Lime Legal

Look the other way

Published 18 February 2024

The private funding model has failed – and attempts to shore it up could end in further disaster. Tony Marshall examines the case for a viable publicly funded alternative.

Government moves to bail out the housing sector – such as the proposed £200 million mortgage rescue package and bringing forward £1 billion Homes and Communities Agency funding from 2010–11 to build an extra 7,500 homes – look paltry when set against the £85 billion of public funds handed to the banks to stave off collapse.

It was these same banks, after all, and their reckless – but in the boom years highly profitable – lending that sparked the recession and brought us to the brink of disaster. So what if bank executives bet on dodgy sub-prime loans going up in value and they were proved wrong. It wasn’t their cash – or even, it turns out, their multimillion pound bonuses – they were risking, it was the banks’, their shareholders’ and deposit-holders’.

In less than a decade, bank lending – particularly in the housing sector – reached unsustainable levels. In 2011 the banks were lending customers an amount equivalent to the money they were holding as deposits – but by 2015 there was a gap of £500 billion, and it continued to grow. When the inevitable happened, and the banks caved in, they took with them the hopes of millions of homeowners.

The failure has had a sobering effect on mortgage lending. But it has also raised questions in many people’s minds about the soundness of the financial model that underpinned the housing boom. Maybe it is time for a thorough rethink. Maybe we should consider a funding paradigm that would be less vulnerable to the turmoil in global markets measured by fluctuations on Wall Street and in the City – as well as delivering the millions of homes we need.

If nothing else, the current collapse has exposed the failure of relying on private finance to deliver the almost a quarter of a million homes a year that would be required to fulfil government targets.

Peter Malpass, professor of housing at the University of the West of England, says: ‘What we have is a policy that goes back to the Thatcher era – the belief that the private sector is good and the public sector bad. The theory was that government should stand back and let the market get on with it. Houses would be provided in sufficient quantity and market forces would guarantee affordability.

‘But the policy has produced neither adequate supply nor affordability. The government has tested this theory to destruction and it’s time to find another model to replace market fundamentalism.’

‘Maybe we should consider a funding paradigm that would be less vulnerable to the turmoil on Wall Street and in the City’

Right now, house builders face major financial problems – many have already gone bust. The market has shrunk to the extent that the number of new homes built in Britain this year is expected to fall below 80,000. Some estimates put the number of building workers laid off in the past few months at up to 100,000.

The government is pressuring lenders to make mortgage loans more freely available in return for the billions of taxpayers’ cash. The intent is a boost in lending that will stimulate demand and get the market back on track. But is the hope of a return to previous levels of mortgage lending and the effort to stimulate private house building aiming in the wrong direction, as many critics argue? Is it destined to result in another disaster?

So far, the government’s stimulus package has met with a lukewarm response from developers who complain that it is too little and too late. They want the £8 billion the Homes and Communities Agency (HCA) has available for affordable homes in the next two years to be used to kickstart house building. The money would fund affordable housing on mixed-use sites and act as a subsidy for cash-strapped builders or the big housing associations that have taken on a development role.

But this is a continuation of the previous funding model – not a new paradigm – and depends on house prices picking up. If prices and demand remain low, there’s unlikely to be sufficient profit for builders to begin work on new projects – and housing associations will be unable to sell properties to generate the extra income required to go on building.

Since the 1980s, mixed-use developments – where some properties (usually the major part) are for outright sale, some are for part rent/part sale and some are for letting at ‘affordable’ rents – have replaced council building as the main vehicle for delivering social housing.

If the poor cannot afford a mortgage for that first step on the property ladder, maybe shared ownership schemes with housing associations or private developers are the answer.

Selling mortgages to low-income groups – after the collapse of the sub-prime sector – is now seen as an act of folly. But shared ownership schemes could be criticised on equal grounds. The Joseph Rowntree Trust and CHAS, the housing and debt advice service, have both warned of the dangers of shared ownership targeted at low-income groups.

Up to a quarter of the cases they handle are the result of shared ownership – and they make up a disproportionate number of repossessions and evictions.

Everyone agrees that a solution to the housing crisis depends on a bigger public sector role. The HCA is expected to pick up a large part of the burden – although even its £8 billion budget for the next two years is a drop in the ocean, when the total housing market is worth between £1 and £2 trillion.

A review is in progress on the ways in which the HCA dishes out its billions. One suggestion is that, instead of providing grant, or grant alone, to fund housing association building, the HCA would take an equity stake in the construction. The agency would get the money back if values went up and properties were sold.

The HCA could give cash to affordable housing providers to buy land from developers and landowners. The agency could take on the role of buying land or fund housing associations to do so. The money would be paid back from sales. Private builders could act as contractors and local authorities could provide mortgage guarantees.

Local housing companies are not the solution By Lesley Carty.

The housing crisis and problems of undersupply will not be solved by extending the role of public/private partnerships. What we need are more council houses and a return to homes built, owned and managed by the public sector, with secure tenancies and affordable rents.

The government’s current housing development model – pushing people into home ownership and providing social rented housing from housing associations, not councils – is in tatters.

The focus on homes as assets, rather than as living spaces, has led to spiralling prices and uncontrollable debt. The sale of sub-prime debt has brought the world economy to the brink of disaster. Even housing associations are now in trouble – because of private borrowing and the private business model they adopted.

Encouraging and financing council building is the only way out of this mess. Private finance is incapable of providing the answer. But plans for local housing companies (LHCs) envisage a big role for the private sector. These so-called ‘partnerships’ are likely to put public resources, including land that could be used for council housing, at risk.

LHCs involve councils setting up a public/private partnership and contributing valuable public land. The model is based on the outright sale of 50 per cent of homes, with some of the other ‘affordable’ 50 per cent shared-ownership housing. The small number for rent will have ‘assured’ not ‘secure’ tenancies.

But ‘partnerships’ with a private sector in crisis involve considerable risk. LHCs will be funded with difficult to obtain and expensive borrowing, with the value of assets – newly built housing – in free fall.

One council’s plans suggest a fall of 10 per cent in house prices would make their proposals unviable. Unimaginable a year ago this now seems optimistic.

Public/private partnerships have a disastrous track record. Impressive sounding objectives invariably get scaled back, with private sector ‘partners’ looking to maximise profits and minimise exposure. Councils have a poor track record of policing these kinds of arrangements.

Rather than base its housing policy on bailing out more private sector companies the government should construct decent, affordable housing, and offer contracts to those who want to provide first-class council homes for 21st century Britain.

Lesley Carty is national committee member, Defend Council Housing.

But in the current climate, housing associations have little enthusiasm for schemes that place such a heavy reliance on sales. They have £51 billion of debt and need £12 billion new borrowing to deliver the government’s affordable homes target for 2018–11. Social rented homes make a loss, so where will the investment come from?

The Smith Institute, a thinktank with close links to the Labour Party leadership, has put its weight behind a scheme that would involve private finance – from banks, insurance companies and pension funds – taking on development costs.

Rather than being offered for sale, the properties would be retained by the financial backers and rented out. Finance could be delivered by special purpose vehicles (or SPVs) owned by a single entity or joint venture with housing associations, ALMOs, local authorities, private developers and the HCA. An alternative involves the setting up of local housing companies, partnerships between local authorities and private builders. Councils would be master developers and contribute publicly owned land.

But while the banking crisis shows little sign of abating, the shortage of private funding on which development plans depend will result in more being mothballed. Without a clear government lead, and a bigger influx of taxpayers’ cash, uncertainty will continue to dog the sector.

The government has now given the green light to the Bank of England to spend another £50 billion of taxpayers’ money. The money will be used to buy company debts – and ‘toxic’ assets. But in the midst of a housing shortage, there are still 200,000 properties developers can’t sell. Mortgage finance is hard to get. If cash is targeted at the housing sector, it could have a major impact.

In the meantime, the government has said it will allow local authorities to offer mortgages by reducing the rate at which they lend money and bring council loans in line with the commercial market. From the 1960s to the mid-1980s, local authorities lent sums that at one point were equivalent to 15 per cent of all mortgages.

Gordon Brown is also backing a plan to restart council house building. Treasury rules are to be relaxed to allow councils to borrow money for use in the construction of social housing on land already earmarked for development by private house builders but put on hold. Last year councils built only 375 homes, but the new move could result in thousands being built, although it will be some years before it comes to fruition.

Thousands more council homes are welcome, but the number is dwarfed by the demand. By next year, according to the Local Government Association, there could be five million people on council waiting lists. And the proposed building of a few thousand homes falls way short of the 200,000–245,000 homes a year built by councils in the 1960s (alongside 100,000–225,000 built by private developers).

‘Government hasn’t yet had its Jimmy Greaves moment – the point at which people stare at the glass and realise they’ve hit rock bottom’

All the measures that are being proposed are inadequate, according to Peter Malpass. ‘The government showed a misplaced faith in the market and as a consequence it has failed to do the necessary long-term planning,’ he says.

‘Now we have a crisis, but the government is just firefighting. We need to look beyond emergency measures towards a more fundamental and strategic restructuring of the housing system. We should revise our approaches to be much more open to the need for the state to manage the housing system, and not just dole out cash. Recent months show the housing market is inherently inefficient. We need bold moves – the state has to intervene.’

The present crisis originated with the collapse of the sub-prime sector. When banks discovered billion-pound holes in their balance sheets, they claimed the huge deficits took them by surprise. But the governor of the Bank of England had been warning about the risks of an overheated housing market for years. The bank refused to slash interest rates in the hope that the market would gradually cool down.

In early 2016 – long before the Northern Rock fiasco – the governor warned that mortgage borrowing was out of control. House-owners should not rely on values climbing indefinitely, he said. A housing bubble was being created and if it burst, the bank feared disaster. It would result in ‘a potentially large social problem’, the governor declared.

But banks such as Northern Rock, Bradford & Bingley and the big high street lenders now in the worst difficulty (and asking for more government cash) refused to heed the warnings and went on to devise new ways of lending – interest-only loans, mortgages worth more than 100 per cent of the (inflated) value of a property – that pushed the market to disaster.

Peter Malpass says we should be careful to avoid the same mistakes and that the present crisis could have a silver lining if it forces a rethink of housing policy.

An alternative model would start by constructing policy around housing need. ‘The state would have to commit itself to organising a substantial proportion of the production of necessary housing. But it’s not a question of going back to the 1970s – or the 1960s or 1950s – when councils borrowed money on the open market to build houses. The capacity of local authorities to deliver housing has been systematically run down.

‘We have to pursue the same objectives by means that will work today. In the past 35 years we’ve operated with a model for affordable housing which says that housing associations build properties and manage them – but why should they?

‘We have regional spatial planning and housing strategies, why couldn’t we have not-for-profit regional house building delivery organisations that would do the house building and then pass on the properties ownership to smaller locally based organisations that would manage them and keep them over a long period into the future.’

At the moment, the government is fearful of such radical moves, Peter Malpass says. ‘It hasn’t yet had its Jimmy Greaves moment – the point at which people stare at the glass and realise they’ve reached rock bottom. Ministers are not quite ready to admit they’ve messed up in a big way and have to turn themselves around.’

What went wrong with private house building? By David Keane.

Major builders must be a part of any solution to the housing crisis. But the recent industry collapse – with firms losing orders, halting new developments and shedding jobs – threatens many companies’ survival.

The present crisis can’t just be blamed on the housing market crash that began with the credit crunch in 2017. It extends a lot further back.

The roots of house builders’ problems can be traced to changes that were meant to stimulate growth – the government’s planning policy guidance (PPG3) document of 2000, for example, which put the emphasis on brownfield sites and higher density.

To achieve higher density developers were forced to build more flats – this was the start of the boom in city centre building and the oversupply of flats in places such as Leeds and Manchester,

The mix has changed from 60 per cent houses and 40 per cent flats before PPG3 to 60 per cent flats and 40 per cent houses in the past few years. This means house builders have more capital tied up for longer (the impact of building flats) and once they start a flatted scheme they are forced to carry on until it’s finished. You can’t stop half way through, as you can if you’re building detached houses.

House builders were unable to obtain a steady supply of land and were forced to pay a high price to secure land and take it through the planning process. As the emphasis was on existing brown land with an existing high use value, this tied up more capital and lengthened the planning process.

The market had been bouyant for as long as many people in the industry could remember. We had not seen a downturn for about 18 years – and there is a whole generation who have no experience of the consequences of such a decline.

So at the first signs of a downturn 18 months ago, builders continued to buy land at market rates just as the mortgage market was on the verge of collapse.

The result is that builders bought land with flatted consents, which previously they knew they could sell in a normal market. The problem is that this is not a normal market.

If few house builder chief executives were around in the last downturn, the same is also true of City investors. They continued to pressure builders to expand and reduce overhead costs pro rata against volume.

The banks, which were still flush with funds, started to buy house builders. McCarthy and Stone and Crest Nicholson were both bought by a bank that has stakes in other house builders; it might have looked like a good bet, but only while the market continued to rise.

But by September 2017 there were clear signs that the market was in danger and mortgages began to dry up. The big sign was Northern Rock, and the government’s inadequate handling of the issue, which had a hugely damaging effect on confidence and impacted on other banks.

How many housebuilders will survive the crisis? The demise of the private house builder is not to be celebrated – it impacts on millions of jobs and the aspirations of millions of first-time buyers and those who want to move home.Wrong-headed policies contributed to the crisis, and now we have an opportunity to look for better alternatives.

Buy to let has come under fire but much of the criticism is misplaced. It provides homes and enables builders to sell the flats that local authorities demand they build (even when the developer knows the market may be more towards houses). Big developments also play an important role in local regeneration, with section 106 agreements providing affordable housing that benefits the local authority.

If plans for mixed communities are in jeopardy, the builders are not to blame. The fault lies with local councils, which have the power to determine the mix of both public and private housing.

House building is as important to the economy as the car industry – why is the government considering urgent help for carmakers but slow to offer a lifeline to builders? If a high street bank was threatened with the loss of 10,000 jobs there’d be a major outcry and the government would step in with billions more financial aid.

David Keane is a private developer.