Building and financing the homes we need
It is widely anticipated that housing will feature in the new chancellor’s first autumn statement. Paul Smee, director general of the Council of Mortgage Lenders, discusses the housing issue and new methods of construction.
In the last CML View, I anticipated that the new prime minister would be launching a series of housing initiatives later this autumn. At this stage, the new political cycle is still cranking into gear but already the housing minister, Gavin Barwell, has warned that the new policy approach may not be focused quite so squarely on homeownership as in the past.
Whatever announcements are still to come, delivering an improvement in the supply of housing is sure to be a key objective. So, the Department for Communities and Local Government’s recent call for evidence on capacity in the home-building industry will be significant, particularly given the UK’s sluggish building rates and a continuing shortage of skills in the construction sector.
Following a sharp contraction in building as a result of the financial crisis, will there be enough capacity to meet the government’s ambitious targets for delivering new homes?
Modern methods of construction
For lenders, a key concern is always the extent to which the durability and quality of newly-built homes can provide good security for a mortgage.
Typically, lenders do not have strong views on the method of construction per se, and are usually reassured if there is a building warranty.
But as technology evolves and offers more potential to cut construction costs, the government has been encouraging lenders to support innovation in the housing market. It wants the industry to take a positive approach to lending on both self-building projects and innovative methods of construction.
At this stage, however, neither of these has become a mainstream option. So, a combination of relatively low levels of demand from borrowers, greater risks associated with lending on self-build projects and higher capital requirements means that the availability of mortgages to fund these options has remained limited.
Self-build
The challenges of releasing stage payments to finance self-building can be time-consuming and expensive for lenders. But we have seen the emergence of innovative schemes in which third parties, including local authorities, provide upfront funding for construction, with the lender only called upon to provide a mortgage once the building project has been completed.
This sort of scheme can make it less onerous for lenders, so we will continue to work with members and other interested parties to see if this can be developed to encourage greater participation.
Offsite construction
Offsite construction is becoming more common, with many builders now using it for at least part of the construction of many new homes. To obtain a mortgage, however, any property must have a life span of at least 60 years, and be capable of providing security for a loan for up to 35 years.
The diversity of offsite construction techniques presents particular challenges for lenders. They might be encouraged to provide greater support if there were more evidence on how custom-built properties hold their value over time and whether there are any long-term effects on the ability to sell a property.
If lenders remain cautious for now, it is because innovative methods of construction have a chequered history. This legacy affects the willingness to lend on construction methods that are either unfamiliar or appear to embody the problems of the past. Lenders providing funding for the social rented sector have similar concerns.
While firms clearly need to lend on properties that are durable and provide security for a long-term loan, they are also looking for other qualities when it comes to custom-built homes.
They want the cost of maintaining the property to be broadly comparable with traditional methods of construction. The owner must be able to get buildings insurance on the same terms as a traditional home, and to repair and adapt it without undue costs or difficulty. And the property must have enough appeal to potential buyers for it to remain marketable for many years to come.
Lenders will also take into account the reactions of other property professionals. So, they will be influenced by the attitude of warranty providers, insurers and valuers to different methods of construction. If other professionals show confidence, lenders may be more encouraged to accept that the construction method meets their own criteria.
So, while the government works on its forthcoming policy announcements, we can anticipate that some of them will focus on ways of improving the supply of housing, and reducing its cost. New methods of construction can play a key role in delivering both objectives.
Generally, the industry is keen to give its support – but the government needs to understand the concerns of lenders and help build their confidence as it seeks to promote a sustainable housing market
Original link - Mortgage Finance Gazette
