Shaping Housing and Community Agendas

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CIH Response to: Reinvigorating the Right to Buy and one for one replacement: A DCLG consultation February 2012 This consultation response is one of a series published by CIH. Further consultation responses to key housing developments can be downloaded from: http://www.cih.org/policy/papers.htm Shaping Housing and Community Agendas Page 1 of 15

Introduction The Chartered Institute of Housing (CIH) is the professional body for people involved in housing and communities. We are a registered charity and not-for-profit organisation. We have a diverse and growing membership of over 22,000 people both in the public and private sectors living and working in over 20 countries on five continents across the world. We exist to maximise the contribution that housing professionals make to the wellbeing of communities. As such, we have a wealth of information and expertise at our disposal and access to members working to deliver housing opportunities across the UK. Our consultation submission is framed on the basis of expertise, practitioner knowledge and information received from our members, local authorities and wider networks. In particular we are grateful for the involvement of the Rural Services Network in the preparation of this response. Background to the Right to Buy The policy of Right to Buy (RTB) has been a contentious housing issue from when it was first introduced in 1980. Views on the policy are divergent. It has either met the home ownership aspirations of a generation, increased social mobility and established mixed communities or it is responsible for the removal of 2million homes from the social housing sector directly contributing to the shortage of social housing this country now faces. The number of RTB sales has declined over recent years due to a number of factors. These include the period of economic uncertainty and the knock-on effect to market confidence and mortgage availability; the tighter cash caps on discount levels introduced by the previous administration and the natural reduction in the number of those who both want and have the means to exercise their RTB. Therefore the debate on RTB had largely died away. Page 2 of 15

The move to local authority self-financing put RTB back into the spotlight. Under selffinancing, it was proposed that local authorities would keep any receipts from RTB sales rather than having to pay 75% of the receipts to Central Government through the RTB receipts pooling arrangements. However, this proposal was subsequently amended and pooling remained. As a consequence, local authorities were compensated in the self-financing settlement for an assumed number of RTBs. While many thought the continuation of any level of RTB receipt pooling was inconsistent with the aims of self-financing, i.e. a localist selfdetermined future for local authority finance, the low forecast levels of RTB gave some comfort that it may not be too big an issue. The sector might have then pushed to remove RTB pooling at the time of the next spending review. However, in October 2011, the Prime Minister indicated an intention to raise RTB discounts to a level that, in the government s view, will make RTB attractive again to tenants across England. The money raised will then be used to cover local authority housing debt, and to fund more affordable housing. Under the plan, for every home brought under RTB a new affordable home would be built over and above existing plans. This new policy was included in 'Laying the Foundations: A Housing Strategy for England' published on November 21. On 22 December, CLG published the consultation 'Reinvigorating the Right to Buy and one for one replacement' setting out the proposals for how the new RTB policy could be implemented. It seeks views on: Proposals to increase the caps on RTB discount; Protections for tenants who exercise their RTB; Preventing abuses; Rural areas and exclusions; Allowances and deductions from RTB receipts; Apportioning RTB receipts; Changes to the Local Authority (Capital Finance and Accounting) Regulations 2003; Delivering RTB replacement homes for Affordable Rent; RTB in the housing association sector; and Working with lenders. The impact assessment accompanying the consultation sets out the overarching policy objectives for RTB sale and replacement as: To drive up RTB take-up, thereby helping more people to realise their aspiration of home ownership; To ensure value to the government and a sufficient average sales receipt to be able to fund replacement homes for affordable rent; To protect the increase in overall affordable housing supply over the current Spending Review period to meet housing need; and Page 3 of 15

To provide an investment stimulus to housing construction to support economic output and growth, without increasing central government borrowing. Summary of CIH position CIH recognises that the government wishes to generate increased Right to Buy sales as a means of stimulating home ownership and generating receipts for reinvestment in new homes. Whilst we believe that the policy does not sit comfortably with the move to self financing being undertaken at the same time, we do recognise that the government has committed to this policy course and acknowledge the commitment to reinvest housing receipts in new housing. We want to work closely with the government and sector to ensure that as many of the governments objectives as possible are achieved whilst ensuring that local authorities continue to have the opportunity to develop and deliver long term and sustainable business plans under self financing. The principles of sound and proactive asset management for council housing must be a primary consideration and we have a concern that if RTB sales activity increases significantly, this will make authorities defensive in their plans and therefore less likely to use the flexibilities under self financing to deliver new housing. The ability for authorities to retain receipts locally might be one measure that could reconcile the RTB policy with active asset management. CIH was against the retention of RTB receipts pooling in the self-financing settlement. Primarily, this was due to the retention of pooling running counter to the principle of localism and consequentially constraining the options for proactive local asset management. In addition, the uncertainty inherent in trying to predict future sales is locked into the settlement therefore adding unnecessary risk. The announcement to reinvigorate RTB compounds the problems posed by the initial decision to retain pooling. Many of the complexities that now arise and which the consultation aims to address (allowances and deductions from receipts; apportioning receipts etc.) may not be as critical if local authorities were able to retain the receipts from RTB sales for reinvestment locally. Moreover, the potential increases in RTB levels pose a real threat to HRA Business Plans if stock is not replenished. Within the constraints of this framework, we welcome the commitment to cover the debt associated with properties that are sold and to build more much needed affordable housing with the remaining receipts. CIH feels that, in the spirit of proactive local asset management, it is important that local authorities are given the opportunity, should they wish, to replenish stock within their HRAs locally and will continue to press for a model that allows this to happen. Where authorities are unwilling or unable to commit to reinvestment, the option to pool receipts for allocation by the Homes and Communities Agency (HCA) should also be part of the framework. Page 4 of 15

Successful design of the policy will balance the levels of discounts required to reinvigorate RTB with the need to retain sufficient receipts to allow replenishment of stock and sustainability of HRA business plans. This is not an easy task. It is clear that the proposals will play out differently in different parts of the country and how this regional dimension is fed into the design will be a key issue. This consultation response looks at the details of the proposals and sets out CIH s response to the ten consultation questions that have been raised. We hope that this is useful both for government in the operation of the right to buy discount, and in helping CIH members look at how the new policy may operate in their housing markets locally. The Government s proposals for tenants Proposals for caps, discount rates and eligibility Currently, the level of discount eligible tenants can receive on exercising their RTB is calculated with reference to three factors: type of property, length of tenancy and a cash cap. Only tenants who have spent at least five years as public sector tenants are eligible. The percentage discount is calculated by applying the starting discount rate (35 per cent for houses; 50 per cent for flats) and increasing (1 per cent per year for houses and 2 per cent per year for flats) for each year beyond the qualifying period up to a maximum discount (60 per cent for houses and 70 per cent for flats). The discount is then capped at a location based maximum discount (currently ranging from 16,000 to 38,000). The Government proposes to reinvigorate RTB by raising the upper limit on the RTB discount cash cap to 50,000 throughout England. These changes will also apply to the preserved RTB which is held by former council tenants who transferred under LSVT. In arriving at this proposal, Government considered 5 possible options for change as set out in the draft impact assessment: Option 1: Maintain existing discount ranges with 50,000 cash cap (the option put forward by government) Option 2: Maintain existing discount ranges with 75,000 cash cap Option 3: 40% Headline RTB discount and no cap Option 4: 50% Headline RTB discount and 75,000 cap Option 5: 50% Headline RTB discount and no cash cap Q1: We would welcome views on the proposals for caps, discount rates and eligibility. While announcing an increase to the flat rate cap is attractive in headline terms, by proposing such a cash cap, and hence losing the current regional variation, no account is taken of the wide disparity in regional house prices. Therefore, if implemented, this approach would play out very differently around the country. The table below shows the Page 5 of 15

minimum and maximum discount to the tenant along with mortgage required on purchasing a house at three different sales prices under the proposed option. Property 1 Property 2 Property 3 Market value 80,000 140,000 200,000 Discount min (35%) 28,000 49,000 50,000 (cap) Mortgage required (at min discount) 52,000 91,000 150,000 Discount max (60%) 48,000 50,000 (cap) 50,000 (cap) Mortgage required (at max discount) 32,000 90,000 150,000 The draft impact assessment that accompanies the consultation suggests that the increase in take up will be greatest in high value areas where the cap has been set at a low level primarily in London where the majority have the cap set at 16,000. However, in high value areas, prospective buyers will still have to source a significant mortgage (75% loan to value on a 200,000 property). In lower value areas, the increase in caps produces a much greater discount relative to the property value. Taking the 80,000 example above, if the maximum percentage discount were applied, a mortgage of 32,000 would be required a loan to value ratio of 40%. Therefore, it could be argued that an approach based around a flat rate cap might lead to higher take up in low value areas. To overcome this uneven discount distribution a system of using only a maximum percentage discount with no cash cap could be used and indeed has been considered within the impact assessment. This has the advantage of proportionally increasing the discount to the tenant while also smoothing out the proportion of receipts that could be retained locally. However, it also produces some significant discounts in high value areas. For example selling a 200,000 house at a 40% discount would give a discount of 80,000 and this level of discount may not be acceptable politically. It will be important for local authorities to carry out their own scenario planning depending on the different options given in the paper. This should include estimates of possible levels of take up as well as the receipt available for replacement as discussed below. CIH believes that a move to a flat rate increase to the cash cap for all areas could create two significant issues. Firstly, in low value areas it will produce a discount that makes RTB Page 6 of 15

very attractive but is unlikely to provide sufficient receipt for one to one replacement. Secondly, in high value areas, whilst larger receipts for one to one replacement might be generated, take up might be more limited. The government should carefully consider the advantages and disadvantages of a move to a discount rate that is proportionate to the sales price in order to offer a more equitable approach around the country before determining the discount policy going forward. Further work is required to understand the regional and local impacts before the government makes its final determination. Protecting tenants who exercise their Right to Buy Q2: Do you agree that information currently provided to prospective Right to Buy purchasers is sufficient? If not, what else should be included? The information provided is comprehensive. It is important that information is well signposted for prospective RTB purchasers to ensure that well informed decisions are taken. Q3: Are there further steps which could be taken to ensure that tenants who purchase under Right to Buy know about and understand the implications of home ownership, including their obligations on becoming a leaseholder? It is essential that tenants wishing to purchase are in possession of the full financial facts and fully aware of the responsibilities and costs of home ownership. Preventing abuses Whilst the consultation paper does not ask for specific feedback on the prevention of abuse section, CIH member feedback has highlighted this as a concern. We recognise the work of the former Labour Government in its reforms has helped ameliorate some of the concerns over the years and the FSA s Mortgage Market review picks up RTB issues too but feel this is likely to be an area that will need to be revisited by government and housing providers in the future. Rural areas Q4: We would welcome evidenced assessments of the impact on rural affordable housing of the proposed changes to Right to Buy discounts. There are a number of measures under the Housing Act 1985 to ensure that properties sold under RTB in rural areas remain in the ownership of local people. These include restrictions on resale. However, CIH members are sceptical about how one for one replacement could work in rural areas. Without additional funding and free/discounted land, deals are unlikely to be viable and this is seen as a huge barrier to successful application in rural areas. In terms of Page 7 of 15

public land being available to make deals work, not all public sector land would necessarily be in the right place for replacement, i.e. not in the village where houses were being sold. Furthermore, developing small scale rural schemes attracts significantly higher development costs which will need to be taken into consideration in any value for money assessment. One of the biggest concerns raised by members is around the criteria which would be put on the replacement in rural areas, replacement properties might end up being in, say, the nearest market town rather than in the village where the original property was sold, and so would exacerbate problems for low income households to remain in their original villages. CIH believes it is essential that the government will need to consider carefully the impact of right to buy take-up on rural areas and exceptions to the main policy criteria may be required in order to secure an approach in which the sale of rural council properties, already in very short supply, does not exacerbate the significant shortage of properties in villages. Detailed understanding and evidence on the makeup of properties in rural areas and stock that may be available through the right to buy would be required, in order to give a view as to how big the problems of loss of stock may be in smaller villages. Government should also seek to look at the use of buy back powers to see whether such issues could offset the problem. The Government s proposals for councils Use of Right to Buy receipts: proposals on allowances and deductions Loss of income to the Housing Revenue Account Under self-financing, each local authority is allocated a level of debt based on the future income and costs of their housing assets over a 30 year period. As set out earlier, there is compensation for assumed levels of RTB built into the calculation. The Government wishes to reinvigorate RTB to generate higher levels of RTB sales and HRA business plans need to be compensated for that loss. To do this, the debt associated with any additional sales will be the first call on the receipt. However, not all properties will generate the same value to the business plan depending on factors such as the size and type of property. In order to allow for this, CLG will issue a spreadsheet that gives the debt associated with each property calculated on the same basis as the self-financing settlement. Basic data about the property will need to be entered to re-perform the selffinancing calculation with the result up rated by inflation to arrive at a debt supportable figure for the property. Page 8 of 15

Q5: We would welcome your views on these (loss of income to HRA) proposals As we understand the proposed system, this will be carried out for each property sold during the year to arrive at an average sale figure for the year. Where more are sold than forecast in the original settlement, this average debt figure will be taken from the receipt to compensate the HRA. This has the potential to become a rather complex and convoluted process; it might be argued that such a process is only required due to the inclusion of RTB receipts pooling in the original self-financing settlement. Some in the sector have suggested that this process is unnecessary as the settlement already provides an average debt figure. However, whilst more complicated, this process will give a more accurate level of compensation to the HRA business plan where higher value properties are sold under RTB. CIH believes that a mechanism to accurately reflect the loss of income to the HRA business plan is required. There is an obvious trade-off between accuracy and complexity but we think a relatively straightforward system can be introduced that gives the required level of accuracy. Local authority transaction and administration costs Currently councils can deduct the actual administration and transactions costs of successful sales from the pooled RTB receipt. However, there is no allowance for costs relating to applications under RTB which do not result in a sale. In order to try and simplify the system, it is proposed that councils deduct and retain a flat rate per successful RTB sale. These flat rates will be set with reference to the 40 th percentile of costs achieved by councils in each region over the last three years. The detail in the annex shows the range per region. It concludes that outside London the regional averages do not vary greatly and proposes two rates: 1,900 for London and 850 for other regions based on a three year rolling average. Q6: What proportion of Right to Buy applications are subsequently withdrawn in your area? No response provided Q7: What costs are incurred in managing aborted applications? The Government is considering making a further allowance to deduct the costs of handling withdrawn applications. The proposed additional allowance is good news for councils as these costs aren t currently compensated for. Anecdotally, there are a large proportion of applications that do not proceed to sale and many of these fail very late in the process so could be a significant cost. The proposal is for a 25% increase to the flat rates shown above Page 9 of 15

to cover withdrawn applications. This takes the figures to 2,360 per sale for London and 1,070 for other areas. CIH welcomes the commitment to an additional allowance for aborted RTB applications which has been a growing problem for many years. It is not clear why there is such a large difference in RTB administration costs in different regions and we wonder whether a further review might be helpful to understand what is contributing to it. CLG may wish to look in detail at these costs at a number of authorities to try to understand the differences so that any allowance can be constructed around the cost drivers rather than historic practices. Improvement costs Under current arrangements, councils can claim any costs they have incurred improving the sale property in the last three years from the RTB receipt. CLG is proposing to remove this allowance as they feel these costs are reflected in the sale price and hence by the receipt received. CIH believes this is a fair and reasonable approach to take. Q8: What sources of funding have you used for improvement works in your area? No response provided. Protecting council and central government projected shares of receipts Q9: We would welcome views on the proposed approach to projected receipts. After deducting sales costs, improvement costs over the past three years and a buy back allowance (see below) from the sales receipt, 75 per cent is paid to government and 25 per cent is retained by the local authority for use on any capital purpose. These shares of RTB receipts have been built into government and local authority forecasts (referred to as government assumed income and local authority assumed income). CLG is proposing to protect that income where possible in the apportionment of any RTB receipts. Within the constraints of the current system, and in the context of our general concerns around the impact of RTB within the self financing settlement (that opening up the selffinancing settlement would not be desirable at this stage), this appears to be an equitable way of dealing with assumed income. However, CIH believes that this should be revisited at the next spending review with a view to removing this layer of complexity from the system. Buyback Q10: We would welcome any information councils can provide on the use of Buyback properties. We would also welcome views on this proposal. Page 10 of 15

Councils have the option of using RTB receipts to cover part of the costs of buying back former council homes. Current use of the buyback provision includes putting stock back to long term social rent but also buys dwellings for demolition under regeneration schemes. Where a unit is bought back and put to long term rental use this would count towards the one to one replacement. When considering the buyback proposals, it is important to consider the wider asset management and regeneration policies of the local authority. Use of this money currently contributes to such schemes and removing it may put schemes at risk. Local authorities should review their proposed use of buyback and inform CLG with details of the potential impact of its removal. Cost floor Q11: Do you have any comments on the cost floor proposal - to not amend section 131 of the Housing Act 1995 The cost floor limits the RTB discount to ensure that the purchase price of the property does not fall below what has been spent on building, buying, repairing or maintaining it over a 10 year period. When considering the cost floor it is also important to set it in the context of the asset management and regeneration policies of the local authority. If changes to the discount rate mean that RTB is more attractive, is the current 10 year rule sufficient to protect the investment of the local authority in new homes. If they can be sold after 10 years with no protection, does this provide an unacceptable level of risk at the higher discount rate? Proposals for apportioning RTB receipts It is proposed to apportion RTB receipts as follows: from the receipt the council may deduct Housing debt supportable from the income on additional sales Transaction and administration costs on all sales Local authority assumed income The council pays to central government Government assumed income The remaining receipt is made available to support funding for replacement homes. This will depend on the decision on buyback (see above) and delivery model (see below). If receipts are insufficient to cover all of the above the local authority assumed income and the government assumed income, they would be shared in direct proportion to their respective assumed incomes. The consultation paper contains a number of worked examples of the calculation. Page 11 of 15

Q12: We would welcome views on the calculation of allowable deductions The system is designed on the basis of having to allow for the current receipts pooling and consequent self-financing settlement adjustment. However, within those constraints it appears an equitable way of splitting the receipt. However, there are a number of issues that require further clarification: Does any RTB shortfall or excess roll forward from one year to the next? For example, if actual sales do not cover government/local authority assumed income in one year, will this shortfall be carried forward and made up the following year should sales exceed the target in the following year? What happens to government/local authority assumed income targets after the spending review period? Will transaction and administration costs be up rated year on year or will they remain static in future years? Subject to the clarifications above and in the context of our overall concerns around receipts pooling within the self financing settlement, we believe apportionment should be revisited at the next spending review to look to remove this layer of complexity from the system. However, CIH believes that this is the only approach the government could have adopted towards splitting the receipt. Delivering RTB replacement homes for Affordable Rent Delivering one for one replacement homes for Affordable Rent is a key objective of the new policy. However, the consultation paper and impact assessment make it clear that receipts generated locally will not necessarily secure one for one replacement in each area. The wide variations in sales price, highlighted above, means that receipts in some areas will not, on their own, be sufficient to fund a replacement in that area. Conversely, in some areas, the receipt could fund more than one replacement. The consultation paper sets out three broad options for delivering replacement homes at Affordable Rent. Option 1: Local Delivery where receipts for replacement are left with the council for reinvestment locally Option 2: National Delivery where receipts for replacement are brought together and then allocated through the Greater London Authority in London and by the Homes and Communities Agency in the rest of England Option 3: Combined approaches with some central direction on use but leaving substantial local control. Option 3 is then further split into a local model with direction or local model with agreement. The main difference between these is the level of upfront agreement as to the level of resources local authorities would have to commit. The model with agreement requires a Page 12 of 15

local funding plan which would include value for money safeguards to secure one for one replacement. Under each of the models, the receipts will require additional resources land, borrowing or other funding as per the approach to the 2011-15 Affordable Rent programme in order to make schemes work financially. Q13: Which model for delivery of replacement housing do you consider the most appropriate, and why? The provision of replacement homes is a contentious issue. Local government representatives are understandably advocating a model where receipts are retained locally, consistent with self-financing and the localist principles that underpin it. This is set against historically low levels of public subsidy achieved through the Affordable Rent programme and the increased assurance over one to one replacement a National approach could achieve. The hybrid models have been developed to try and reconcile these two aims. CIH believes that a hybrid solution presents a potential way forward to allow local authorities to develop local plans for reinvestment consistent with the move to selffinancing. However, further work will be required to ensure the system gives fair opportunity to local authorities while minimising the level of bureaucracy such a system could create. The approach should be based on the following principles: Local authorities have the opportunity to retain receipts strictly on the basis that they are reinvested in new affordable housing. Local authorities could be required to prove value for money consistent with that which was delivered in the recent HCA affordable rent programme. This will require other LA resources to be made available (for example land, other receipts or reserves, match borrowing under the self financing debt cap) in order to achieve equivalent value for money. Where local authorities are unwilling or unable (for example through capacity or lack of other resources) to reinvest locally, receipts above the debt element could be pooled for redistribution via the HCA. The above approach has the advantages that the policy could be consistent with proactive local asset management, local controversy could be avoided as LAs have the opportunity to make their own case, and value for money could be secured in line with HCA programmes. An element of redistribution can still be introduced as, inevitably, a proportion of receipts would be likely to be pooled. CIH are keen to work with local authorities, Government and other stakeholders on the detailed criteria required for such a system following the conclusion of the consultation. Page 13 of 15

The Government s proposals for housing associations Eligibility, discount rates and caps applying to RTB also apply to the preserved RTB. The preserved RTB applies to housing association tenants who transferred from a local authority. CLG estimates that 620,000 housing association tenants have the preserved RTB. The distribution of preserved RTB receipts is subject to local agreements between the housing association and the transferring local authority. In most cases receipts are shared with a portion being retained by the housing association to cover sales costs and compensate for lost rental income. Government do not intend to mandate what housing associations do with any receipts they retain. Q14: How can housing associations and councils be further encouraged to use receipts from Preserved Right to Buy sales to support provision of replacement homes? Several authorities and associations have raised concerns around the possible impact that reduced receipt levels might have on allocations under transfer agreements. For example, it is usual for the value of a sold property to the LSVT association to be less than the receipt thereby leaving a proportion of the receipt for the local authority. If discounts are lifted too high, receipts might be lower than the value to the association leaving the local authority with a much lower receipt allocation which might then in turn affect the ability for one-one replacement. We urge CLG to work with LSVT authorities and associations to show how their agreements locally would be affected. Whilst the government has recognised that it should not intervene in the allocation of receipts, there may be more work needed on understanding the impact on reducing the size of receipts. We are also aware of concerns from some LSVT organisations that any significant sales of their stock could affect their loan covenants because of the ratio of debt to value of stock. We would like an assurance that this has been considered by CLG in terms of their scale of understanding before we proceed. Q15: If there are any exceptions where administration and debt costs cannot be covered, please provide details No response provided. Page 14 of 15

The Government s proposals for lenders Q16: Based on your experience, are you able to provide any evidence on the likely percentage of Right to Buy purchasers on housing benefit? No response provided. About CIH: CIH provides a wide range of services available to members, non-members, organisations, the housing sector and other sectors involved in the creation of communities. Many of our services are only available to CIH Members, including discounts on publications, training and events. For further information on the measures associated with the RTB consultation or the CIH response, please contact: Sian Sankey: Policy Manager Email: Sian.Sankey@cih.org Tel: 024 7685 1741 Page 15 of 15