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HIPs are history– but does that help the housing market?

publication date: Jul 1, 2010
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The scrapping of Home Information Packs (HIPs) by the new Government has proved popular with consumers. When the new Housing Minister, Grant Shapps, referred to it during a recent broadcast of the BBC’s Any Questions programme, it was greeted with a huge spontaneous burst of applause from the studio audience.

The Government plans to amend the 2004 Housing Act to complete the formalities for getting rid of HIPs. Once it does so, it will mark the end of an initiative that took a decade to implement and then limped along as a feature of the UK housing market for less than three years.

Sadly, however, the suspension of unloved, unlamented HIPs will do little to re-invigorate a UK housing market that is suffering structural, deep-rooted problems. Its biggest impact will be on those unfortunate firms and individuals that have chosen to become pack providers.

Although both parties in the coalition government were committed to getting rid of HIPs, the announcement by Eric Pickles, the new Communities Secretary, of their immediate suspension still came as something of a surprise. It was criticised in some quarters as a source of potential market disruption. The withdrawal of packs should have been phased, it was argued. It is, however, quite possible that this could have further depressed an already weak housing market by encouraging potential sellers to hold off until HIPs had finally been phased out.

On balance, we support the decision to suspend HIPs. Without the compulsion to include a home condition report, the value of packs to buyers was already diminished. And their limited benefits were offset by the waste and additional cost of the unnecessary duplication of searches.

THE BIGGER PICTURE

The reality is that the removal of HIPs will have little effect on the housing market with problems that include a malfunctioning mortgage market Scrapping HIPs will deliver a modest reduction in the upfront costs of marketing a property, but will do nothing to address the bigger problems.

The current malfunctioning of housing and mortgage markets has its root causes in the credit crunch. Support from the Bank of England has mitigated some of the effects of the financial crisis, but lenders are now facing a £300 billion funding gap as the Bank and the Government plan to withdraw their support over the next four years. Market problems have also been exacerbated by the past recession, slow economic growth and the need to address the Government’s fiscal debt (the impact of which has not yet been felt).

In recent months, we have seen an small improvement in lending conditions, with some higher loan-to-value loans available for first-time buyers However, challenges now confronting lenders mean that without a co-ordinated effort by the tripartite authorities and the industry, we may see a reversal of these improvements. This could result in prolonged mortgage rationing and higher borrowing costs.

If this is unavoidable, the Government must begin to set expectations accordingly, and pursue a plan to help existing, financially stretched borrowers. It will also need to focus on more tenureneutral housing policy goals. As things stand, the Government will have a major struggle to deliver housing policy priorities, whether they are targeted at homeownership, investment in the private rented sector or the provision of social housing.

If the credit crunch is the source of our current problems, it did, at least, lead to the formation of a body that could potentially become a focal point for delivering some of the solutions – the home finance forum. The forum has had a haphazard existence to date, but it does offer something for the new Government to build on.

It could play a crucial role in bringing together the main interested parties – the Government, Bank of England, regulator, lenders and consumers – to address the market problems and, where possible, develop shared solutions to help deliver mortgage and housing market priorities. But it will require a commitment from the Government to engage in a genuine dialogue with other members of the forum and to pursue a forward-looking agenda.

COMPETITION AND DIVERSITY

Re-structuring the banking sector to meet European state aid requirements is already a live issue and will directly affect some mortgage lenders over the next few years. We have also seen a number of new entrants emerge this year. These trends should, over time, help diversify competition and reverse one of the effects of the credit crunch – an increasing concentration of lending in the hands of a small number of large firms.

However, new plans for bankruptcies and closer prudential supervision of banks could mitigate some of these potentially beneficial effects by choking off new lending supply and constraining competition. It is not possible to second guess at this stage the future shape and diversity of banking competition in the UK.

But the new Government has said it intends to promote building societies and other mutually-owned organisations, which we support. The Treasury is currently consulting on new approaches to raising capital and looking at the potential benefits to the mutual sector of services that could be shared between firms. What we need are tangible measures that will promote diversity and real competition.

Meanwhile, there is a key role for the tripartite authorities, led by the Treasury, in promoting more effective operation of wholesale funding markets. This would help improve the availability of mortgages and, over time, could help specialist lenders re-enter the market, promoting diversity.

Finally, now that we have greater political, economic and regulatory stability, we believe there is a strong case for the tripartite authorities and the lending industry jointly to hold roadshows to promote inward investment in UK residential property markets. Encouraging new entrants into the mortgage market could improve the availability of funding and further promote competition, which will be additional benefits to ensure that the ‘normal’ market of the future will not be like the one we have today, in which mortgages are, in effect, rationed.

BORROWERS IN DIFFICULTY

Despite the acute pressures on public finances, we believe it is important to extend over the term of this Parliament – and certainly over the period of the comprehensive spending review – existing measures to support borrowers in financial difficulty. The most important of these measures are maintaining income support for mortgage interest, the mortgage rescue scheme and the funding of independent debt advice for consumers.

We recently wrote to the new Chancellor, in conjunction with Shelter, and supported by Citizens Advice and the Building Societies Association, urging him to maintain a commitment to help borrowers in difficulty.

Although payment problems have been kept in check during the recent downturn, this is heavily dependent both on low interest rates and the public policy measures that currently apply. An early announcement in the coalition government’s forthcoming Budget will show that it is listening to the arguments to help those in most housing need.

MORTGAGE REGULATION

On regulation, the over-riding need for lenders is that new rules on capital and liquidity are introduced over a realistic period of time. In a riskaverse environment, there is no need for urgency. Rushed implementation significantly increases the risk of both poor regulation and unintended, but harmful, consequences for banks, building societies and other non-bank lenders.

We need to build into the timetable for regulatory reform sufficient time for the Financial Services Authority (FSA) to assess properly the impact of new prudential requirements on lenders and future levels of mortgage market activity. This is an essential consideration in assessing the outcome of the FSA’s mortgage market review and deciding whether it has established a compelling case for changing the mortgage conduct of business rules.

Potentially, there is another role here for the home finance forum, in testing the proposals emerging from the FSA as a result of the review. We understand, and support, the FSA’s desire to be an intrusive and intensive regulator. But there is a real risk that, in its zeal to fulfil this role, it does not give sufficient weight to market evidence. Imposing undue costs on firms in exchange for modest consumer benefits is not how an effective regulator should operate. It may help its internal regulatory objectives – intensive supervision – but will not help consumers.

An example of this could arise in proposals to regulate buy-to-let lending. Generally, we accept the principle of regulation by the FSA of secured lending. We also want to ensure that the momentum of implementing this is maintained. But buy-to-let is fundamentally different to other types of secured lending, and we are not convinced that there is a case for consumer regulation of the sector, or that it is a priority.

We would like to see the new Government agree a series of policy priorities for housing in different tenures that lenders and others can support. Scrapping HIPs has proved popular but will have little impact on the number of prospective buyers who would like to take out a mortgage and cannot do so. First-time buyers are helped to some extent by the current stamp duty rules, but these measures are also unlikely to have any significant impact on the number of housing transactions, currently at a post-war low.

The rented sector is potentially similarly constrained by unhelpful policy initiatives. Proposals to introduce higher capital gains tax for non-business assets, for example, will deter investors in private rental properties at a time when the Government should be looking to increase incentives for landlords to compensate for the decline in owner-occupation. Meanwhile, low-cost home-ownership, the social rented sector and house-building activity generally are all set to be squeezed as the Government is forced to cut the fiscal deficit. And the potential abolition of the Tenants Services Authority risks undermining future confidence in regulation of the sector for lenders who have so far poured £50 billion funding into social housing.

The shortage of housing supply has now become structural and difficult to reverse. House price movements are increasingly affected by the vagaries of transaction numbers and consumer confidence (both of which are low), with the possibility of more potential sellers than buyers.

Against this difficult backdrop – the most challenging for the housing sector since the Second World War – it is vital that the coalition government sets clear priorities and expectations as it establishes its housing aims Bernard Clarke for the next five years. Encouragingly, the Government made a step in the right direction with a commitment to continue to invest in social housing when setting out its recent plans for £6 billion spending cuts.

CONCLUSION - IT'S TIME FOR CO-ORDINATION

A funding shortage has been central to housing market problems and will continue to be a drag on economic recovery and delivery of government housing policy priorities. A co-ordinated approach is vital in order to prioritise actions by the Government, the housing sector and lenders.

The home finance forum has had a chequered history, but it does have a track record in improving co-ordination between different groups of interested parties. We believe that it should therefore continue to play a central role, and the Government should make a commitment to improving how it operates. Once policy priorities have been agreed, it will be crucial to help deliver what the Government wants to achieve.