The Newcastle Journal has the full story of the Lib Dem city council’s move to buy up private sector housing to avert a property slump, and increase the supply of affordable rental housing:
Newcastle City Council is buying 15 houses as the first step in a move to help stave off the property slump. The authority will become the first in the country to take direct action in the private sector as the housing market crash gathers pace. The homes are on a new development which would go bust without the vital council cash to shore it up. Bosses hope to seal the deal within two months and will then put the houses up for affordable rent.
The council is also working with mortgage lenders to devise a way of increasing shared-ownership properties for families struggling to get on to the housing ladder. Housebuilders and estate agents last night welcomed the move, which the authority said could be the first of many. And it came as agents said North East house values were dropping by as much as 20%
Newcastle City Council is working to complete the first of a series of planned deals with developers within six to eight weeks. The homes will then be made available for affordable rents. And the council is working with building societies to help mortgage holders by allowing them to sell part of their home but stay in it. Last night experts said the proposals could stabilise the market and maintain the supply of affordable housing.
The deal has certainly earned approval from the Journal:
These moves reveal councillors possessed of the political courage to invest in their city’s future. … As the owner of the properties, the city council and the citizens it represents will benefit from the investment when the market eventually turns up again.
In the shorter term, this North East authority has embarked on a new course of action in which the pain of financial markets is not merely to be endured, but confronted and overcome. How brave, how bold, how commendable.
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37 Comments
Brilliant.
The LDs have got to demonstrate effective leadership in the councils they run… so far as Blatcher’s assault on local government allows them to.
So let me get this straight.
The Council buys up an unfinished housing development at above market rate (i.e. before the price falls to a level where a private sector firm would judge it to be profitable) thus reducing the losses of an unsuccessful building firm at the expense of Council Tax payers.
In so doing it will “avert a property slump” that is a natural response to the over-priced hosing market. It will then try to “to devise a way of increasing shared-ownership properties for families struggling to get on to the housing ladder” as a consequence of the housing bubble, rather than letting prices fall until would-be homeowners could afford to buy (the whole of) a house (rather than sharing ownership).
Meanwhile, they intend to “help mortgage holders by allowing them to sell part of their home but stay in it”, thus persuading people to keep hold of part of an asset that is losing value, while using taxpayers money to buy an asset that is falling in value.
How very commendable.
It does seem to be a policy that runs the risk of making a tiny difference to the stock of social housing at the expense of moderate-income families outside the social housing system to the benefit of private housing developers who have taken bad risks.
But there is a public good in ensuring that the supply of affordable homes doesn’t dry up completely because the suppliers have gone out of business. Leaving new housing developments to fail is also not a clever way of delivering regeneration.
But there is a public good in ensuring that the supply of affordable homes doesn’t dry up completely because the suppliers have gone out of business.
The suppliers are driven out of business by government providing housing. There’s no point in private business building low cost housing because government does it with extorted tax money.
As for development – government messes this up again and again. Why not be liberal and trust in property rights, markets and local private initiative rather than throwing tax money at a problem with no real accountability.
Private business doesn’t build low-cost housing because it can use the same plot to build higher-cost housing for a greater rate of return.
Come on folks – this is a brilliant idea – the main problem in finding affordable housing is that the private developers hold most of the land. Any opportunity to acquire sites and fill houses that are empty with families who desperately need it is to be commended. This is an excellent example of an innovative local authority. We are watching in neighbouring Northumberland with interest!
I think the best that can be said about this sorry affair is that the Newcastle Journal’s editorial position is even more absurd and misguided than the policy itself.
Surely this is a simple value for money question? If the council got the properties cheaply enough, the policy is sensible, if they got only a small discount (say 20% from current market values) then they may well have failed to ensure value for money for tax payers. The terms have not been revealed, which makes it hard to judge whether this is a bail out or an astute purchase.
Tim,
You might be right that the impact on local taxpayers will be determined by whether this constitutes a good purchase, but that deosn’t appear to be the justification for the decision to spend this money.
By way of analogy, Newcastle council might believe that there’s a horse running in the 3.30 at Chepstow tomorrow which is sensationally good value at 16-1. They might even be right in this assertion. But whether they should be allowed to put taxpayers’ cash on an each way bet on this horse is an entirely different matter.
Libertarians, stop being daft for once. We’ll soon see whether this works, but based on the evidence it will help solve the problems of people getting affordable housing and finding occupants for new property: when the demand clearly exists it is out of some people’s price range, which is hardly efficient.
What we should always beware of is concentrating the poorest in one area. The experience of the socialist council estates, and of the areas like mine in which there is a high incidence of buy to let, shows that it is toxic.
The policy of combining social and private housing is the way forward, as there is less of a dragging down and a suffocation of aspiration.
The other issue not noted here is the difficulty of securing funding to provide anywhere near enough new social housing units to meet demand through Govt funding programmes.
The alternative is to build them as part of a joint regen initiative with private developers – who are unfortunately walking away from new build at the moment because of the crunch. Therefore, increasing the authority’s housing stock at less than market rates and more quickly than could ever be achieved through conventional Housing Corp methods is a Good Thing.
The 3.30 at Chepstow doesn’t come into it.
“The Council buys up an unfinished housing development at above market rate”
That’s an assumption which may not be true. It’s possible that “the market” wouldn’t buy the properties at any price at the moment.
It should also be set in the wider context of boosting confidence in developers to finish housing projects as undoubtedly a part of the City Centre regeneration plans.
The Council could do nothing or do something.
If someone wants to check the details of the transaction should be public domain as they’ll be in the land registry documents when completed.
Given the above it might not be a bad idea for NCC to publish how much they paid. If there was a hefty discount to the “market rate” then it would certainly put other developers off from thinking they could carry on as normal with a nice safety net underneath them.
“Private business doesn’t build low-cost housing because it can use the same plot to build higher-cost housing for a greater rate of return.”
If that is true it is because Government (both local and national) restricts supply through the planning process, so that there is not enough development. Otherwise, houses would be built for all budgets.
“It’s possible that “the market” wouldn’t buy the properties at any price at the moment.”
That is patently not true. If the houses were put up for sale for £1 they would undoubtedly sell. If that were not the case, it could only be because the properties were worthless, in which case the Council has squandered taxpayers’ money.
If the Council has paid over the market rate then this is a case of malfeasance; if it has paid no more than the market rate, the intervention was unnecessary.
Did the chap that sold them look anything like that nice Mr Abrahams? Got some iffy planning consent from Lib Dem Durham according to Chris Huhne I seem to recall.
“If the Council has paid over the market rate”
This discussion* is attaching great importance to this market value when actually you can’t make any firm assessment. Market value is what someone will pay for it. In a volatile market that can be very variable figure.
Yes they would sell for £1 (well probably – there are properties which do not get bids at auction) but there is a price below which a developer will not consider selling as it’s a better proposition to mothball them and wait.
If we believe that Councils have a role in providing affordable housing then they have to buy it from somewhere. There’s really not a huge functional difference between this and “propping up” Wimpey by contracting with them for some new build.
*Well maybe discussion is a bit of a grandiose term for a bunch of micro-state free market liberals unleashing their prejudices.
Not sure about this. It depends what the council pays for the properties.
Councils should provide housing but why should the taxpayer be there to bail out building companies who have caught a cold through sheer greed.
Sustaining this Ponzi scheme that is the housing market will do no one any favours in the longer term and, although it is very rare, I disagree with the excellent Vince Cable on this although the discomfort he inspires in the government is great.
We need house prices to fall to a sustainable level to allow first time buyers a chance to get on the property ladder and yes, there is nothing wrong at all with being a free market liberal. It is not a dirty word.
On the market value question there are cases where buyers are PAID to take property on, where all the sealed bids are in the negative.
The comments of Andy Mayer, ‘Tristan’ and others here are ill-informed nonsense. Potentially (and because the figures are confidential, nobody yet can really know apart from Newcastle councillors and officers who have legal duties to ensure fiscal responsibility) this is a major step forward and a ‘win-win’ in an otherwise increasingly difficult situation.
The devil in this deal depends on the detail. It’s clear that councils need to look forward and work out what is to happen to the rising number of reposessed properties, as well as to the more rapidly (at the moment) rising number of unfinished developments being put on hold, like the one round the corner from my house and the eyesore round the corner from that where the developers have gone bust.
It is clear that the market for some of these developers have dried up; the private elements of some new build around me are empty while the affordable sections are full. The so-called ‘market gurus’ here are so far off the solar system, that they do not understand it makes sense for everyone involved (potentially even including the developers) to get the properties occupied (off private developers’ books, and off local authorities’ waiting lists).
Let’s give a lesson to the so-called market Liberals. One of the main reasons the state should intervene in markets is when they fail. If the housing market hasn’t failed (and give me two minutes with the camera on my mobile phone, and I can give them at least 3 pieces of evidence), I’m a banana.
It will be interesting to find out the final detail of what goes on in Newcastle. It may be well worth rolling out across many other areas.
“there is nothing wrong at all with being a free market liberal. It is not a dirty word”
That will be news to some members of this party!
I’m unclear from that Mr. Angry anti-market rant what element of my single sentence contribution, or anyone elses you disagreed with Gareth.
It was a rather angry and incoherent rant wasn’t it.
Mark Littlewood’s particularly silly “horse-race” comparison.
Tom Papworth’s they should never do anything like this.
There isn’t anything wrong with being a free market liberal. But if all you do is advocate free market solutions then that is something you quite definately aren’t.
It sounds to me that we all agree on the substance. It is a “win-win” situation if the council paid less than they would have paid for other social housing units that they would have bought anyway.
But if they have paid something close to market price then in a falling market that is pretty silly, both in the short term (paying over the odds) and in the medium term (making developers feel that they cannot lose).
There is clearly both market failure and govt failure in the housing market. I wonder whether the way to stop ugly half built and abandoned developments is to give time constrained planning permission that says that by the end of the period the properties must either be built and inhabited, or that the site will lose the planning permission, and will be rezoned as community land. At that point the buildings would get finished come what may.
But Tim – in your example, who is going to build the houses on the “rezoned community land” if the housebuilders have gone bust?
When credit is unreasonably tight, as it now is, there will be some housing for sale unreasonably cheap in most areas. That is not theory. Read the figures for prices at auction that Vince Cable quotes from; or ask your bank manager if he knows any builder very keen to unload.
In that situation, any enterprising Council that has borrowing consents available and an unmet demand for social housing should get in there and make some low offers for suitable property. That, I assume is roughly what Newcastle are doing. If so, they will deserve the praise for good value for money which will be coming their way from the Audit Commission.
What worries me is the rumour that Gordon Brown is about to “copy” Newcastle by throwing a mountain of money at the housing market. Over-do it and you will find the bargains disappear – everyone will up their prices to get a share of the gravy train. Local taxpayers will get a bad bargain and the necessary lowering of prices in the housing market will be slowed down – or reversed for the time being. I guess that if Vince Cable were Chancellor he would feed borrowing consents for the purpose in careful tranches for the local authoritiues to use as they saw fit; and monitor the market to see that house price:income ratios keep adjusting down to historic levels. On their record, Brown/Darling are unlikely to do anything so sensible.
Greg: if the company has gone bust the receivers would sell the site for whatever they could get, and the new buyers would do so. After all, losing the planning permission is extremely costly, so it would (almost) always make sense for someone to finish them.
“I wonder whether the way to stop ugly half built and abandoned developments is to give time constrained planning permission that says that by the end of the period the properties must either be built and inhabited”
I think it is possible to do this – at least as far as construction – though you can only require completion not “seize the land”. There would be big issues with that as what would the developer get for the 50-60-70% etc of the development they had built and paid for.
Inhabitation would be a more difficult area. I suspect it would lead to increased prices as developers factored in the risk of losing a development due to changing market conditions resulting in the property being unoccupied.
I’m sure someone will be along to point out (correctly IMV) that completed but vacant properties could be better dealt with by SVR 🙂
Peoples grasp of economics is a bit odd here. The council will not have paid substantially above the odds – under due diligence it will not be allowed to.
The key fact in the North East (and probably elsewhere) is that if a council wants to increase its social rented stock, as most Lib Dem councils do, then it is really hard for it to buy land as most suitable land is owned by developers. Better to work with them whilst they are still solvent than to wait till they go out of business and then risk trying to buy them in a public auction of their assets.
Newcastle house prices have dipped in the last quarter like everywhere else but does anyone who seriously analises the historical trends for domestic property doubt that values will rise? Newcastle is buying these houses to provide much needed homes for people who can’t afford them. The housing list is a big one in Newcastle and the council is showing the long term vision required of it.
Contrary to what people may think I’m definitely a proud economic Liberal in the party. I just think the public sector should be allowed to benefit from market failure.
Hywel, it is virtually impossible in practice to force the completion of a planning permission.
“Newcastle house prices have dipped in the last quarter like everywhere else but does anyone who seriously analises the historical trends for domestic property doubt that values will rise? ” I understand that Vince Cable has suggested that prices may stagnate for 10 years.
I agree with Gareth that the devil is in the detail of the terms of sale and that depending on those details this has the potential to be a win-win situation, but I doubt it will be quite as clearcut in the final outcome.
This move shows that LibDems are pioneers in the sense that we are taking a lead on trying to avert some of the worst hardships for the most vulnerable, but the tone of this discussion shows how vulnerable WE are to bad language in the way the specific dealings are described.
The need for intervention in the housing market highlights how the way it has been regulated has created distortions which lead to the instability, when a properly liberal policy would have prevented the loss of confidence that has resulted in this inevitable slowdown/slump.
There will always be a need for some level of social housing which isn’t held in private hands (individual or corporate), but it is paramount that we are also able to concentrate on the quality of that housing, not just the cost – low-cost doesn’t necessarily equate to affordable or economic.
Both the anti-market statists and the market absolutists are wrong in their ideological prescriptions, and I would criticise them from both liberal and democratic perspectives.
A good piece by Ross Clark in today’s Times explains why Governments should not intervene in the housing market.
This is a fascinating discussion but it seems to be somewhat wide of the mark. The crux of this story is that it is sensationally good PR for the LDs in Newcastle at a relatively modest outlay in terms of their whole budget.
Property slump or no, investment in property is rarely a bad idea. Newcastle has been one of the most thriving parts of the country in recent years so the value of these houses will go up.
The bottom line is that Newcastle LDs are in the business of winning elections and this is a great initiative.
Surprised to be Mark Littlewood on here. Surely he’d be more comfortable on Conservative Home…
Does Newcastle have homeless families in B&B? If so, I expect it would be cheaper to buy at the top of the market, than to keep doing this. If it weren’t for right-to-buy anyway.
In any case this seems by far the best way for the council to acquire houses. I don’t suppose it will build them very efficiently itself, however few or many contractors and PFI deals are involved. But on the open market you pay commodity prices rather than government-premium prices.
Tim has put the most coherent arguments together on this. It has to be a very hard headed commercial decision, remembering particularly that we are in a falling market. I do not believe we should be propping up firms whose senior managers have bet the house on markets going up (and taken big bonuses while it happened). But we can’t let the entire house fall down because the incompetents in government couldn’t detect a bubble if it was coming out of a washing up bowl. Also allowing the entire building industry to collapse into rubble for a decade, losing skills etc would be a tragedy.
The devil will be in the detail. We mustn’t pay more than a fair price for the homes, which will mean that the building firms will have to suffer significantly. Also we will have to ensure that they do not just use the money to get out of the market completely, which some may try to do, otherwise the skills will be lost anyway.
Finally, which firms do you help out, why not individual homeowners etc etc?