Potential effects of the sale of highervalue council homes interim report

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1 Potential effects of the sale of highervalue council homes interim report London Boroughs of Camden, Enfield, Haringey and Islington 1 Executive summary a Based purely on market values and the current flow of vacant council homes, we can expect around 3,500 homes to be sold across the boroughs of Camden, Haringey and Islington in the first 5 years of the new policy b These figures are based on annual general needs vacancy rates that vary from 3.1% in Haringey to 4.4% in Islington c Enfield is unlikely to have any properties that will be sold under this policy because all of its council homes are below the London-wide thresholds d The building of homes to replace those sold will need to be funded by additional borrowing e Depending on the difference in price between those homes being sold and the replacement homes, it is possible that the majority of the finance being made available for the Brownfield Fund and new Right-To-Buy discounts will also arise from additional borrowing f There is direct trade-off between the rent charged in replacement homes and the amount of money available for Right-To-Buy discounts g It is likely that some local authorities will have difficulty obtaining land for replacement homes h If the one-for-one replacement policy is to be delivered, it is probable replacement homes for some local authorities will need to be built outside of the local authority area i This approach can only work if authorities start building homes outside of their own areas, or funds are transferred to other authorities or housing associations and changes are made to allocations policies to allow those prevented from obtaining local authority tenancies due to sales to access replacement homes built in other authorities j There will be a lag time between the selling of higher-value homes and the availability of replacement homes k 46% of those obtaining local authority tenancies in these four boroughs are already in general needs social housing, 13% are in temporary accommodation or homeless and 12% are living with family and friends l 28% of those obtaining local authority tenancies in these four boroughs are homeless m 40% of those obtaining local authority tenancies in these four boroughs are families with children n The average earnings of those who are working who obtain local authority tenancies in each borough ranges from 200 to 269 per week o The most common reasons for moving given by tenants are being asked to leave by friends and family, overcrowding, underoccupation and eviction or repossession. p In the first two years, 385 homeless households will not obtain a tenancy due to this policy

2 q In the first two years, 615 households in general needs social housing will not obtain a tenancy due to this policy r In the first two years, 579 families with children will not obtain a tenancy due to this policy s Unless the market value of replacement homes is less than 62.5% of the value of the homes that they replaced, it is likely that rent levels faced by tenants will be higher in the replacement homes t Tenants denied a new council tenancy are likely to face the choice of retaining support networks but remaining overcrowded, moving to a new tenancy in another borough or, if homeless, entering or remaining in temporary accommodation u There is therefore a strong likelihood of an increase in the requirement for temporary accommodation v This is likely to have an effect on the private rented sector and on other council services in outer London boroughs as inner London boroughs rent homes for use as temporary accommodation outside of their own boroughs w There is also likely to be a reduction in the flow of new vacancies in council homes as people remain in overcrowded or underoccupied accommodation rather than disrupt their support networks x There will therefore be an increase in the number of people living in overcrowded conditions, and the number of people underoccupying council accommodation y It is possible that the finance raised by this policy will undershoot expectations because vacancy rates fall over time as current tenants choose not to move to new tenancies outside of their current borough 2 Introduction The aim of this report is to provide an initial exploration the social impact of the proposed policy that local authorities should sell off their higher-value homes as they become vacant. Sections 4 and 5 look at how many homes are likely to be sold off and at the financial viability and potential location of replacement homes as these issues are important drivers of any potential social impacts. Section 6 looks in more detail at who is likely to be affected by this policy, and at what is likely to happen to them as a result. Given the short timescale available, the findings should be regarded as an interim view. There are areas such as likely behavioural responses to the offer of accommodation in a different borough, or patterns of use of temporary accommodation where more time would have allowed further analysis. There are also many aspects of the policy where assumptions have had to be made about how it will work in practice. It is also beyond the scope of this report to analyse the effects of the policy on Housing Revenue Accounts but this is an issue that local authorities will need to consider carefully.

3 3 Background 3.1 Conservative Party manifesto The Conservative party manifesto contained a proposal to fund the extension of Right to Buy to Housing Association tenants by requiring local authorities to sell off their higher value properties: We will fund the replacement of properties sold under the extended Right to Buy by requiring local authorities to manage their housing assets more efficiently, with the most expensive properties sold off and replaced as they fall vacant Media reports Media reports of the launch of the announcement contained more detail about the policy, based on a press release issued by the Conservative Party 2 : The Tories estimate that this would involve 15,000 houses a year (0.4 per cent of the total stock) and would raise 4.5bn; therefore they assume the average sale would raise 300,000. In their press release, the Tories provide the following estimates of what will constitute an expensive property in different regions of the country: This means, for example, that the Tories expect two-bedroom council houses vacated in London worth more than 400,000 would be sold off under their plan Previous analysis This policy is based on a Policy Exchange paper written by Alex Morton in 2012 called Ending Expensive Social Tenancies: Fairness, higher growth and more homes. 4 Whereas the Policy Exchange paper recommended selling all council homes above the bedroomspecific median property value in each region, the Conservative Party proposals are to define expensive properties as those in the top third of bedroom-specific market values in each region. Following the Conservative Party s manifesto launch, the Institute of Fiscal Studies produced an analysis of the effects of the policy called Extending Right to Buy: risks and uncertainties. 5

4 4 How many homes are likely to be sold? The Conservative Party announcement of this policy assumed that the government would set regional thresholds for defining expensive properties, as set out in the table above. Its estimates of the effects of the policy also assumed regional thresholds. However the Institute of Fiscal Studies reported that the government intended to consult on whether to implement regional or more local thresholds. 6 The analysis below uses the regional thresholds listed in the Financial Times article of 14 April Were thresholds specific to each local authority to be used, the effect would be to reduce the proportion above the threshold in inner-london boroughs to one-third, and to increase the proportion in outer-london boroughs to one-third. Table 1: Volume of homes likely to be sold under this policy Camden Enfield Haringey Islington Fourborough total Number of council homes 2014/ ,267 10,281 15,440 25,736 73,724 Proportion above market value threshold % 0.0% 4.9% 33.8% 26% General needs lettings 2013/ ,122 2,819 Estimated annual vacancy rate % 3.9% 3.1% 4.4% 3.8% Number of properties sold in year Number of properties sold in year Total no of properties sold in years 1 to ,467 Years to reduce social housing stock by 20% n/a Replacement homes 5.1 Financial viability of building replacement homes The Conservative Party manifesto said that expensive homes would be sold-off and replaced as they fall vacant 14. As discussed by both the Institute for Fiscal Studies and the Financial Times, the intention of the policy is for outstanding debt on any properties being sold to be paid off first, and then for funds raised to: Contribute to the establishment of a Brownfield Fund to pay for the additional costs of residential development on brownfield land Fund discounts provided under the new Right-To-Buy policy for housing association tenants Pay for the replacement of the homes sold off Thus the full amount of the net property value (gross value less debt secured on the property) will not be available for replacement. Whilst some savings would be made by building replacement homes in a cheaper area, it is highly likely that a substantial part of the cost of building a replacement home would have to be financed through additional borrowing.

5 The precise amount of additional borrowing would depend on how large a contribution was required from the sale of each property to the Brownfield Fund and to Right-To-Buy discounts. It would also depend on the expected level of rent for the replacement homes. If the new homes were to be offered at the Affordable Rent level of 80% of market value, this would normally constrain borrowing on the replacement homes to no more than 80% of the value of the home. On the other hand, if the replacement homes were to be offered at a social rent of 50% of market rent, this would normally constrain borrowing to 50% of its value. 15 See the table below for an illustrative example of the two rent scenarios: affordable rent and social rent. Both examples assume that we have a property being sold that is worth 400,000 and its replacement will be worth 320,000, reflecting the idea that it is being built in a cheaper area. 16 Table 2: Illustrative example of sale of a single property and replacement with one that is 20% cheaper Affordable Rent Social Rent Current market value of home 400, ,000 Debt secured on this home 40,000 40,000 Sale costs (assume 5% cost of sale) 20,000 20,000 Net cash position after sale 340, ,000 Contribution to Brownfield Fund (assume 22.2% 17 ) 88,888 88,888 Net cash position after Brownfield Fund contribution 251, ,112 Minimum cash payment required to build replacement home 64,000 64,000 (Assumes build cost of 320,000 and maximum loan of 80% of market value) Net cash position after Brownfield Fund and minimum payment to build 187, ,112 replacement home Amount spent on reducing rent on replacement home to below 80% of 0 96,000 market rent Amount available to fund Right-To-Buy discounts 187,112 91,112 Table 3: Summary of illustrative example Affordable Rent Social Rent Amount raised through sale 340, ,000 Brownfield Fund 88,888 88,888 Cash payment towards costs of replacement home 64, ,000 Funds available for Right-To-Buy discount 187,112 91,112 Debt secured on replacement property 256, ,000 Two points become clear from this example. The first is that, where replacement homes are of the order of 20% cheaper than the homes being sold, the majority of the finance being made available for the Brownfield Fund and Right-To-Buy discounts arises from the raising of additional debt on the housing assets owned by the council and not from the sale of the original property per se. In this

6 situation, it raises the question as to whether funds of a similar order of magnitude could be obtained by local authorities raising their borrowing against existing homes. The point is that if the starting debt on each property is as low as 10%, and rents are in the region of 50% of market rent, there is the potential for raising capital equal to 40% of the property s value. If the desire is to raise rents to 80% of market rent, there is the potential to raise capital equal to 70% of the value. 18 Secondly, in our illustrative example, having sold the original property and paid the minimum 20% of costs required to build a replacement, there is 187,000 of cash remaining. This can either be used to reduce the debt on the replacement property and therefore allow a cheaper rent, or it can be used for some other purpose such as funding Right-To-Buy discounts. There is therefore a direct trade-off between the level of rent charged in the replacement homes and the amount of contribution that each sale makes towards Right-To-Buy discounts. 5.2 Where will the replacement homes get built? Whilst the Policy Exchange paper of 2012 proposed that replacement homes could be built within 30 miles of those sold 19, the Financial Times reported that, in his speech launching the manifesto, the prime minister said that the replacement homes would be in the same area. It then goes on to express scepticism as to whether this would actually take place. 20 Similarly the Institute for Fiscal Studies assumes that the aim of the policy is for homes that are sold to be replaced by new accommodation within the same local authority area. 21 However in the context of inner-london boroughs such as Camden and Islington, availability of land is a serious issue. As the Mayor of London s London Plan acknowledges in its housing supply monitoring targets, the expectations of house-building in these boroughs, and in Enfield, are much lower than other authorities such as Tower Hamlets, Southwark, Greenwich and Barnet, which have been identified as priorities. 22 It is therefore reasonable to assume that it will be quite difficult to deliver sufficient replacement homes within every local authority. 23 It is of course possible that new homes will not end up being built to replace those sold off. The Institute for Fiscal Studies points to a poor record of replacing those homes sold under Right-To-Buy between 2012 and 2014 leading to scepticism on their part. 24 It is also possible that a more realistic prospect for replacing those homes sold in boroughs such as Islington and Camden is for the replacements to be located in boroughs such as Tower Hamlets, Southwark or potentially Barnet, which are priorities for development according to the London Plan. This approach brings with it a number of complications. First of all, either individual boroughs will need to start procuring land in other areas for letting to their own tenants, or funds will need to be transferred to other authorities (or housing associations) and allocations policies will need to be adjusted to take into account of the notion that, whilst Islington and Camden are losing social housing, their replacements are to be found in other boroughs.

7 5.3 When will the replacement homes become available? Any building programme will take some time. Unless local authorities have a source of funds with which to start a replacement building programme before the first homes are sold, it is inevitable that there will be a lag time between the sales of higher-value homes and the availability of replacement homes. This will be required for identifying and negotiating suitable sites, securing planning consent, agreeing funding, identifying developers and construction firms, and the time required for construction itself. Many of these contractual processes depend on certainty about funding for the building programme so cannot be confirmed in advance of having secured the necessary funds from sales. Therefore, for the purposes of this analysis, this lag time will therefore be to be of the order of two years Potential tenants 6.1 Who will not be able to move into a new council tenancy as a result of these sales? What follows are breakdowns of households who took up local authority general needs tenancies in 2013/14. These tables are all based on Social Housing Lettings data for 2013/14, published by the Department of Communities and Local Government. 26 Table 4: Previous tenancy Previous tenancy Camden Enfield Haringey Islington Fourborough total Local authority general needs 38% 39% 11% 53% 40% Housing association general needs 2% 8% 7% 7% 6% Private rented sector 19% 7% 3% 2% 8% Specialist housing 4% 2% 2% 1% 2% Temporary accommodation/homeless 8% 33% 18% 9% 13% Living with friends and family 27% 4% 1% 9% 12% Other 2% 9% 58% 20% 20% Table 5: Whether homeless Proportion who are homeless Camden Enfield Haringey Islington Fourborough total Statutorily homeless - owed duty 8% 34% 70% 8% 22% Other homeless 0% 0% 1% 15% 6%

8 Table 6: Household type Household type Camden Enfield Haringey Islington 27 Fourborough total Elders 8% 5% 4% 8% 7% Adult(s) without children 33% 42% 42% 45% 40% Families with children 52% 45% 36% 38% 43% Other 7% 9% 18% 10% 10% Table 7: Weekly earnings Mean weekly earnings for those new tenants who responded Camden Enfield Haringey Islington Mean earnings n/a Reasons for move Unfortunately the table on reasons for move has a high number of new tenants in the Don t know and Other categories so these figures need to be interpreted with some caution. Across the four boroughs, amongst those new tenants for whom there is data, the largest categories of reason for move, in descending order, are: 1 Asked to leave by family or friends (287 responses) 2 Property unsuitable because of overcrowding (262 responses) 3 Underoccupation (155 responses) 4 Eviction or repossession (111 responses) 6.2 How many people in these groups are likely not to get tenancies due to this policy? Based on the percentages identified above, the number of people across all four boroughs who will not obtain tenancies is shown in the table below. 29 Table 8: Number of people in different groups who are likely not to obtain a tenancy across all four boroughs In the first year In the first 2 years In the first 5 years Previous tenure: Local authority general needs Previous tenure: Housing association general needs Previous tenure: Private rented sector Previous tenure: Specialist housing Previous tenure: Temporary accommodation/ homeless Previous tenure: Living with friends and family Previous tenure: Other Not homeless

9 Statutorily homeless - owed duty Other homeless Elders Adult(s) without children Families with children Other Impacts of the policy Whilst it is possible that homes that are sold under this policy are not replaced on a one-to-one basis, the remainder of this section assumes that this does take place. However it assumes that the majority of the replacement homes for the boroughs of Camden, Haringey and Islington are built outside of these boroughs, following the patterns set out in the London Plan Rent levels Given that the government s funding for new-build sub-market homes has largely been at Affordable Rents equal to 80% of the market rent, it is also assumed that replacement homes under this policy will also be let at these rent levels. Table 9: Average weekly rent for new council tenancies 2013/14 Camden Enfield Haringey Islington Mean weekly rent including service charges for new council tenancies 2013/ Table 9 shows the mean rent for new council lettings in these four boroughs in 2013/14. Given that the mean number of bedrooms in new lettings for all four authorities is just under two 32, it is clear that the average rent level is substantially below what might be charged if using the Affordable Rent definition of 80% of market rent. If we assume that current rent policy is to charge a Social Rent of 50% of the market rent for a new letting, and that in future new tenancies will only be available in properties in cheaper areas (and hence with a lower market value) but that the rent level will be set at an Affordable Rent of 80% of market value, we can calculate the effects of this policy on rent levels faced by potential tenants. If under this policy the home that a potential tenant is offered (the replacement home) has a market value of 80% of the value of the home sold by the council (the original home), then the Affordable Rent in the replacement home will be 64% of the market rent for the original home. If the current rent policy is 50% of market rent, this would represent an increase of 28% for the tenant. If the market value of the replacement home is more than 62.5% of the market value of the original home, the rent is likely to be higher in the replacement home than in the original.

10 Table 10: Relationship between relative market value of original and replacement home and rent increase faced by potential tenants Replacement home value / Original home value 50% -20% 60% -4% 70% 12% 80% 28% 90% 44% 100% 60% Increase in rent faced by potential tenants (Assumes current rent policy of 50% of market rent and future policy of 80% of market rent for replacement homes) 7.2 Choice facing potential tenants Thus provided that cross-border allocation systems exist, potential tenants who might in previous years have been able to obtain a council tenancy, but no longer can, are likely to be faced with the choice of remaining in their previous accommodation, moving to a council tenancy in another borough and probably a higher level of rent, moving into temporary accommodation provided by the local authority, or seeking accommodation in the private rented sector. A substantial move to another part of London brings with it a number of consequences including disruption to family networks, sources of informal childcare, sources of informal support, and networks that might help with job search. There have been attempts to quantify the economic value of the losses associated with a disruptive move of this kind. If this could be done in a rigorous manner, it might be possible to estimate the proportion of tenants denied a tenancy by the sale of higher-value homes who will choose to move and the proportion of who will choose to stay In the absence of specific data on this question, we can certainly accept that the disruption of a substantial move will have some effect. This will mean that some people will choose not to move so as to retain their local support networks, despite the availability of a new tenancy in another borough, and are either likely to remain in overcrowded conditions, or enter/remain in temporary accommodation whilst waiting for a tenancy closer to home. Returning to the main reasons why people obtain a new tenancy from their local council (see Section 6.1.1), we can expect a high proportion of those being asked to leave by family and friends, and all of those facing eviction or repossession to require temporary accommodation. Table 8 shows that, in the four boroughs, 415 homeless households will not be able to take up a tenancy in the first two years. It is probable that all of these people will find themselves in temporary accommodation.

11 7.3 Temporary accommodation Table 11: Location of placements of people in temporary accommodation 33 Within the borough Outside the borough main locations Camden 24% 17% in Hackney Enfield 55% 10% in Haringey Haringey 67% 8% in Enfield, 3% in Barnet Islington 34% 15% in Haringey, 8% in Hackney, 3% in Enfield As we can see from Table 11, the four boroughs use out-of-borough accommodation for a significant proportion of their temporary accommodation. As we have seen above, in the first two years, no replacement homes are likely to be available so all of those denied a new tenancy will be remaining in their current accommodation, looking for a tenancy in the private rented sector or, if homeless, going into temporary accommodation. In future years, because some people will accept council tenancies in other boroughs the additional flow of people into temporary accommodation will reduce to some extent, but will still exist. The combined effect of additional flows of people into temporary accommodation, and others seeking their own private rented sector tenancies, is likely to increase pressure on the private rented sector in outer London boroughs. 7.4 Future flow of vacancies in council homes Those who are moving because of overcrowding, often in another council home, will have the choice as to whether to remain overcrowded, or to take up the offer of a tenancy in another borough. As discussed above, it is difficult to be sure how many will choose to remain overcrowded but retain local networks and how many will choose to move to another borough. However we can be certain that some will choose to remain in their current tenancy. In addition to increasing the numbers of people who live in overcrowded conditions, this will also reduce the flow of vacant homes in future years. Finally, we can probably expect that a fairly substantial proportion of those who are moving because of underoccupation will choose to remain with their current tenancy, once again reducing the flow of vacant homes. 8 Notes 1 The Conservative Party Manifesto 2015, page 52, accessed 20 May 2015 at 1.amazonaws.com/manifesto2015/ConservativeManifesto2015.pdf 2 This press release appears no longer to be on the Conservative Party website. See 3 Financial Times 14 April 2015, What is the real cost of the Tories housing policies? at 4 Alex Morton, Ending Expensive Social Tenancies: Fairness, higher growth and more homes, Policy Exchange, 2012, available at Alex Morton left Policy Exchange in December 2013 to become a special adviser on housing and planning at No 10 Downing Street. (See

12 5 Daniel Chandler and Richard Disney, Extending Right to Buy: risks and uncertainties, Institute of Fiscal Studies, IFS Briefing Note BN171, April Daniel Chandler and Richard Disney, op cit, page 4 7 Provided by each local authority 8 Provided by each local authority 9 Number of General Needs lettings in 2013/14. Source: Department for Communities and Local Government, Social housing lettings in England: April 2013 to March 2014, referred to as CORE data 2013/14, available at 10 General needs lettings divided by total number of council homes 11 Vacancy rate multiplied by proportion above market value threshold multiplied by total stock 12 Each year the total council housing stock is depleted by the number sold off under this policy, so applying the vacancy rate multiplied by the proportion above market value thresholds multiplied by total council housing stock formula produces a gradually declining number of sales each year. There is an implicit assumption to simplify this analysis and to show only the effects of this policy that the stock is not depleted for other reasons (e.g. Right-To-Buy sales) 13 Assuming no other reasons for reduction in stock of council homes. For a more complete exercise, it would be necessary to take into account existing Right-To-Buy sales, and other reasons for disposals, but this gives an order of magnitude for the effect of this policy alone. 14 See section This discussion is not intended as a discussion of actual debt caps faced by authorities in running their Housing Revenue Accounts but an illustration of the relationship between rent levels and the level of debt that can be sustained on a property. 16 It is arguable that the different in value between homes that are being sold under this policy and that of potential replacements is greater than 20% but this example is intended to be illustrative of replacement within a local authority, where differences are likely to be smaller. 17 This follows the Financial Times article of 14 April 2015 where the total amount expected to be raised from sales of higher-value council homes is 4.5 billion and the size of the Brownfield Fund is expected to be 1 billion so the average rate of contribution from each property is 22.2% 18 Once again, this is not a discussion of current debt caps but a discussion of the theoretical possibility of raising debt on existing properties. 19 Alex Morton, op cit 20 Financial Times, 14 April 2015, op cit 21 Daniel Chandler and Richard Disney, op cit, page 7 22 Mayor of London, The London Plan, March 2015, page 110, available at 23 More time would allow more detailed analysis of authorities existing development plans and the scope for identifying additional land in each borough. 24 Daniel Chandler and Richard Disney, op cit, page 7 25 Whether two years is a reasonable lag time to expect between the sale of homes and the completion of building replacement homes is a question that, for the purposes of this report, there was insufficient time to research further. Also, part of the answer to this question depends on details as to how the policy will operate in practice, which are not yet available. 26 CORE data 2013/14 27 Islington data on household type is based on 1,084 responses so data is not available for 38 out of 1,122 new lettings in 2013/14 28 Based on a sample of only 48 respondents 29 Based on applying the percentages in section 6.1 to the number of properties sold each year 30 Enfield does not need replacement homes as none of its council homes exceed the market value threshold and so none would be sold under this policy. 31 CORE data 2013/14 32 CORE data 2013/14 shows the mean figures to be Camden 1.78, Enfield 1.85, Haringey 1.85, Islington Data provided by the four local authorities