Local authorities need cash to build houses; savers need somewhere to invest their cash. So, asks Kathleen Dunmore, why not get the two together?
With the financial sector in disarray, the time is right for councils and local delivery vehicles to explore other ways of getting hold of the funds to kickstart housebuilding and development. One obvious solution would be to tap the resources of individual investors who are searching in vain for somewhere to put their funds. If it is a shortage of capital that is hindering housebuilding, and if the lack of secure investment opportunities is a problem for savers, could local authorities not reinvent the role of the early building societies and find one solution for two problems?
What would a modern version of such an initiative look like? One possibility would be for a local authority or local delivery vehicle, working either on its own or in partnership with a friendly funding institution, to set up a local housing fund.
Local housing fund
The local housing fund would aim to provide a risk-free investment, offering a return guaranteed by the local authority or the Homes and Communities Agency. Although local housing products would be targeted at the retail market, the fund could also be of interest to pension and investment funds. The fund would have two components, the local housing bond and the local housing mortgage, and councils could choose whether to offer one or both.
Local housing bond
The local housing bond would provide gap-funding to finance the physical and social infrastructure that is required to enable development to take place, as well as development finance for affordable housing. The bond would provide a specified payment after a fixed term of 10, 15, or 20 years, and would be aimed at people saving for retirement.
The infrastructure element of the bond would be financed by a roof tax on development (and ultimately on land value) payable by developers on completed new homes and modelled on the Milton Keynes tariff.
A 5% or 6% return from a local housing bond or mortgage would seem an attractive option for savers now being offered a maximum of 3% on an ISA
Local housing mortgage
The local housing mortgage would provide mortgages for homes in the area. It would provide a monthly income funded by mortgage payments.
Savers could invest in one or both products. A 5% or 6% return from a local housing bond or mortgage would seem an attractive option for savers now being offered a maximum of 3% on an ISA and for those saving for retirement facing annuity rates depressed by quantitative easing.
Local authorities could restrict access to the mortgage to particular types of property or borrower – for example, low-cost homes or first-time buyers – or decide to offer it to all home buyers. In the eighties local authority mortgages represented 16% of the overall mortgage market and a considerably higher share of the first-time buyer market. The local housing mortgage builds on the success of this model and provides an alternative source of funding to the public purse.
The charity sector has already moved in the direction of local funds for specific purposes. The Charity Bank, together with Yorkshire First, offers a Yorkshire Deposit Bond, which lends money for charitable projects, including the provision of affordable homes. To date, such schemes have been targeted at philanthropic investors. The local housing fund would be a logical next step, taking advantage of the large gap between rates available to savers and those charged to commercial borrowers to offer a product that meets both their needs.
Kathleen Dunmore is a director of consultancy Three Dragons