Lenders must take stock of housing

This is clearly not a good situation to be in, but out of chaos and adversity usually comes opportunity. And by that I don't mean the art of picking out quoted companies which, in the current financial crisis, seem undervalued and look good for a bit
of profit-taking at some time in the future.

There is no doubting the culpability of banks and other major financial institutions as authors of their own, and our, misfortune.

However, they may just have an opportunity to redeem themselves in the eyes of the people of this country. They should acquire properties and make them available to families for a commercial rent. This would have the two benefits of injecting some life into the beleaguered housing market and tackling the shortage of affordable housing.
The move would address the issues that have adversely affected the housing market ever since council tenants were given a legal right to purchase their homes, usually at a huge discount on the market value, 28 years ago this month.

Right to Buy was one of Margaret Thatcher's most popular moves. This is hardly surprising given that it extended to millions of families the freedom of home ownership as well as a chance to build up a previously undreamed off capital asset.

At first the phenomenon caused concern among "conventional" homeowners on their Wimpey and Barratt-type estates who worried that the release of council houses would flood the market with extra stock, thus diminishing the rise in values which had become the norm since the 1950s.

In fact, the opposite happened: for many council tenants this was only the start. They too had aspirations and, taking advantage of the discount, used the large capital sums on the eventual sale of their former rented homes to trade up to conventional owner-occupied areas. As a result, the prices of both new and second-hand privately built homes continued to rise.

Unfortunately, this started to leave large numbers of the population behind – not the usual feckless, work-shy benefits junkies but the good, honest, hardworking army for whom owner-occupation became less and less affordable.

Then came a lifeline in the easy credit auction that consumer banking turned into, with the repercussions that we are now experiencing today.

"Can't afford a deposit? Never mind – we'll pay it for you with our special cash back deal."

"Don't earn enough to qualify for a mortgage? We have contacts who will lend up to five times your gross annual salary."

"A mortgage of 125% on the value of the house is still a good investment; house price inflation will clear the negative equity and very soon you'll be in profit."

And so it went on.

For a while the system worked because rising house prices gave much of the population a hedge against their borrowings, while the bonuses and overtime which had artificially boosted their earnings claims kept owner occupation, and a reasonable lifestyle, affordable. That was until the building blocks on which this theory was based proved to be made of sand and the whole structure started to collapse.

The reason many are having their dreams of home ownership shattered is not so much the slump in the housing market but the fact that many of them could not afford to be owner-occupiers in the first place.

Long-standing opponents of Right to Buy argue that history has proven them right. They say that without this legislation there would, today, be sufficient local authority accommodation for people outside the home-ownership affordability loop. That is no doubt true but their solution – to allow local authorities to borrow to build new council houses and to buy up repossessed properties for rent – is not the answer. The principle of council housing is perfectly laudable but as our own Scottish experience has shown, the system that developed was also used and abused for generations by politicians.

As council housing expanded, especially in the aftermath of the Second World War, it became obvious that this fiefdom gave politicians tremendous electoral power. It usually involved holding down rental costs to ridiculously low levels which bore absolutely no relation to the outstanding capital and interest owed on the overall housing stock. On many schemes in Scotland there was little difference between the weekly rent on a two-bedroom terraced council house and renting the latest 21-inch television set from the now-defunct DER.

Add to this a Luddite system of maintenance and repairs and a mediocre debt-management process and it is easy to see why council housing, without vast subsidies, was an economic basket case.

So if all the good council houses have been bought up and new ones are not being built, what do regular wage-earners have to do to find decent, affordable accommodation? This is becoming an even bigger challenge as the trend in mortgage rates seems to be up rather than down.

This brings me back to where I started with the financial institutions that have come under such criticism over the past 12 months. It could be their chance to show themselves as knights on a white charger rather than backers of some of the worst investment nags in history.

The private rented sector has been one of the business success stories of the past quarter of a century and continues to be so. Indeed, it is the only sector of the housing industry currently showing growth, in terms of a market-driven rise in rents. However, in social terms, the main beneficiaries have been singles or couples without children because most private rental stock is made up of flats. There has been little or no organised large-scale investment in family homes for commercial rent.

So, herein lies a tremendous opportunity for the financial services organisations to win back the trust of the public. They should use the slump in the property market to acquire and make available the type of properties so needed by families for whom owner-occupation is neither affordable nor, in some cases, particularly desirable.

Although this scheme would have a social element, the banks need not be "social landlords" in the local authority sense. The best hope of long-term success is a market-driven scheme providing normal commercial rates of return. Handled properly, it offers the tantalising prospect of addressing a social need while securing, for investors, regular income allied to an appreciating capital asset, albeit more modest than we have usually come to expect from housing.

Looking further ahead, corporate-led homes for rent could even eventually appeal to more affluent people who, though able to afford a mortgage, might not necessarily wish to live most of their working lives mortgaged to the hilt.

David Alexander is sole proprietor of the letting and estate agency, D J Alexander

SCOTLAND ON SUNDAY, 19 October 2008