A new report published this week will argue that local councils should offer financial support to homeowners threatened by the credit crunch. The New Local Government Network (NLGN) argues that local authorities should adopt US style Mortgage Support Plans and offer below market rate, whole or partial mortgages to either stave off repossession and eviction, prop up the housing market to prevent remortgage difficulties, or support first time buyers to buy locally.
Local authorities have a history of providing mortgages and would routinely lend to local residents up until the early-1980s. With repossession levels at their highest since the early 1990s and many households struggling with mortgage payments, NLGN argues that councils are in an ideal position to help stabilise the housing market. Such schemes are already commonplace in the United States and is a key part of Barack Obama’s strategy for reviving the flagging US housing market.
Under the scheme, councils would be able to borrow money under prudential borrowing rules and offer support to a select group of people, such as first time buyers or people involved in mortgage difficulties, particularly when numbers of mortgage defaults might impact disproportionately on social housing demand in the area. According to the report’s author, Anthony Brand:
“Prudential borrowing would support lower-interest debt than the markets can support. With mortgage defaults up 17% this year, and likely to top 100,000, supporting those areas hit hardest could be vital to sustaining communities. Government should set £2bn of its £50bn intervention package aside for supporting these measures, and allowing the hardest hit councils to apply for funding. This could help up to 15,000 people out of difficulty and even provide a long-term profit to the Treasury”.
In the report NLGN also says that local councils should be given powers to restrict the amount of Right-to-Buy properties in areas of high housing demand to maintain levels of social housing. The report calculates that since its inception in the 1980s, Right-to-Buy has lead to the sale of over 2 million public sector houses and that this has in part led to a shortage of social housing, leaving 1.6 million households on the housing waiting list. It also argues that the current £26,000 discount of Right-to-Buy properties should be removed as it offers an unfair advantage to buying property below the market price.
The report also calls for local authorities to be given greater freedoms to build and invest in new properties. In 2005 only 239 houses were built by local authorities compared to 173,000 in 1970. To help free up new dwelling, councils should be given powers to borrow money to invest in social housing and be able to take over dormant buildings where they have been empty for five years and turn them into social housing. In areas where the ownership of second homes is affecting the local property marker, councils should also have the option to levy additional council tax on the second property.
The report also found that a substantial number of people in social housing earned enough money to rent property in the private sector. 261,000 households in social housing earned over £2,000 a month after tax, including 57% of who pay less than £300.00 a month in rent. For these households rent represents less than 11% of their disposable income, compared to the 20% average paid by people on an equivalent salary in the private rental market. The report also found that 38,000 households in social housing earn over £50,000 a year, significantly above the average household income for England and Wales of £27,500.