes (such as Help to Buy, shared ownership and the right to acquire) been in improving the affordability of housing?
2.1. Low cost home ownership schemes (LCHO) have been vital in supporting first-time-buyers. Shared ownership in particular has been (and continues to be) an important product to meet the homeownership aspirations of low to medium income households.
2.2. Demand for shared ownership homes outstrips supply by as much as 10:1, and although only around 1 per cent of people live in the tenure, we believe that can play an important role in addressing our housing crisis. This is why Orbit in partnership with the Chartered Institute of Housing published Shared Ownership 2.0 which sets out the potential to expand shared ownership so it becomes a fourth mainstream tenure, alongside home ownership and social and private renting. In the report, we call for a simpler and more flexible product, so it works better for consumers, housing providers and mortgage lenders.
2.3. The recent Government announcements to fund 135,000 new shared ownership homes, as well as lifting restrictions on eligibility criteria will allow an additional 175,000 households to access the product from next April. These measures are very welcomed and are something we have been calling for some time.
2.4. However, there are a number of remaining issues which we would like to see addressed in order to unlock the full potential of shared ownership as part of a well-functioning housing market.
What measures can be taken to increase the supply of low cost private rental properties in the UK?
3.1. The main barrier to private rent is that viable land sites are currently taken up by build-to-sell developers who are able to afford to pay more for the land that becomes available. Build-to-sell developers are in a much stronger financial position because their capital is tied up for a shorter period of time and they are able to re-invest profits over a shorter time period than rented developers.
3.2. In order to encourage growth in the PRS market, planning authorities need to actively require a percentage of any new application to be reserved for PRS, as is the case with affordable / starter homes. This should be particularly encouraged for developed sites in towns and cities where demand for PRS is highest.
3.3. We would recommend that this is incentivised through tax benefits, similar to pension relief on commercial property investments. Additionally, the removal of CIL payments for PRS units coupled with a fast track planning option for PRS schemes would make it a more attractive proposition for developers and increase the pace of supply.
3.4. A further measure would be for government to identify and release government land for PRS sites. In this case a development lease could be granted for developers, with the land cost deferred over (say) 30 years making the rent levels affordable compared to full market rate which is the case when buying private land.
3.5.
a. Will the reduction of tax relief available to private landlords announced by the Chancellor of the Exchequer in the 2015 Budget increase the cost of privately rented accommodation?
3.6. It is likely that this will increase the cost of privately rented accommodation for individual buy to let landlords. However, institutional investors / providers are far less likely to be affected. It is unclear of the true impact of this change, and a rise in interest rates may have a far greater impact on landlords if they are highly geared.
3.7.
b. Will the current trend of a decline in home ownership and an increase in private renting continue? How can the Government encourage a stable long term rental culture?
3.8. The move away from home ownership will continue as new generations of people are unable to raise the capital to achieve a deposit. The desire for home ownership may not disappear quickly as the UK has a culture that sees residential property as an asset class, and as such, outperforms virtually all investments.
3.9. With limited land supply and challenging planning systems, demand will continue to outstrip supply. Major developers have no desire to increase their production output, as this would put further pressure on materials and labour cost. There is very little investment in PRS because of the cost of land and the risk to longer return on the capital investment.
3.10. The comfort and security that renters have benefited through PRS, such as very long term tenancy arrangements can be seen as a detractor for a landlord, particularly when rent levels cannot keep pace with market trends, or when difficult tenants are hard to remove.
3.11. We would recommend a review of the current AST agreements in order to give longer term certainty to people deciding to rent, as per the European model, and still allowing for sensible rent reviews to ensure Landlords rental incomes remain attractive.
c. What are the advantages and disadvantages of restricting rent increases in the private sector?
3.12. A balance needs to be achieved that allows landlords the certainty of a return that enables them to properly maintain their property and make a profit, whilst ensuring that rents remain affordable.
Are any measures needed to increase the supply of social housing?
a. What will be the impact of the Right to Buy for housing association tenants?
4.1. Within Orbit’s customer base approximately 10.7% of our general needs customers are currently already eligible to purchase their home through Right to Buy as a result of stock transfers from Local Authorities. With the extension of Right to Buy, a further 57.7% are now potentially eligible to exercise this right. Within these estimates, the majority of these tenants are based outside London (82.8%) and live in houses (64.4%) rather than flats. Amongst eligible tenants, the majority are families who typically have tightly-managed finances, evidence of financial issues and a history of credit refusal.
4.2. We expect that the impact of Right to Buy for Orbit and other housing association tenants will be primarily positive. Housing association tenants will now be able to purchase their home with a substantial discount. Such tenants with no previous opportunity to own a high-value asset will now have a means to make this possible as a result of the Right to Buy extension. Eligible housing association tenants will also have the opportunity to radically increase the wealth of subsequent generations of their own family since they can now offer an asset in their inheritance which they previously could not.
4.3. While primarily positive, we expect that the Right to Buy extension may still lead to some negative outcomes for individual cases. For example, not all housing association tenants fulfil the eligibility criteria for Right to Buy or are currently in a financial position to obtain a mortgage. Those tenants who are unaware they are ineligible for Right to Buy could have their hopes unnecessarily raised due to lack of knowledge of the Right to Buy or of mortgage lending criteria.
4.4. Increasing opportunities for home ownership to those in social housing may lead to an increase in sub-prime mortgage lending. Whilst the Right to Buy discount will mean that mortgage repayments are lower than a mortgage for a similar property purchased outright, tenants whose finances have not been sufficiently explored by creditors may be offered mortgages they simply cannot afford.
b. What will be the impact of the proposed changes to social housing rents announced by the Chancellor of the Exchequer in the 2015 budget? Are any additional or alternate changes to social housing rents needed?
4.5. Orbit has plans to deliver 12,000 new homes over this period, and invest £10m in community support programmes to ensure our customers have the financial, digital and employment skills to improve their wellbeing. Orbit is also committed to improving the efficiency of its homes through a large scale retrofit programme that will see all homes achieving an EPC level C rating.
4.6. The 1% cumulative cut in social rents over 4 years will have a substantial impact on Orbit’s revenue, which may mean that its ambition in some of these areas will need to be reviewed.
4.7. Initial estimates show that Orbit’s income will be £29m a year less by 2020 due to this action (see table below). If no other changes were made, Orbit would default in its Debt per Unit bank covenant. To redress the Debt per Unit covenant, the Group’s development programme would need to reduce by 600 properties – effectively reducing Orbit’s capacity to develop new properties.
| 2017 | 2018 | 2019 | 2020 |
Rent Reduction (£m) | 6.6 | 13.8 | 21.5 | 29.7 |
4.8. Enabling all housing associations autonomy over rent-setting may allow Orbit to have greater control over its financial future whilst maximising affordability for those customers with low-incomes. Access to income data, as anticipated from recent announcements, does make this a more real proposition, and would enable housing associations to means test our rents, making them more affordable for low-income households whilst scaling rent fairly for those with greater capacity to pay higher rents.
17 December 2015