We share the government’s enthusiasm to improve the flow of lending to households, and greatly appreciate the fact that in the autumn statement the Chancellor was able to establish a guarantee fund of £1 billion to support up to 100,000 purchases under the new build indemnity scheme, now known as "NewBuy".
We firmly believe that such measures offer significant potential to improve housing provision, employment and wider economic growth prospects; we continue to work, alongside colleagues in the house-building industry and officials from government departments, to deliver the detailed arrangements that will help to underpin the early and effective launch of the scheme.
NewBuy will initially run for three years. A key assessment of the scheme’s success will be the extent to which house building and house purchases under the scheme are additional to those that would have taken place anyway. But it is also important that NewBuy does not distort the wider housing market. We are grateful that ministers have not set specific volume targets, as this would have risked unintended consequences.
UK banks have made significant progress in strengthening their financial positions over the past few years, improving both their capital and funding positions. The customer funding gap has fallen by over £600 billion since the start of credit crunch to stand at £273 billion at mid-year 2011.
Sources: Published accounts and Bank of England calculations.
(a) Shows the gap between customer lending and customer funding, where customer refers to all non-bank borrowers and depositors. Repurchase agreements are excluded from loans and deposits where disclosed.
UK banks have now fully repaid loans provided under the Special Liquidity Scheme and around half of the support provided via the Credit Guarantee Scheme. But the industry still faces large refinancing needs this year (£140 billion of term funding), much of it in the first half.
This means that UK banks continue to rely heavily on wholesale markets to meet their funding needs. This leaves them, and our mortgage lending industry, subject to the challenging funding conditions caused by systemic problems in the eurozone area.
Funding conditions have eased in recent weeks, following the actions by the European Central Bank to provide eurozone banks with three-year funding, indirectly helping to lower funding costs for UK banks and lift the pressure they have been under to tighten mortgage pricing and other terms. But funding costs remain higher than a year ago, and the UK remains vulnerable to future eurozone developments.
Given the vulnerabilities and uncertainties, it is important to make sure that we have explored all avenues for how to strengthen and diversify funding structures. In this context, we note with interest that the government continues to explore the obstacles to greater institutional investment in the supply of private rental property (most recently, via the Montague Review). But, strangely, the further scope for promoting domestic institutional investor interest in mortgage assets seems to be a neglected area of policy.
The issue was originally touched on by the Miles Review of the mid-1990s, since when much larger volumes of longer-term gilt issuance and historically low gilt yields may have improved prospects. We believe that measures to encourage domestic institutional investment in mortgage assets would be desirable.
Given that current market conditions are somewhat fragile, it is very important that other government policies do not serve to undermine NewBuy or housing market sentiment more generally.
We believe that there are a few areas where policies are not as well aligned as they could be.
Residential stamp duty
As we reflected at the time of the announcement, we doubt the wisdom of allowing the current stamp duty exemption for first-time buyers to expire in March. We are now likely to see an unhelpful bunching of activity prior to the concession’s expiry, followed by a dip. Our data suggests that this pattern is already under way. At a time of economic fragility, the loss of the stamp duty concession risks having a disproportionate negative effect on household sentiment, which we believe it would be best to avoid.
Longer term, more fundamental flaws that persist in the structure of stamp duty need to be addressed.
Although the latest OBR projections now recognise that housing market conditions are likely to continue to be subdued this year, there is a danger that its medium-term projections are still optimistic.
The experience following the early 1990s recession suggests that we should perhaps not expect a sharp bounce-back in activity levels. We also think that housing market dynamics may have altered in the light of the recent experience of subdued house prices and challenging funding conditions, reducing the likelihood of a strong bounce-back over the coming years. Fewer housing transactions would slow the projected recovery in yield from residential stamp duty over the next few years, and it may be sensible to take this into account with future fiscal projections.
We retain our long-standing criticism of the current “slab” structure of residential stamp duty, and believe that it distorts housing market decisions and impedes labour mobility. Its adverse impacts are particularly harsh above the £250,000 threshold, a price bucket that includes a quarter of first-time buyers in London and the south east. The prospect of a sluggish recovery in the yield from residential stamp duty leaves open the doors to longer-term reform, and we would welcome the opportunity to discuss this further with officials.
We believe that the government is mistaken in proposing that support for mortgage interest and, in due course, housing benefit payments should be made directly to the claimant.
We do of course acknowledge the merits of encouraging personal responsibility, by mimicking for claimants the financial decision-making they experience when in work, but we believe the intended approach has not been fully thought through. In practice, most people in work will have in place direct debit or standing order arrangements that ensure that payments of mortgage or rental costs and related utility bills are prioritised automatically. Day-to-day budgeting thus centres on items of discretionary expenditure only, and this is the behaviour that policy should be seeking to foster.
To our minds, then, the current thinking underlying government policy is wrong in principle. And, just as importantly, we think that, if implemented, it would risk undermining the effectiveness of such support and, ultimately, the extent to which lenders/landlords felt able to rely on it.
We are aware that many housing association landlords are extremely concerned about mounting rent arrears and the consequent impact on their cash flows, as a result of rent direct. Although the demonstration projects recently announced and launched by the Department for Work and Pensions will test various scenarios and arrears trigger points for housing benefit payments reverting to a landlord, we are concerned that the trigger points being tested range from 3 weeks to 12 weeks. Clearly, risk and damage to landlords’ cash flows increases as arrears are allowed to accumulate over time. The CML has expressed its willingness to work closely and constructively with DWP on the demonstration projects advisory group, and we look forward to a positive response from the Department to our offer.
Also on housing benefit, we do not think the proposed changes to reduce housing benefit where a claimant has the use of a spare bedroom are likely to be workable in many parts of the country, especially as landlords are concerned that this will further reduce a tenant’s ability to pay their rent and increase the possibility of arrears.
Government has stated publicly that welfare reforms and changes to housing benefit should not undermine the economic viability of housing associations and the social housing sector. Yet our members continue to tell us that rent direct, long arrears triggers and benefit deductions for under-occupancy will, if implemented as proposed, seriously damage the credit-worthiness of the sector at the very time when it needs to access more private finance and capital investment to fund essential expansion.
We remain keen to work constructively with government in minimising as far as possible any negative impacts of the proposed housing benefit changes.
Support for Mortgage Interest
While many aspects of the government’s welfare reform policy are still some way off before being implemented, DWP is currently consulting informally on support for mortgage interest, some of which cause lenders concern.
Here, we would welcome working with DWP in understanding what can be done to pay SMI at the actual mortgage rate charged by the lender, to eliminate the inherent unfairness created by the current system and save government some money - £25 million according to our estimates. And, whilst we understand the computational difficulties that such an approach would entail for DWP, it is equally important that any alternative arrangement does not inadvertently impose onerous administrative costs onto lenders. The government has already achieved savings of hundreds of millions of pounds a year by moving to less generous standard interest rate arrangements, and it is important to bear in mind that any fresh tweaks will still create winners and losers. It is particularly vital that any new arrangement anticipates the likelihood of interest rates reverting to more normal levels over the medium-term, if it is to avoid unintended adverse consequences.
We are particularly exercised by the suggestion that from January 2013, SMI reverts to a 39 week waiting period and £100k capital limit, as this risks materially shrinking the effectiveness of the SMI safety net in limiting possessions.
More generally, we remain willing to explore ideas around placing a charge on a claimant’s property as an offset for more generous SMI eligibility terms. However, there are a number of areas of government policy where such an arrangement might be beneficial, and we believe that close consultation with mortgage lenders is needed in order to ensure that this is an appropriately flexible policy tool.
Fiscal measures to optimise use of the housing stock
Finally, the policy landscape needs to recognise an important limitation affecting housing supply considerations. Improving new build outcomes is and should be a key element of longer-term government housing policy. But new build is unlikely to meet all of our unmet and future demographic needs for housing.
We need to recognise the fact that the bulk of our housing stock that will exist in 20 years time has already been built. A long-standing aim of the CML – voiced in our 2004 mortgage market manifesto – is to promote greater flexibility within and across tenures. To our mind, it seems pure common-sense to explore how we can make better use of the housing stock we already have and how we can maintain/improve its quality.
In this context, lifetime mortgages offer a valuable coping strategy for many older households, helping them to maintain and adapt their homes in later life. But individual circumstances vary widely, and this is an area where a range of policy options is desirable.
This is a sensitive area, as evidenced by the reaction to last autumn’s Intergenerational Foundation report, but not one that interested stakeholders should shy away from. This is an area of housing policy where exploring ideas and establishing cross-party support is desirable. An important principle which should underpin all actions in this area is one of choice rather than compulsion, but this is consistent with using both the tax system and local discretion to create positive incentives.
The recent call for councils to explore using the New Deal for Older People to make it easier for elderly home-owners to downsize to more appropriate housing without having to sell their homes represents a positive example of how to give elderly people more choice and independence.
We welcome and would encourage official (and industry) thinking in this area, and are keen to discuss with officials how to develop market solutions to meet a variety of emerging policy needs.More Articles by Council of Mortgage Lenders (CML) ...