How will housing association Right to Buy affect the mortgage market?
Published: 14 October 2015 | Author: Sue Anderson
Observers of housing policy have had an interesting few months, watching the Conservatives' pre-election intention to extend the statutory Right to Buy to housing association tenants morph into a voluntary agreement between the housing association sector (led by the National Housing Federation) and the government.
Hot off the press is the news that a reported 86% of housing associations, representing 93% of the sector's rented homes, voted in favour of adopting the voluntary deal. This means that the Housing Bill does not include provisions to give statutory effect to the policy. Instead, housing associations will be working with government to offer a voluntary alternative, the effect of which is still designed to enable tenants to buy their homes.
But what does it all mean for mortgage lenders? And what might the impact be in the lending market? In this article we consider the implications.
The policy - and the politics
The Right to Buy has been an iconic plank of Conservative housing policy for decades. Despite numbers tailing off markedly in recent years, and the withdrawal of Right to Buy from the market in Scotland taking effect from August 2016, it is undeniable that Right to Buy was the policy that fundamentally shifted the tenure of the UK housing stock to one of mass home-ownership.
In opinion polls, public sentiment has long tended to be mixed. YouGov polling in 2013 after Margaret Thatcher's death found that 21% of people saw Right to Buy and the growth in home-ownership one of her greatest achievements, while 22% thought selling off council housing through Right to Buy one of her worst failures.
The allure of the home-ownership dream persists far less equivocally though, with around 80% of adults consistently aspiring to home-ownership. The recent rhetoric across the political spectrum has been firmly centred on home-ownership. For the prime minister, the conference speech soundbite was a pledge to take young people "from generation rent to generation buy", while for Labour, the key announcement was of a new commission looking at home ownership under the chairmanship of Taylor Wimpey chief executive Peter Redfern.
The Conservative pledge to extend the Right to Buy to housing association tenants in England clearly capitalises on the perceived desire for home-ownership, and an aspiration to help as many people as possible achieve it. Nevertheless, it is a technically complex policy and a multi-faceted one for the mortgage lending sector.
The position of lenders
The CML and mortgage lenders are understandably perceived as pro home-ownership. Naturally, many mortgage lenders do make it their core business to provide the lending that enables people to buy. As our chairman Moray McDonald has rightly articulated on a number of occasions, of all financial products mortgages are the one most bound up with people's aspirations and their emotional lives, tangibly enabling people's hopes and desires for home and family to be met in a way that is less relevant to other financial services.
However - and this may come as a surprise to some - the CML is in fact a tenure-neutral organisation. This position is borne not out of ideology, but out of a reflection of reality - our members lend to home-owners but also to buy-to-let landlords, on a commercial basis to institutional landlords, and to social landlords such as housing associations.
So, the Right to Buy policy - and its extension - have to be seen from two different perspectives if you are standing in the shoes of a mortgage lender. On the one hand, it creates a lending opportunity to a potential home-owner (provided both they, and their property, pass muster as acceptable lending risks). On the other hand, the housing association selling the property may see a significant change in its balance sheet, in terms of both its assets and its cash flow, which will potentially matter to any lender who has lent on a commercial basis to that housing association.
From a lender's perspective, successful policy delivery by government - in a way which enhances rather than reduces the lender's appetite to lend, both to would-be owners and to housing associations - needs to take account of both these considerations.
So will the policy change affect lending?
So far, we don't have full detail of how the policy will work. However, communities secretary Greg Clark announced the outline agreement between the government and the National Housing Federation in a statement on 12 October. There was a heated debate between the opposition housing spokesman and the housing minister on the practical implementation of the policy.
The agreement says that the first housing association tenants will be able to start to buy their homes from next year, and that "under the agreement, all homes sold to tenants will be replaced on a one-for-one basis, delivering an overall increase in housing supply". This echoes the commitment made when the previous coalition government announced the reinvigoration of the existing Right to Buy policy in 2012, with more generous discounts accompanied by a pledge that "for the first time, every additional home sold under Right to Buy will be replaced by a new home for affordable rent, with receipts from sales recycled towards the cost of replacement." However, what is different about the commitment to replacement of sold stock this time around is that housing associations are allowed (but not compelled) to include low cost home-ownership, as well as homes for affordable rent, in their flow of stock replacement housing.
In summary, the deal will enable the following:
- 1.3 million families will be given the opportunity to purchase a home at Right to Buy level discounts, subject to the overall availability of funding for the scheme and the eligibility requirements. The presumption is that housing associations will sell the tenant the property in which they live.
- The government will compensate the housing association for the discount offered to the tenant, and housing associations will retain the sales receipt to enable them to re-invest in the delivery of new homes.
- Housing associations will use the sales proceeds to deliver new supply and will have the flexibility, but not the obligation, to replace rented homes with other tenures such as shared ownership.
- Government will continue to work with the National Housing Federation and its members to develop new and innovative products, so that every tenant can buy a stake in their home.
As part of the agreement, the government will also implement deregulatory measures which will support housing associations in their objectives to help support tenants into home-ownership and deliver additional supply of new homes.
Until we get more detail, it is difficult to assess whether all the objectives of the new policy can be met coherently in the round - the Right to Buy itself, the compensation to housing associations, the one-for-one housing association stock replacement, and the deregulation agenda for housing associations. For lenders, the underlying viability of their lending (to tenant-owners, and to housing associations) is the key consideration too, and one that we will encourage the government to recognise and embed.
For lenders, none of these measures in themselves are necessarily controversial or problematic. Nevertheless, the detailed implementation plans will need to be mindful of lenders' risk appetites and operational needs, if lenders are to offer the flow of finance to both would-be owners and housing associations that will enable the policy to operate successfully in practice. We look forward to working with the government and the housing association sector as further details emerge.
One of the most notable things about the current policy environment is the strong political focus - from both the Conservatives and Labour - on promoting and extending home-ownership. This is clearly in line with many consumers' aspirations, and chimes with voter concerns. It seems likely that the lifetime of this parliament will be characterised by a renewed focus on home ownership as a tenure, and the Right to Buy extension is just one manifestation of that.
This is potentially positive for those who aspire to home-ownership, and can sustain it for the long term. But it must be balanced by a very clear understanding that we also need more rented housing, both affordable and at market rates - housing supply is the goal, not just home-ownership supply. And, down at brass tacks business level for mortgage lenders, it is vital that any steps taken to promote home-ownership are complementary to, and not at the expense of, the flow of lending to support sustainable housing finance in all tenures.