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Reforming the ‘Right to Buy’

The Government has made significant changes to the Right to Buy scheme (“Reinvigorating Right to Buy and One for One Replacement, Information for Local Authorities”) with the aim of increasing take up and ensuring a ‘one-for-one’ replacement of social housing sold under the scheme. Key features of the changes are:

  • Replacing the regional discount caps with a significantly increased single national cap of £75,000 – a £25,000 increase on the cap proposed in the consultation. The discount rates have not changed and tenants still need to have been a public sector tenants for five years; 
  • A national commitment to replace every additional home sold (as a result of the changes to the scheme) using recycled sales receipts towards the cost of replacement social housing let on an ‘affordable rent’ (i.e. at a rent of up to eighty per cent of market rents);
  • Local authorities will be able to retain all the additional receipts (generated as a result of the changes to the scheme) for replacement housing, provided they agree to limit the use of the net receipts (after certain costs) to thirty per cent of the cost of the replacement homes;
  • In the same way as the Affordable Homes Programme local authorities will then lever in additional resources (including land) and borrowing (secured on the higher rental income) either on their own or in partnership with another provider; and
  • Any local authorities that are unable or do not wish to use receipts for replacement homes will submit their surplus receipts to a national pool to which local authorities and Registered Providers can bid.

The Right to Buy scheme has been one of the iconic public policies of the last thirty years. Whilst, council house sales took place before it is synonymous with Margaret Thatcher’s legacy. At the time of its introduction Michael Heseltine described the Right to Buy as “an irreversible shift of wealth in favour of working people and away from the state”. If it was introduced today, David Cameron would probably describe it as part of his ‘Big Society’. However, despite their criticism of the Labour Government’s reforms to the scheme which the Conservatives saw, not entirely correctly, as leading sales to drop to barely a few thousand a year, there was no commitment in either their 2010 Election Manifesto or the Coalition Agreement to reverse those changes. 

What subsequently changed was an increasing emphasis on housing policy in the Coalition Government’s second year and the political need to have a housing strategy. In the short term this sought to highlight the missed opportunities under the Labour Government. In the longer term it seeks to build political stock with those beneath the housing ladder ahead of the 2015 General Election. 

Winning over HM Treasury

There was also an opportunity for a “win win” to realise the value of the existing housing stock to build new homes, addressing head on the fundamental criticism of the scheme that it shrunk the social housing stock; nudging the Coalition Government closer to its pledge to build up to 170,000 new affordable homes by 2015; and, at the same time helping to stimulate the housing construction sector – all with no additional Central Government expenditure. 

An attractive proposition for the Treasury who still had be persuaded to waive their ‘rights’ to this income stream by protecting their expected income from the scheme chalked up in the last Comprehensive Spending Review, allowing the additional receipts to be ring-fenced for replacement homes.

However, Treasury officials also probably saw that the revised scheme put another ‘nail in the coffin’ in Government grants supporting social housing and, moved the spotlight to an area where they have been keen to focus for a number of years – the value residing in the existing social housing stock. For years Treasury officials have been pouring over the books, particularly those for the housing association sector, seeing what they consider to be their investment (i.e. past Government Grant) not working for them. Ideally, they probably wanted to adopt the same delivery model for replacement homes for local authorities, to housing associations.

Extending Right to Buy to Housing Associations?

Instead, the Government is deploying incentives on housing associations to recycle receipts much as expected for local authorities. To go further would have meant clashing with the sector over their independent status which, while is ill defined (for example, they are categorised as those of a “public authority” for the purposes of the Human Rights Act and judicial review) is fiercely guarded. The sector likes to remind the Treasury that their independence protects them from housing associations becoming an ‘on balance’ sheet problem for Government. But it is a weak defence and besides, there is already a statutory ‘Right to Acquire’ scheme for housing association tenants, albeit vastly inferior to the Right to Buy, so that particular Rubicon has already been crossed.

Fully extending the Right to Buy to housing association tenants (or significantly increasing the discounts under the ‘Right to Acquire’ scheme) would, be a ‘feather in the cap’ for the Government’s aims for increasing home ownership. Indeed, early in the year the Institute for Public Policy Research published a paper from two prominent Members of Parliament, David Davis and Frank Field (“Right to buy 2.0”) providing proposals to do just that. In response Housing Minister Grant Shapps, who is known to be in favour of such a plan, has said the government would consider the idea as part of its review of housing policy. With a million housing association tenants without a Right to Buy and, with Government searching for cheap growth stimulates, maybe that change will come sooner rather than later?

Will the changes deliver?

The key consideration in making changes to the scheme was maximising take up whilst ensuring value for money and, that the average sale receipt will be sufficient for the replacement on a ‘one for one’ basis, based on an affordable rent model.

The Government saw that the simplest and most immediate way to achieve this was to raise the regional discount caps which, had been significantly reduced by the last Labour Government, which had ranged from £13,000 to £39,000. Consequently, these caps became the main constraint on the size of the discount rather than the percentage rate as originally intended. The decision to introduce a single national £75,000 cap reverses this situation and takes, for example, the average ‘effective discount’ in London from thirteen to thirty-nine per cent and in the South East from twenty-eight to forty-five per cent. This drew criticism from within the local government and housing sectors as not taking account of regional variation of house prices. They claim that sales in low value areas would on this basis provide poor value for money and produce receipts representing a significant loss in terms of a one-for-one replacement of homes.

But, Ministers wanted a simple single national offer to tenants and, were keen to see the level of effective discounts in London and the South East to make a difference in take up. They accept that receipts will not be large enough to fund a one-for-one replacement in some areas. But point out that this is a national commitment which can be met as evidenced by the Affordable Homes Programme.

What the Government is hoping for is that areas in London and South East will be able to ‘out-perform’ the policy and deliver more than a one-for-one replacement, making up for the shortfall elsewhere. Consequently, what we could see is a gradual shift in the number of council and social housing from the North and the Midlands to London and the South East, perhaps even from Stoke to the London Borough of Newham? While that might just reflect demand, it is also an emotive political issue though, one which might take a number of years to be noticed.

In practice even in the London and the South East there are a number of potential hurdles. Notably in terms of demand, access to mortgage finance could be a significant brake on take up. We also know that increasing deposit requirements and Stamp Duty is often the bigger hurdle for first time buyers than affordability. While these factors are currently suppressing the housing market more generally, they may be even more pronounced amongst prospective Right to Buy purchasers. Indeed, whilst welcoming the changes the Building Societies Association has highlighted the “risky” nature of Right to Buy mortgages with forty per cent experiencing payment problems with nine per cent in arrears. Mortgage providers are therefore likely to approach Right to Buy mortgages with caution. 

This is understood by Government as while effective discount rates are to return to the levels last seen in 1999, projected sales after these new changes (23,000 per annum) are significantly lower than they were in that same year. With an estimated 300,000 households that have a Right to Buy and could afford to do so, that will leave many tenants disappointed and local authorities glad that are being (for the first time) compensated for withdrawn applications. Will local authorities and, housing associations in London and the South East see it in their interests to fill that gap (as some are doing to help first time buyers, more generally) in the name of increasing housing supply? We will have to wait, and see.

This post is based on a Local Government Information Unit member briefing by Mark Upton, LGIU Associate. For more information about LGiU membership and briefings see www.lgiu.org.uk or contact chris.naylor@lgiu.org.uk. 

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