The BoE is assessing if contagion from this scandal could spread to the broader housing market and cause a new financial crisis.
By Nick Corbishley for WOLF STREET:
The Bank of England is now fretting about the impact the UK’s flammable-cladding crisis could have on broader home prices in the UK and what that means for banks. New data shows that affected properties — and there are up to 1.3 million of these flats — sell for as little as one third of what the owner had paid.
The BoE is concerned about the banks that sit on loans backed by those properties and is assessing whether contagion from this scandal could spread to the broader housing market and cause a new financial crisis.
The BoE’s Prudential Regulation Authority (PRA) has surveyed mortgage-lenders on their exposure to leasehold flats with fire risks. And it is asking lenders for regular updates.
The crisis, now in its fourth year, has uncovered a litany of fire safety issues afflicting high-rise and medium-rise buildings. And it’s the apartments’ leaseholders — the people who own the apartments, but not the land, and who hold zero responsibility for the problems — who will have to foot the bill to rectify them. Many can’t afford to. Some are facing bankruptcy.
With banks refusing to offer mortgages on apartments in these buildings, and with cash buyers demanding crippling discounts, even selling the unit is not really an option.
In the wake of the fire at the Grenfell Tower of June 2017, which resulted in the deaths of 72 people, up to 1.3 million leaseholders in the UK discovered that the buildings in which they own their flats may have also been rigged with flammable cladding and insulation materials.
They’ve had to pay hundreds of pounds a month — in addition to the mortgage payments and other costs — to cover the costs of round-the-clock fire-patrols to make sure the building they occupy doesn’t suddenly go up in flames. Home insurance costs have soared. Some have also had to pay for a safety inspection. And if their building doesn’t make the grade, they have to pay tens of thousands more to have the flammable insulation and cladding materials replaced and other fire risks remediated.
“Leasehold” arrangements are still common in England, particularly with regard to apartment buildings. When an apartment is purchased as a leasehold, the buyer is really a tenant with a tenancy agreement that typically lasts for up to a century.
The “freehold” — the building and the land — belongs to somebody else, usually the developer, a financial entity the developer sold it to, or a large landowner such as the Queen or the Duke of Westminster. They are able to extract annual rent on those assets.
Under leasehold law, owners of the flats are liable for the costs. Over the past 12 months, apartments in many multi-occupancy buildings, even those of four stories or fewer, have required a so-called external wall system (EWS1) form in order to qualify for a mortgage. But many of the buildings are still waiting for inspection, leaving their occupants trapped in financial limbo, in buildings that may also be a firetrap.
Up to 1.3 million flats, including in thousands of recently built structures, are currently unmortgageable. These properties are at the low end of the housing ladder. And they are all but impossible to sell, without plunging their current leaseholders into a deep loss. That this low end of the housing market is beginning to seize up as lenders refuse to offer mortgages on any multi-occupancy buildings that pose even the slightest fire risk is threatening to disrupt the entire property market.
Now attention is turning to the potential impact this could have on the wider financial system. A study by the Leasehold Knowledge Partnership (LKP), cited by The Times, has found that of the flats in buildings with fire risks that had gone to auction since December 2019, about 80% failed to sell at all, or sold at discounts of up to 67% from the price the owner had originally paid.
For example, a one-bedroom flat in Manchester failed to sell last month despite being listed for half the £330,000 its owner had paid in 2017. In another example, a two-bedroom flat at The Decks, an award-winning design with flammable cladding, sold at auction for £52,000 last year, 62% lower than the price its owners had paid (£134,450) in 2008.
The UK government has so far pledged £5 billion to help remediate fire-risk flats but only in buildings above 18 meters. Official estimates put the total cost at £15 billion, though even that could be on the low side. Colmore Tang Construction, a contractor that has priced remedial projects on more than 20 typical developments in Leeds, Liverpool, Manchester and the Midlands, believes the final figure is likely to be closer to £50 billion.
The government has gone out of its way to protect those most responsible for fire safety issues, including the developers that designed the fire-hazard buildings, the contractors that built them, the manufacturers that created and marketed the highly flammable cladding and insulation, many of which are Conservative Party donors, and the safety bodies and regulators that looked the other way as the multi-story death-traps were erected. MPs in the House of Commons have voted a total of five times in the past few months, including twice this week not to pass the costs onto developers and manufacturers.
In the case of fire-risk buildings lower than 18 meters high, leaseholders are to receive no assistance whatsoever beyond the offer of a long-term low-interest loan to cover the costs.
Average costs include 24-hour fire patrols (£3,972 a year), soaring buildings insurance (up 400%, or £1,087 a year) and repairs of flammable cladding (£22,511) and other fire risks, such as wooden balconies (£25,671). This adds up to more than three years’ total disposable income for flat-owners in Manchester, Birmingham, Sheffield and Liverpool, LKP found, based on Office for National Statistics data. Leaseholders are already receiving bills for remediation work they cannot afford to pay.
In many cases, the additional debt will sink leaseholders deep into negative equity, meaning they will still not be able to sell their apartment without incurring a significant loss even after the cladding and insulation have finally been removed.
The scale of the crisis is big, but it’s still unclear how big. For the moment, the rest of the UK’s housing market is buoyant, with average prices rising 7.1% compared to a year ago. But the bottom layer of the housing market is seizing up as lenders refuse to offer mortgages on any multi-occupancy buildings that pose this type of fire risk.
Yet even as all of this is happening, new data suggests that three-quarters of cladding systems being installed on new medium-rise buildings completed in 2019 and 2020 still used combustible materials. The government had proposed banning the use of such materials in these buildings but hasn’t actually followed through with legislation. The data – from an analysis by non-combustible insulation manufacturer Rockwool of figures from construction database Glenigan – also shows that 112 other potentially high-risk buildings had been built with combustible rainscreen systems during the same period. By Nick Corbishley, for WOLF STREET.
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