Infrastructure and Capital Investment Committee

Meeting date: Wednesday, October 24, 2012

Official Report 494KB pdf

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Draft Budget Scrutiny 2013-14

Good morning, everyone, and welcome to the 17th meeting in 2012 of the Infrastructure and Capital Investment Committee. I remind everyone to turn off their mobile phones and BlackBerrys, if they have not already done so, because they affect the broadcasting system.

We begin the meeting with our second evidence session on the affordable housing spending allocation within the Scottish Government’s draft budget for 2013-14. I welcome the witnesses: David Bookbinder, head of policy and public affairs at the Chartered Institute of Housing in Scotland; Fraser Stewart, the lead member of housing investment at the Glasgow and west of Scotland forum of housing associations, who is also the director of New Gorbals Housing Association; and Gordon MacRae, head of communications and policy at Shelter Scotland. I thank you all for your written evidence.

Good morning. What are your views on the Government’s overall ambition for Scotland to become a hydro nation? Sorry, that is the wrong question. [Laughter.] I apologise—I am just so keen on Scottish Water.

The Government’s five-year plan to develop 30,000 additional affordable homes—6,000 a year—resulted in 6,800 completions in year 1. Why did the performance exceed the target? What are your views about whether the target for the rest of the planning period can be met?

The quick answer to why the first year’s performance exceeded the target is that the completions that it was based on were generally funded through a more generous grant regime. The litmus test of whether the forward programme will be successful is what is being approved. The approvals in 2011-12 were just over 6,000, of which about 60 per cent were social rented. Some saw it as quite a cynical move when the Scottish Government switched from counting approvals to counting completions. Approvals really give us the true picture of what is being funded.

It is important that we compare the previous spending review with this spending review. There has been an issue with the level of transparency about the funds that are available, so it is easier to look at the £770 million that has been allocated during this three-year period than the £1.4 billion in the previous three-year period. As David Bookbinder says, the completions were up in previous years because of a couple of things, such as accelerated finance, which was brought in during the lowest point of the recession.

What we expect is that during this three-year period, out of the target of 18,000 affordable homes—the 30,000 target is over the period of this parliamentary session, not over the period of the spending review—about 12,000 would be social rented. The only way in which that can be delivered is at considerably lower levels of grant subsidy. We have to assume therefore that we are looking at about £40,000 to £45,000 per unit—that has never previously been delivered at a sustained level.

We are in effect looking at a 45 per cent cut in the overall capital budget for house building between this comprehensive spending review period and the previous one. Our real worry is that with welfare reform kicking in during this period, we are facing a real one-two knockout punch for low-income families who desperately require secure, affordable housing. It will be more difficult to access such housing because, in looking at the starts, we have to anticipate that fewer social rented properties will be available in the next three or four years.

Rather than comment on why the 6,000 figure was exceeded, I would like to answer the question whether we will achieve the figures for the remainder of the period.

The forum’s concern is that the level of grants is not sufficient to sustain the level of development that the Government wants to be achieved, even if we include housing at mid-market rent and so forth. The programme is supposed to have a 70:30 split between social rented housing and mid-market rented housing and other forms of low-cost home ownership, but the outcome is much more likely to be 30 per cent social rented and 70 per cent mid-market rent.

That is my association’s experience, and we are being as flexible as we can be to maintain the momentum of regeneration programmes. It is also the anecdotal evidence from local authorities, including Glasgow City Council—although what happens remains to be seen. Government officials have not set out planning assumptions on how the figures will be achieved and seem to be relying on organisations—the CIHS, I think, or Shelter Scotland—to say that the figures will be achieved. That is disappointing.

Another factor is that rents appear to have gone up significantly as a result of the innovation and investment fund. There is evidence that some rents are in excess of mid-market rents. Social rents of more than £5,000 per year have had to be implemented to achieve the figures that were just mentioned. In our view, that is not sustainable. Housing associations in Scotland in future years will not be happy to apply the rent levels that we have seen in the past year.

There is a huge question whether the programme is achievable. Government officials must properly review and examine what was achieved through IIF, because things have not changed significantly, and they must publish their assumptions in relation to the shape of the programme. We are certainly not convinced that the programme is deliverable, especially in relation to the social housing unit numbers.

It is important to say that the Government’s original ambition was for all the units to be social housing. The ambition is now for 70 per cent social housing, but there is every possibility that that will not be achieved.

You have referred to the shortfall. What should and can be done to alleviate the deficit in affordable new supply?

Shelter Scotland argues that we should reverse the 45 per cent cut. We acknowledge that capital budgets have been reduced overall in the Scottish block grant, but the overall capital cut is about 33 per cent and housing is taking a 45 per cent cut, which is disproportionate. We are in the midst of a deep social housing crisis in Scotland, and in the long term the cuts will exacerbate the problems that people face in accessing affordable and secure accommodation.

Transport has received additional funds. The recent addition of £40 million to the affordable housing budget only reduces the cut from 50 to 45 per cent, which is still disproportionately large. We hope that the Scottish Government will reconsider and bring housing more into line with the mainstream cut that capital has taken.

Any additional money that came along within the spending period—that can happen—would help to make up for the huge reduction to which Gordon MacRae referred and would be welcome.

I sound a cautionary note to those who are playing the numbers game. It will be hugely important to monitor what is being provided and where, not just the actual number of units, because as things are squeezed more there is a fear that anything that costs a bit more—or significantly more, in some cases—will simply get squeezed. I am talking about work on remote rural sites, work on contaminated brownfield sites as part of an urban regeneration scheme or work to build houses to full wheelchair standards or to greener standards. All those things cost more, and there is an obvious risk that such work will be unduly and disproportionately squeezed when funding gets tight. We must ensure not just that we can tick the numbers box but that a range of needs is met.

What has happened over the past two or three years is that the pips have been squeezed until they squeak—and now that they are squeaking, no one is listening. The simple fact is that we need additional funding. Following Gordon MacRae’s suggestion, I acknowledge that the housing cuts are happening, but if they were restored to the national average for the other things funded by Government, that would go a long way towards resolving the issue.

Three or four years ago, my housing association had to raise private finance of around £35,000 for each social rented housing unit; when that increased to £55,000, the pips started to squeak and we would not have been able to sustain that. However, if we wanted to go ahead with new-build social rented housing now, we would have to find £85,000 per unit. That is simply not sustainable; we will not do it. Although we are trying to maintain momentum in transformational regeneration projects and will consider a very modest number of social rents and some mid-market rents that we can afford, we cannot consider developing to any great degree or scale. I guess that you will ask later about areas such as Glasgow, where there is no local authority house building, but I suggest that trying to get larger housing associations to undertake that work would be a very dangerous path to go down.

You have all focused heavily on the reduction in spending and the cut in the level of grant per unit. However, although the Scottish Government has made it clear that it has had to reduce the grant per unit of housing, evidence suggests that we will still be able to maintain the level of new housing supply. Is it not expected that there might be some change in balance in relation to provision by registered social landlords and provision by local authorities, and is there not an implicit challenge to local authorities to step up to the plate with regard to the provision of social housing?

Efficiencies can always be made in any sector, but we argue that housing associations and local authorities have made those efficiencies and that, over the past few years, more has been delivered with less. What disappoints us is that that has not been turned into a case for putting more in because it will get us closer to starting to address housing need; the fact is—and the Scottish Government will not suggest otherwise—that these plans are not about addressing housing need on that scale but maintaining momentum in the social sector.

The real test is the number of new starts. Looking across the social sector, including local authorities and housing associations, I will admit that there was an increase in the number of local authority starts in 2010-11 but overall the number of starts has fallen from 4,800 in 2010-11 to 3,366 in 2011-12. Given the lag time in all that, I think that we are heading for a cliff edge with regard to new completions in the next few years.

It is all about looking into the future. As Gordon MacRae has suggested—and indeed as the representative from the Association of Local Authority Chief Housing Officers touched on a few weeks ago—there is evidence that some local authorities have capacity to increase the amount of housing that they are building. In some areas, that might well make up for the shortfall that we will see in the coming years from housing associations. However, the situation will vary from area to area and the big question is what happens in areas in which the council either is not building or is coming to the end of its capacity, which is the case in some council areas. In that instance, in areas such as Glasgow where there is no house-building programme we might well see a real problem—not in the next year or two, but thereafter.

If that was the expectation, it should have been modelled by officials. Those planning assumptions should have been published.

Why do you calculate the number on the basis of approvals, rather than completions? Others have said that it should be based on completions, rather than approvals.

10:15

First, if we move overnight from a system of counting approvals to one of counting completions, we would count the same houses twice for a year’s or two years’ worth of house building. Even if we had a clean sheet and started counting completions, it would feel a bit rich for the Government to cut grant rates and then say that it has supplied 6,800 homes, when those were funded through a more generous grant rate. We are simply looking for a kind of honesty, if you like, so that the Government says what has been funded with a lower grant regime. The only way of doing that is to count approvals.

That approach gives a sense of where the programme is going from the present onwards, not of what was funded two years ago on different grant levels. Ultimately, if we start counting completions, in time we will get a clearer picture of what is being funded on the lower grant regime, but we do not have that picture now.

The construction industry says that it is in dire straits, so obviously there will be lots of competition among construction companies to build the houses and the cost will be going down. Can you give us an idea of what the cost of building a house is this year, compared with the cost two or three years ago?

There is no evidence that costs are continuing to go down. As a rule, we have reached rock bottom. In fact, in some cases, there is evidence that costs are going up. Because there have been so many lay-offs and redundancies and firms going out of business, the sector is now different. Do not get me wrong—costs are still keen, but a brick costs what a brick costs. Just through ordinary competition, we are getting good prices, but I do not think that anybody should rely on costs going down further. Other organisations, such as Homes for Scotland, are more competent to say whether costs can reduce further, but we are not planning for that. Costs have remained flat for the past year and a half or so.

I defer to the house-building experts on that.

To return to the point about completions, there is a logical case for using completions as the standard but, as David Bookbinder rightly says, we are in the interim period in which we are double counting some houses. If the question is about what the money that was allocated in the comprehensive spending review and in this financial year will deliver, we can conclude only that it will deliver less than was previously anticipated for the three-year period.

I want to ask about the target of 6,000 houses a year. You have covered that to a large extent, although I will ask a question about it in a moment. However, I have a prior question about transparency. Your evidence has been helpful to us in trying to understand the current situation, particularly the comments on counting completions rather than approvals. The draft budget appears to me to be not very transparent, and part of the problem is that extra sums of money have been announced in the past few months but, as far as I can see, nowhere is that stated in the document. What do you think about transparency and how could the situation be improved?

I thank Shelter and the Chartered Institute of Housing for their evidence. You seem to be more on top of the issue than I am, so could you explain how you arrived at the figure of £770 million as distinct from the £630 million that was announced in the budget process last year? That would help us to understand what the figures amount to. As far as I know, there have been three announcements of extra sums of money since the budget was announced a year ago, and then we had Nicola Sturgeon’s speech on Sunday, which I take to be a reannouncement. The witnesses might be able to shed some light on that.

I will kick off and Gordon MacRae might come in.

By my calculations, the additional £140 million that has been announced in the year and a half since the original draft budget for the three-year period has come in three tranches. The last one was in September, so you are right that the announcement earlier this week was confirmation of that new £40 million or £45 million. The CIH understands that a large tranche of the additional £140 million has come from Barnett consequentials as a result of spending announcements down south, but that is still welcome. We expect Barnett consequentials from housing announcements down south to be respected and to come to housing here. Westminster cuts are quickly passed on, so we expect Westminster spending to be reflected in additional money up here.

You are correct that there has been £140 million extra in three tranches. I think that the largest tranche was about £80 million or £85 million, which came as Barnett consequentials. Gordon MacRae might have the up-to-date figures in front of him.

It is just not clear to me whether all that money is Barnett consequentials or whether some of it is made up of underspends or money that has been brought forward; I just do not know. There is nothing on that in the budget document, and I saw nothing in the original announcements that would make that clear.

The overall point is that it is extremely frustrating for housing policy people who want to get in behind the announcements. We got level 4 data for the most recent announcements only in the past few days. There is a lack of transparency about where the money is going, which is why we must compare comprehensive spending review periods rather than comparing ups and downs in particular years.

The most recent announcement, which was made at the weekend, was on how the money would be allocated, rather than being an announcement of entirely new money—that was identified previously, and I understand that it was a Barnett consequential. I share David Bookbinder’s analysis. It is predominantly money that has come from announcements down south. The Scottish Government should be commended for ensuring that that money goes into housing. It is worth noting that there is now a broad political consensus that social and affordable housing is an important area to draw attention to.

We are yet to have a game-changing announcement—as opposed to the announcement of a number of small initiatives at various points throughout the year—that will get us to a position in which we start to address housing need.

Gordon MacRae and David Bookbinder are the experts on the overall national figures, but in relation to your point about transparency, it might easily be missed that grant is no longer payable throughout projects but is payable only on completion. That is another way of buying a year for free, which means that it will be several years before we can start to compare figures on a like-for-like basis. I also point out that not paying grant until completion is the most inefficient use of public money—the best use of public money is to put the money in as early as possible, up front. The fact that that is not happening is requiring a lot of housing RSLs, such as us, to borrow to develop, which costs in the region of £3,000 per unit. If the money goes in up front, that cost—which, in effect, is a public purse cost—would not be encountered. There is a loss of £3,000 per unit in development funding as a result of the switch to payment on completion. It is another piece of sleight of hand that not many people would necessarily pick up. The subsidy is not £42,000 a unit; it is between £39,000 and £40,000.

Before I go on to ask about the 6,000 houses a year, I have something else to say on transparency. Given that we have had those three announcements of extra money, which you say is now paid on completion, it is not quite clear to me—to take the most recent example—how the £40 million will be spent, particularly if it is to be spent this year. That is just a completion of the transparency point.

My more substantive question relates to the scepticism that you have all expressed about the target of building 6,000 units a year. What feasible alternative measures would you ask the Government to consider to help the target to be met? Some, if not all of you have already expressed the simple demand for more money, but I wonder whether you have any other suggestions. Even if you propose extra money, how would you like it to be spent? I guess that Fraser Stewart would like something to be done about the subsidy level for each house, but it would be useful to hear other suggestions from all of you.

We are getting to a point at which we must acknowledge that there are no real alternatives to direct subsidy to deliver the social housing that we require. If the only game in town were getting 6,000 units up, we would be better off looking at just building a new town somewhere. When we talk about social rented properties, it is important to remember that we are talking about properties with security of tenure and a level of affordability that is not found in the private rented sector or in mid-market rents, although I think that there is some evidence of rents for what we would in the past have identified as social houses increasing to such levels.

We would like to see investment in house building, be it council or housing association, to build good-quality homes where they need to be, based on an analysis of need. We have called for the Scottish Government to undertake an overall look at the national picture for housing need. Currently, we have some useful tools for local authorities to identify need in their areas, but they do not always take into account cross-border issues, so Edinburgh’s analysis and East Lothian’s analysis, for example, may well conflict in some areas. We therefore need a national picture. The most recent best estimate of housing need was done by Professor Bramley. Our analysis of that shows that he suggested that we need about 10,000 new social rented properties a year just to meet the levels of demand, which are due to demographic changes and various things.

The Scottish National Party was the only political party to propose a target for house building in the most recent election campaign, and its 6,000 target was welcome, but it is about maintaining some life in the house-building sector and is not about addressing need. We want to see a house-building programme that starts to address the issues of poverty, ill-health, and low educational attainment, which are the consequences of poor housing. With regard to the choices that the Scottish Government can make between expensive transport projects and vital housing projects, as you might expect we would prefer the money to be put into housing.

There is no magic solution, but I think that the sector deserves credit for doing its best in the past year or two to look at things differently. For example, where housing associations in conjunction with their strategic local authority partners see in some hot-spot areas a real market for intermediate rent, they are looking to get stuck into that in quite a significant way. Sometimes that might take some pressure off social housing lists, while in other cases it relieves pressure at the other end of the market for people who would have bought in times gone by.

The picture is different from what it was two or three years ago because the sector is not standing still and is looking at new ways to provide. However, there are obviously urban and rural areas in Scotland where there is not really a market for mid-market rent because there is no major private rented market. We can have a proper intermediate rental market only where we try to help people avoid high rent levels in private renting, but that is not always the case in different parts of Scotland.

I want to add to that, in case housing associations are being characterised as just putting out the begging bowl without going to other places to see whether they can help out. It is important to look at all the things that we have done, but the fact is that we have run out of road. Our management costs are as low as we can get them and are comparable to those of any housing association in England. Our build costs are way down because we procure things in a better way than previously. In our case in the Gorbals, our acquisition costs are virtually zero because we work in a transformational regeneration area in collaboration with the council. Our borrowing costs are significantly cheaper than those for most historical, large housing associations in England. For example, the most recent bond that we got through the Housing Finance Corporation was just marginally above 5 per cent, so those costs are down at rock bottom. Organisations such as ours are looking to do their fair share of mid-market rented shared equity, but we have run out of road.

The Bramley research that was mentioned a minute or two ago has been used by the Government to define policy over the past couple of years. However, that research is now two years old. If it was done again today, what would it tell us about financial capacity?

The Bramley research on housing need was done closer to 10 years ago. It obviously predates the economic crisis and the planned changes in welfare. We would expect that any such new research would paint a picture that would show that we require more shared accommodation and one-bedroom housing, because that is all that welfare will pay for in the future and there is a chronic shortage of such accommodation. The Scottish Government did some good analysis of the impact of the welfare reforms that identified that chronic shortage.

We are—going by Shelter’s experience of people who turn up for advice and support—seeing a new generation of people who would previously have been able to access home ownership but now have to look at other forms of housing to meet their needs. That is why we identify the private rented sector as an area that is worthy of reform so that it can give people the security of tenure that they cannot get otherwise because they cannot access home ownership or social renting. We need to give them security so that they can lay down roots in their communities and raise their children without being worried about losing their home after six months.

We therefore expect that a needs analysis now would give a slightly different picture of what the investment priorities should be.

10:30

Before Fraser Stewart comes in on housing associations specifically, the CIHS would make three brief comments on the more recent Bramley capacity report. It is generally felt that the report was just about right in estimating local authority capacity, although there was a feeling that there might, in some cases, even have been a slight underestimation.

On the housing association side, notwithstanding what Fraser Stewart will talk about, there were flaws in a number of the assumptions, including on the availability and use of reserves and what commitments were already in place for them. However, as Gordon MacRae said, things have changed even since then; for example, the lending regime, the lack of availability of reasonable lending rates and welfare reform, of course.

I warn again that the Bramley capacity research looked at things purely in terms of numbers rather than at exactly what could be provided, whether in regenerational development or remoter rural development. Again, I give a warning about playing the pure numbers game.

I am sure that Fraser Stewart will have comments on the detail of the assumptions that were made on housing associations.

No policy should ever have been predicated or premised on the Bramley report because the brief for that report did not allow it—even if the report was going to be any good in the first place—to get to the truth of the financial capacity of housing associations. Officials set up the brief so that, in effect, it preset a number of conclusions.

The report does not bear any relationship to reality. For example, there was absolutely no examination of any housing associations’ business plans and forward projections; the report was based simply on a view of surpluses and accounts. Not enough situations were looked at and not enough people were interviewed.

My opinion is that the report is not worth the paper that it is written on, and things have moved on since then. It does not show the sector’s financial capacity; rather, it simply reiterates what senior officials said to various committees several years ago, including Mike Foulis, who came pretty close to saying—using the regulator’s figures—that housing associations are awash with cash. They are not, and are not anywhere near that to the degree that the Bramley report suggests. The report should not be given the currency or respect that it appears to have.

To develop that theme slightly, I am aware that some housing associations sat on fairly strong reserves and were fairly well capitalised. Has the policy that has been pursued over the past two years been primarily about running down those reserves and forcing housing associations to become less well capitalised?

Yes. That is unquestionably the case. I am not arguing that any significant surpluses that housing associations do not otherwise require should not be used, but we have said to the Government that other fairer means must be brought into the funding regime to bring those reserves into play. My association and others are, in effect, volunteering some of our reserves, but we will not volunteer all of them, particularly in Glasgow and the west of Scotland.

It should be remembered that our boards are made up of people who are involved in housing really because of the terrible housing circumstances that they were in either in local authority housing or in the private sector, where the highest rents were charged for the most miserable accommodation and no repairs were carried out. Those housing associations are not going down the route of bankrupting themselves or getting themselves into a position in which they cannot manage and maintain their current stock. Therefore, there is a point that cannot be gone beyond in looking at surpluses. If you want to do hard work on the matter and engage properly with the sector, there is a way of appropriately ensuring that reserves that are not otherwise needed are brought into play.

Would it be fair to say that those reserves were an element of financial capacity and there was an option to squeeze them, but they can be squeezed only once and cannot be counted again once that is done?

Absolutely. We have been squeezed—that is a fact. I know that that has happened to a number of other associations, too. Others, however, have not been in a position to be squeezed. As I said, it was suggested to Government officials that they should look more flexibly at how excess reserves—if you like—might be used. Some associations—particularly larger ones—appear to wish to queue up to develop at all costs, but I do not think that that will be the position anywhere in Scotland. I am proud of a sector that is prepared to stand its ground and say, “I’m sorry, but we’re not prepared to develop at all costs.”

In England, the Home Group’s chief executive went to a Conservative Party conference fringe meeting to ask for the reserves and equity of smaller associations in effect to be given to larger associations, so that they could continue their development programmes. That is the shape of things to come in England. What is perhaps worrying for Scotland is that such organisations now control a significant number of Scottish assets.

Is the message that smaller housing associations that still have their reserves should use them now, before somebody else does?

The answer is no, because there is no prospect that, or reason why, housing associations that have looked after their businesses properly would have in any shape or form to join large United Kingdom-based associations.

I apologise—I had thought that Alex Johnstone referred to the Bramley needs analysis earlier.

We need to remember the context in which the capacity research was undertaken. At that time, we faced the risk that the social house-building sector would disappear. The question was how we would find resources to keep things moving. The sector should be commended for responding, which has meant that housing associations went into reserves and has meant a far greater role for councils than they had before.

The sector entered into that activity on the basis that support would be provided in the future and that, once the reserves had been squeezed, at least a programme of finance would exist. However, when the accelerated capital investment was removed, the remaining figure became the base level for the budget in the following year. The overall spend in the last year of the comprehensive spending review period was lower, because funding had been spent in the previous year, but the final figure became the base point for the budget in the following year. That meant that we had a massive cut and it is why we now face a 45 per cent cut. The message from landlords is that they can go no further. If we are to have a sustainable future in which we build more homes and start to address need, we must have a new solution.

The Bramley capacity research was very much on a moment in time. In 2010-11, local authorities started to build more than 1,400 new homes; that figure has halved in the past year. A burst of activity happened, but the figure has dropped back again. We need to get it back up to the previous level.

The Bramley research pointed out—rightly—that the situation will lead to pressure on rents, which will be the last port of call; we have driven costs down as far as we can, so the only place from which an increase in income can come is rent. The evidence shows that rents are going up significantly—we will submit a report on that in the fullness of time, once we have all the raw data. That trend will continue.

I do not think that anybody in the Scottish Government or the Scottish Parliament would like things to take that direction of travel, because the people who will suffer most from that are the poorest in our society and—particularly—people who are in low-paid work. When welfare reform and so forth kick in, the consequences will be serious for households and families.

Given that the financial constraints are as they are—you have spoken extensively about that—what can feasibly be done to support the sector in the medium term?

We suggest genuine transparency from the Scottish Government about exactly what is being provided, and about what is not—because it is more expensive, for example—being provided.

Recently, a higher benchmark rate was put in place for houses with greener features, as was a benchmark relating to remote and rural areas. We are all keenly awaiting the outcome of the first of the three-year spending rounds through the local authority strategic programmes to see whether some of the more expensive provisions are being made because housing associations and local authorities are taking advantage of the somewhat higher grant rates. That illustrates the need for a thorough look at what is being provided and at whether that provision meets the right range of needs. It may well be that part of the answer is—if we are to widen the range of needs appropriately—slightly higher grant rates in some cases and considerably higher grant rates in others, if that makes the difference between making some provision and making no provision whatever.

You cannot get something for nothing. We have reached the point at which there is no more to be done except to put rents up significantly, and that is where the pressure now lies.

I have no other suggestions. Government has done everything it can; every initiative has been tried. The fact of the matter is that quality and the meeting of a lot of other Government objectives have probably gone backwards; that includes a host of areas that we put in our submission. Nobody is measuring or has set targets for greater environmental sustainability, community regeneration, town centre renewal or the development of brownfield land. Those are only nice terms and aspirations, and there is no relationship between them and policy and funding. Were such a relationship to be created, you would see a miserable shortfall. For example, among all of that, environmental funding—which used to be part and parcel of the availability of grants—is gone.

I work for a housing association that has deservedly won a lot of awards in the UK and Europe-wide for placemaking. We relied on generous grant levels and environmental grant assistance in order to achieve that. Many Government documents are predicated by saying that they want to replicate the Gorbals—that will not happen with the funding rates that are on offer.

We suggest that there are three ways to support the sector. First, we need greater transparency in the budget-setting process so that we can see where the money is going and what we are getting for it. Secondly, if housing has to take a share of the cuts, its share should not be disproportionate, which means that the cut should be reversed to the 33 per cent average. Thirdly, we should build a national picture of the level of housing need. We are concerned that the building programme will, in effect, condemn a number of families to a life of poverty. That is not what we should aspire to as a nation.

We have looked into this corner for quite a while now. Are there any affordable housing supply models that the Government should consider that are different from the model that it is pursuing and that might deliver housing—including affordable housing—in the future?

The development of intermediate rent has been an understandable flavour of the month in recent times and, where there is a market, there is absolutely no reason not to provide that. As I said earlier, looking at new markets is relevant. A small number of providers will look at market rent because they think that they can provide better rates than some private landlords. Again, that is perfectly legitimate.

A variety of potential private finance models are out there, but that is new private finance that replaces the old private finance that is no longer available from the banks.

Although many new things are going on, none of them provides the magic answer to the ultimate issue that some grant is needed to build houses for people on low incomes and people in low-paid work. Much as we appreciate Parliament’s efforts to look around every corner and try to find answers, it is difficult to get beyond the fact that a grant is needed to build houses for social rent.

10:45

You talked about mid-market rent. Could that be used in some parts of Scotland to assist the provision of social housing as part of mixed developments?

Sales—which are difficult in any sector at the moment because of the market conditions, with which we are all familiar—or full market rent may partly subsidise social rent. Mid-market rent may pay for itself, but it does not cross-subsidise social rent. We want to stamp down fairly heavily on the myth that it does. That is not to do down mid-market rent in any way, but it does not cross-subsidise social rent.

I asked that question because, if it was achievable and we were considering doing it, we would face the problem that it would be achievable in some parts of Scotland but not others. Therefore, there would be a distinct geographical problem with that approach.

Indeed; you have hit the nail on the head. There are parts of Edinburgh, Aberdeen and other areas of Scotland where some element of cross-subsidy would be possible because of the existence of a wide range of rental markets, but there are other areas where it simply would not be possible.

There is no direct replacement for grant subsidy to ensure the provision of social rented housing. There will always be a need for that. However, there are other things that we should do.

We are clear that we will not get the necessary level of social or private house building unless we have a buoyant private house building sector. We can do more to ensure that there is no land banking, that, when a planning application is passed, it gets going and that land that is identified for housing, and social housing in particular, is developed in a timely fashion.

Notwithstanding the pressures that house builders face, we can do more to ensure that the house building sector can grow again by examining the planning system and addressing issues with land taxation to encourage development and ensure that we get 25 per cent affordable housing on a site—affordable housing, rather than social rented housing, although we would rather that it all went on social rented housing.

There is a role for the Government in encouraging the private house building sector to do more.

That answer leads neatly on to my question. Land supply is generally believed to be a critical factor and, potentially, an important constraint on such a programme. Is there sufficient land supply—that is obviously a geographical question—subsidised or otherwise? I include section 75 affordable housing agreements in that. Is land supply a constraint on delivery of the Scottish affordable housing target? Are there particular local markets where that is the case?

I am not able to answer the specific question on local markets, but Scotland is certainly not short of brownfield or greenfield land. However, we have sites that are more difficult to develop and sites that can more readily be developed. During this downtime, few sites are being developed at all. Our real fear is that we will not learn the lessons of the past but will, in a rush just to keep the industry going, lose the section 75 agreements and end up creating highly profitable small developments that do not start to address the need for a mixed community or help to address housing need, and that we will not cycle back into the healthy housing market for which we are calling.

Others may be better placed to talk about the impact on social house building.

For our members, the land is available, but the issue is the cost of remediation work and, in many cases, the cost of purchasing land from the council. Because councils are under such extraordinary financial pressures, they are required to maximise receipts, so the cost of land can be significant, even when there is a further cost of remediation work. That tends to be what drives the issue with land supply. The land is physically there, but it is expensive to develop.

The situation is exacerbated because there is no money for acquisition. So even if good off-market deals in the private sector were possible, some associations could not do that because they do not have the money up front. In years gone by, they would have got money from the Scottish Government or the housing association grant to purchase land. That would become part of the land bank and would be in the pipeline for the future—it might be used in two or four years. However, associations no longer do that. Only the larger and more wealthy ones with surpluses can acquire sites. More can be done on that.

To answer the earlier questions about how to save money in the programme overall, the Government will just have to bite the bullet and start paying for costs as they are incurred, because that is the most efficient use of public resources. At present, £3,000 of public money is being wasted per unit because the money is paid on completion. That is not efficient use of public money.

Obviously, if fewer houses are built across all sectors, less land is needed. Land supply is less of a problem now than it was felt it was in the boom time. As Fraser Stewart said, the issue is about the cost of land. Whether we are talking about remote rural land that might not be fully serviced, including by water, or about contaminated brownfield land, the issue is whether people can afford to use it.

In your experience, are councils feeling pressure from house builders on the section 75 affordable housing agreements?

We have certainly picked up on public statements that have called for a lessening or loosening of those strictures, but we urge decision makers to ensure that we stick to them. We do not want to repeat the history of failed communities. We would prefer to have quality developments and communities so that we do not end up in the situation in which the public sector has to step in and pick up the bills for failed developments, as has happened in the past.

I turn to welfare reform, which the witnesses touched on earlier. In your written submissions, you all expressed concern about the introduction of universal credit and its impact on the supply of affordable housing. I imagine that, overall, the concern is about the impact on social landlords’ income stream. What will be the impact of direct payment of universal credit to benefit claimants? What will be the impact of the reduction in housing benefit for those who are seen to be underoccupying a property?

We anticipate that the direct impact will be an increase in homelessness. The number of people who are unable to afford to keep the home that they are in will increase. There is no prospect of a sufficient supply of one-bedroom properties or shared accommodation to mitigate the problem. It is because of the welfare reforms that we are so disappointed by the 45 per cent cut in the capital budget. As I said, it feels a bit like a one-two knockout punch to people who need access to such housing. We argue that, because of the welfare reforms, now is the time to invest more in new-build social housing.

The CIH puts a slightly different emphasis on the grave implications of welfare reform. We certainly agree with Gordon MacRae that, given the pressures that are already on the private rented sector from welfare reform, increases in homelessness might well result.

In the social rented sector, if as a result of the bedroom tax the shortfall results in some tenants struggling to pay their rent, perhaps because they are in difficult circumstances or have chaotic lifestyles—or, in a very small minority of cases, because of blatant non-payment—I would not assume that that will result in more homelessness from that sector, because that would suggest that councils and housing associations would put such pressure on those tenants that there would be abandonments and evictions. I would like to think that that will not necessarily be the result.

However, if that is not the result, the implication is that social landlords will take the hit, and that is where income streams, the ability to maintain existing homes and, as has been alluded to already, any flexibility for funding new build will go. I think that we need to be wary of saying that there will be increased homelessness from the social rented sector, as that may not be the case. The implication is that social landlords will take the hit.

I think that you have the answer to the question: the result will be either homelessness or arrears. Many housing associations are already modelling the arrears impact. In our case, we are presuming that the impact will be around 2 per cent, going up to 5 per cent for around five years, but that may well be overoptimistic. If our arrears go up to 5 per cent—if they more than double—the financial consequences will be absolutely horrendous. If we were to capitalise that, it would amount to a loss of £3,000 per existing unit. There were questions about the prospect of there being spare capacity and how it might be used, but any spare capacity will be eroded by that.

I echo David Bookbinder in saying that the social housing sector will need to find ways and means of ensuring that homelessness is not the result. However, there is a long way to go on welfare reform and when it actually happens there is no question but that it will be an absolutely massive social issue. I just keep my fingers crossed every day that no one ever finds a computer that is able to do it.

In the exercise that Mr Stewart referred to, was it possible to quantify specifically the impact of the direct payment of universal credit?

No. There is other research that you could look at, and there were pilot schemes in England and one in Scotland. However, the pilots were so small that it is not really possible to draw any conclusions from them. Glasgow Housing Association has created a model that seeks to second-guess exactly what the consequences will be, but we will not know until it happens—end of. We will not be able to judge the impact until a year or two thereafter because there will have to be a change in culture. However, the immediate impact of the direct payment of universal credit will be horrendous. There is no question about that. It will be bordering on the unmanageable for some associations.

Certainly, I think that every association will be planning to put all its available staff resources into bringing all tenants up to speed, to deal with vulnerable tenants and to try to ensure that the advice is out there. I know that the Scottish Government is very supportive of any initiative that seeks to mitigate the effects particularly of that aspect of welfare reform, and that is welcome.

Just on that very specific point about the Scottish Government’s response, what further measures could the Scottish Government take to mitigate the reform’s impact on housing supply?

On what the Scottish Government can do to aid the likes of Fraser Stewart’s tenants who are in hard-to-reach groups, we were disappointed that the mitigation money that came from Westminster was not passed on to advice services. It will be crucial that hard-to-reach tenants and others who are concerned about what will happen to their benefits are able to access impartial advice and support. At a Scottish level and at a local level, we are seeing deep cuts to advice services such as those provided by Shelter Scotland, Citizens Advice Scotland and others.

I echo that. I was not aware of the fact that the Scottish Government had not passed on certain moneys that were expected to go into those services. It is crucial that those services are supported as generously as possible, because it will be a very difficult period for tenants and landlords alike.

11:00

The CIH is very glad to have been the recipient of a modest amount of Scottish Government support to help social landlords to prepare in as practical a way as possible for the reforms, and that support has certainly been very welcome. That on-going programme includes providing good practice guidance to social landlords, the first part of which will go out in the next week or so.

However, I think that the bigger picture is about advice services, exactly as Gordon MacRae said. We are talking about reserved matters, but a key part of the scene that is not reserved but which is within the gift of the Scottish Government is proper funding of advice services, whether through direct grants or through assisting and supporting local authorities to provide those. That is one area where the Scottish Government can make a difference.

If I may add a general comment, I think that the Scottish Government and Scottish Parliament probably need to be aware that, while they are taking a very welcome interest in welfare reform, there is a risk of raising expectations that the Scottish Parliament can do more to mitigate the impacts than perhaps it can. That is something that I think the Parliament needs to watch.

This year, as we touched on earlier, we are moving to multi-year resource planning assumptions, with local authorities across Scotland taking much more of a lead in the development funding process and in marrying spend to local need. What do you expect will be the main advantages and disadvantages of that process in practice?

The process includes a number of very welcome elements. First, the fact that we now have a three-year programme is really significant. There was previously a bit of a stuttering start in the ability to plan ahead, so having a three-year programme will be good.

However, the three-year programme will not be a rolling three-year programme, so a potentially difficult issue could build up: if local authorities—and, indeed, the Scottish Government with its overview of the programme—are very cautious about what they approve next year and the year after that, by default we will have created a smaller housing budget from 2015 onwards. I believe that the Scottish Government is aware of that issue, but I think that we all need to work together to see whether we can create a rolling programme rather than just one three-year programme followed by another.

While we await the outcome of the new system—we hope that, within the next few weeks, we will see what year 1 of the new system has brought—there is one aspect of it that we very much welcome. Although it is entirely logical for local authorities with their strategic role to have greater influence over the distribution of resources, there are two things to watch. First, a challenge for some local authorities that are both builders and strategic planners will be to decide how much money goes into their own building and how much money goes into that of RSLs. We will be looking closely to see what that balance is. Secondly, we will also be watching the extent to which the money gets spent. Therefore, we very much welcome the fact that the Scottish Government will retain overall control, if you like, or at least an overview of the situation, so that if work at a site in one council area slips, the money can be vired quickly to another area, and the situation can be put right later. That retention of overall Scottish Government control is certainly a very welcome feature.

Adam Ingram asked about the advantages and disadvantages. An advantage should be a more strategic overview that ensures that homes go where they are needed rather than simply where there is the capacity to build them, although I am not sure that that will necessarily be the result. A disadvantage is that things will be less transparent in terms of the ability to say what is going where and when.

The other issue with the three-year plan, which should be an advantage, is that it should mean more homes. It is worth noting that £770 million is an increase on what was originally announced in the budget, but we have not seen an increase in the target, which remains the same target that was fully funded at around £620 million or £600 million when John Swinney first published the comprehensive spending review. We hope that a three-year plan will enable additional investment to be more quickly added to the pot and that the overall supply will increase when funds become available.

What has been lost in all the changes is the submission by housing associations of annual strategy development funding plans, which allowed serious attention to be given to the bottom-up component of planning and allowed housing associations to bid for sites and to make the case for the strategic importance of what they were doing. That has been completely and utterly lost. We had quite a healthy combination of top-down and bottom-up approaches three or four years ago before there were any changes, with healthy compromises being made and nothing being overlooked. That was certainly an accountable and transparent planning process for everybody concerned, including the Government. We have lost that completely, and it should be reinstated—it is as simple as that. There was nothing wrong with the process, which worked very well.

I can talk only for Glasgow, where things are working well. There is a lot of support for and knowledge of local priorities as well as strategic priorities. However, that is not necessarily always guaranteed, so we could do with a system that had that as an in-built feature.

I return to the point about the programme not being a three-year rolling programme. In effect, approvals will set the budget for future years. Can you explain that a bit more? What do we need to do to ensure that that does not happen?

We all struggle to get our heads around the way in which the funding is to be paid out on completion. For instance, at the start of the next spending round, from April 2015 onwards, the housing budget for 2015-16 will be spent on paying out on the completion of schemes that will have been approved 12 or 24 months before then. If not enough is approved in 2013-14 and 2014-15 because of the worry that that would involve making a commitment to spend money without knowing whether it will be there, by default the housing budget will be lower. It will not need to be higher, because if paying out is done only on completion and not enough has been approved, there will not be as much on which to pay out.

There needs to be cross-party working with the Government to ensure that a minimum, acceptable, decent level of homes to meet existing targets can be committed to into the next programme. Obviously, the next programme will cross into the responsibility of a new Administration, hence the need for a consensual approach to ensure that approvals do not quietly start dropping because of caution.

That seems to support the argument for having more strategic control at the Scottish Government level as opposed to devolving control to local authorities.

The system that we have now can be balanced in that regard. Ultimately, the money comes from the Scottish Government, and the CIHS is certainly comfortable with there being a local authority approach to dealing with it. However, neither local authorities nor the Scottish Government will be able to commit to a specific level of approvals without having some sense of a master plan to cover the start of the next spending review, otherwise we will see a fall by default.

The Scottish Government is retaining overall control, so it is not as if the process has been completely devolved to local authorities for them to provide funding from their own resources, as has happened in some other areas. The Scottish Government is still in control of the moneys, even for Edinburgh and Glasgow—they are still ultimately Scottish Government moneys.

I concur with that comment. We all want to avoid a situation in which we sleepwalk into an underspend for a housing budget that has already been well cut. We will require to do more to support local authorities to get more approvals through before we hit the final date.

Our concern flows from what Glasgow City Council has told us, which is that, as a consequence of what has happened, it has compressed all its planned site starts into the next financial year, which is 2013-14, and that it cannot plan for anything after 2014-15. That just seems crazy to us.

To get back to some of the initial questions, whether what the council plans to do is achievable is open to question. My association plays quite a prominent role in the affordable housing programme, and we are only now being asked to confirm that we can afford to do everything that we are pencilled in to do—and I fear that we cannot. That goes back to the projected 70:30 balance of the programme—it should be 100 per cent social rented housing anyway—drifting towards 30:70 to make the programme work. At that point, we get complete confusion. We are already in a situation in Scotland in which some social rents are higher than some so-called mid-market rents. A definition of social housing would probably help with all that, and a rolling programme is probably essential for longer-term planning.

I suppose that if you are moving towards more local decision making, the other aspect would be the effect of the pressures on the local government settlement on local authorities and how that impacts on their decisions and on local outcomes. In the context of cuts and a squeeze across the board, can we be confident that spending decisions on and the funding of affordable supply will be protected?

The CIH does not have worries about that money somehow disappearing. We expect complete transparency from local authorities and the Scottish Government on what the money in the affordable housing supply programme has funded. It is possible that the squeeze on general funding as a result of the financial pressures that local authorities are under might limit their ability to build up a package that enables them to use their £30,000 subsidy and supplement it with other local sources for their own house-building programmes. However, I do not expect financial pressures on local authorities to have any impact on making sure that money in the affordable housing supply programme is spent fully.

I agree with that comprehensive explanation.

Some of the answers have already alluded to the longer-term implications for the RSL sector of the way in which money is provided, the grant rates and the shift to larger associations, as we have seen south of the border. To what extent will the long-term impact of the shift in funding and provision for affordable housing affect the housing association sector? Is consolidation inevitable or desirable? If not, is it preventable?

It is certainly not inevitable or desirable, and it is certainly preventable, although that could be helped by further legislation.

It is accepted and demonstrable that south of the border mergers and acquisitions were more related to the retirement age of chief executives than they were to any benefit flowing from those mergers and acquisitions. A lot of research and reviews have been done and they have not led to lower borrowing costs. We are all getting sick of people saying that you cannot borrow money unless you are absolutely huge—that is total nonsense. Big is not beautiful. There is a backlash in England at the moment, but those voices are not loud enough, and there is serious concern that some UK or England-registered organisations are acting in a fundamentally predatory manner. Any associations that feel that they have to merge with or become subsidiaries of UK-based organisations—for example, Irvine Housing Association and the West of Scotland Housing Association, which have up to 20,000 houses—need to look at how they have run their organisations for the past 10 or 20 years. It is certainly not something that has to be done by any of the organisations with which I am familiar. There is no clear attraction in it, and the loss of autonomy and commitments to physical communities and communities of interest would mean that the associations concerned would lose their raison d’être. Why would they continue? What is the point in being a housing association in such circumstances? In many respects, people would be happier with the accountability provided by a local authority rather than having a huge landlord that appears to have no roots among the tenants that they serve.

11:15

There may be a slight implication that if a housing association is not developing, it needs to look at rationalising or merging. However, the opposite is perhaps the case now. If an association is not developing, it probably has a much lower risk profile than one that is, so there is no reason why even small associations with 500 units or fewer cannot carry on as landlords.

If rents are affordable and tenants are happy with the service, I cannot see why the development profile, which is changing because there are fewer developing associations, would have any impact on a small association’s ability to survive into the future. We have heard about other threats, not least from welfare reform, but as far as the CIH can see, the lack of development does not in itself lead to a pressure to merge.

Shelter Scotland is obviously not a landlord, so we are observers on this issue. Will consolidation happen? It appears to be the direction of travel in some places. Should it happen? It is up to the advocates of merger to demonstrate the benefits that it would have for tenants and prospective tenants. We take a pragmatic view that anything that increases the overall supply of good-quality social rented properties in the right places should be welcomed, but such business management decisions are rightly the responsibility of individual associations.

At the national policy level, if there is capacity—be it in relation to land or borrowing—associations should be encouraged and supported to build as best they can.

We have already touched on housing need and have heard that we need to build 10,000 social rented homes a year. Given that the spending allocation for new affordable homes will achieve less than that, what are your views on whether enough priority is given to rural housing, the development of brownfield sites and the building of special-needs housing? Is there enough targeting to meet the needs of people who are on low incomes, who are poorly housed or who are homeless?

Fundamentally, we would say that not enough priority is being given to housing at the strategic level. There is clear evidence that people are suffering and that they are struggling to keep a roof over their heads. We are seeing people—be they renters or home owners—who are struggling to pay their household bills.

Looking forward, I think that the programme is a programme not to address housing need but to deliver the Government’s target. We believe that the question is really about what sort of country we want to be. Do we want to be a country in which everyone has a secure, affordable home—whether they rent or own it—or a country that keeps a subsistence level of house building going? Looking forward, I think that we will be a country that has that subsistence level of house building. That is not the aspiration for Scotland that we would hope for.

We have to watch the potential disconnect between the housing supply programme and wider Government objectives. Let me give the example of the ageing population. We reluctantly have to accept that in recent years and probably in the next few years the amount of specialist housing and care provision for older people has not been and will not be what it once was. We would find it more difficult to accept inadequate provision of mainstream housing built to a standard that is suitable for wheelchair users, for example. That would be a serious disconnect, because although such housing involves an extra cost, it is nothing like as complex as building a specialist housing or care scheme for older people.

A Horizon Housing Association report that is coming out shortly and which is supported by the CIHS will highlight the shortfall in mainstream housing that is suitable for wheelchair users. Of course, if we are talking about our ageing population and the fact that people are getting older and becoming increasingly frail, it is very easy to say that we should build housing of the right standard to address a particular need, but the situation perfectly exemplifies our anxieties about slightly more expensive provision getting squeezed.

Developing housing to cover all the issues that Gordon MacDonald mentioned, such as special needs, brownfield sites and remote and rural communities, costs money and will be the first thing to get squeezed. As I said at the beginning, the huge concern is that Government officials are not seeking to measure the impact of the proposals on such things. We should really agree as a society what the outturn needs to be and what we need to create, and then we should examine how policy and funding arrangements are contributing to those developments and the meeting of targets. However, targets are not being set and the incentive is not to do any of the things that Gordon MacDonald talked about. Brownfield sites, special needs and remote and rural locations are all expensive to deal with and aside from the little bits of money that are being given out—which I have to say are getting smaller and smaller—nothing is to be done to assist the situation. It is all about unit costs, and that approach is not going to meet the country’s overall needs.

Many of the 32 local authorities cover rural areas. The Government has stated that 20,000 homes should be built for social rent, with authorities building 5,000 houses. Do you agree with that allocation? Is the council build target achievable?

Although we welcome the setting of any target that allows us to identify what delivery has been, we would like that target to be higher. Local authorities could play more of a role than they have in the past, but I do not think that we should lose sight of the overall social housing picture. The fact that one part of the social housing sector is doing a wee bit more should not result in the other part doing considerably less. We are concerned about that.

Remote and rural communities have particular issues that have not yet been properly addressed. As Fraser Stewart and David Bookbinder have made clear, there are particular reasons why it is harder to address such issues, which is why we very much welcome the minister’s commitment to carrying out a national overview of local needs analysis. We need to identify the homes that Scotland requires and what we want social housing to deliver. Is it about better communities or is it just about throwing up units here, there and everywhere? Once we have a national programme that is about addressing housing need and building better communities, we can start to move towards a situation in which we build more homes than we lose every year. That would certainly be a positive move.

The issue of remote and rural areas is interesting, especially when taken with the question of the council house contribution to the programme. If, as the CIHS suspects, the proportion of the social rented programme that councils take on will need to increase, we will be intrigued to find out whether they can step into providing housing in more difficult sites—in, say, remote and rural areas—which has traditionally been provided by often very local housing associations with very reasonable grants. There is a broad, national issue about councils taking on a greater proportion of the programme, but the interesting question is whether they will take on the more difficult provision.

I am not really in a position to comment on rural issues with regard to local authorities.

The date for delivering the 2012 homelessness commitment is almost upon us. What impact will the current levels of affordable housing supply have on that?

It will make it harder for local authorities to ensure that there is settled accommodation for everyone who becomes unintentionally homeless. I am not sure whether the 2012 commitment will make things more complex for local authorities, but the overall reduction in house building simply adds to the pressure on overall supply. We need to recognise that the majority of people who get settled accommodation have spent time on the waiting list.

We would argue that the 2012 homelessness commitment is one of this Parliament’s most progressive achievements and should be recognised as such. However, it requires local authorities to look again at prevention, support and advice. It is not just about supply or getting access to temporary accommodation but about the service that local authorities deliver to people who become homeless. After all, there is more that we can do to prevent homelessness in the first place.

Members have no more questions, so I thank the witnesses for their thorough evidence. You have certainly given us a lot of questions to put to the relevant ministers.

I suspend the meeting briefly to allow the witnesses to leave the room and the next panel to take their seats.

11:25 Meeting suspended.

11:29 On resuming—