Reaching the wrong conclusion

And so we have reached the last question to which we are being asked to respond for the Property Compensation Consultation 2013 for the London-West Midlands HS2 route:

“QUESTION 7: What are your views on the option to introduce a ‘time-based’ property bond scheme within a ‘rural support zone’ as an alternative to the voluntary purchase scheme?”

There was no equivalent question in the original compensation consultation.

Now let’s be clear about this, the Government threw the concept of a property bond scheme for HS2 into the waste bin in January 2012 on the basis of opinions that it set out in the document Review of Property Issues. This followed a consultation on compensation that employed one of the questions set for the 2011 High Speed Rail: Investing in Britain’s Future consultation. That a property bond has re-surfaced as an option is due only to the High Court inviting the Government to think again. However the re-run consultation is not on the same basis as the original consultation; the goalposts have been moved.

For the 2011 consultation we were asked to choose between three options: a hardship-based property purchase scheme, a bond-based property purchase scheme, and a compensation bond scheme. Despite a clear preference being expressed by respondents to the consultation for a bond-based property purchase scheme (also called a “property bond”), the Government decided to opt for the hardship-based property purchase scheme, and dropped the other two, for the 2012-13 Property and Compensation consultation.

 It appears that the Government is really, really keen on the hardship-based property purchase scheme and wants such a scheme as a part of the compensation package come what may. The current consultation does not offer you a choice on this matter; you are only being asked to comment on the details of the Government’s version of this concept, the long-term hardship scheme, not on its inclusion in the package (see my blog Counting the pennies, posted 16 Nov 2013).

However, faced with having to reintroduce a property bond offering into the current consultation, the Government did what it usually does when it needs ideas; the Department for Transport (DfT) used our money to commission a report on the property bond option. The lucky recipient of our dosh this time is Deloitte.

Now I am very suspicious of reports commissioned by government departments. I can’t help but feel that there is usually at least an element of “he who pays the piper” about them – did somebody mention KPMG? Certainly, I am sure that the DfT was very happy with this one, since I doubt that the High Court judgement did anything to change the apparent dislike of property bonds in the Department. It proposes retaining the long-term hardship scheme, which I am sure met with general DfT approval. The report also recommends that, if a property bond is to be offered for HS2 Phase 1, it should be on the basis that it is “a mutually exclusive alternative” to the voluntary purchase scheme. The Government agrees, and this is the basis on which the consultation document proposes it as an option that would take the place of the voluntary purchase scheme (see my blog Simply not good enough, posted 20 Nov 2013). This is why I am claiming that the goalposts have been moved since the original consultation; we are now being asked to compare the merits of a property bond scheme against a geographically-qualifying property purchase scheme, rather than against a hardship-based property purchase scheme.

The Deloitte report sets out, in Chapter 7, a proposed form of bond scheme. The details of the design of this proposal are summarised well in Annex B to the consultation document and so I do not propose to repeat them here. In Section 5.2 of the consultation document the Government discusses the Deloitte proposal and gives its reaction.

The really key feature of any property bond scheme is the degree of universality offered, and an important determining factor in this will be the geographical limits, if any, that apply. In its proposal for a property bond scheme the HS2 Action Alliance (HS2AA) suggests that there should be no such physical limit applying to eligibility; the scheme should be available to any “property owners who suffer a ‘loss in property value’ due to HS2”, irrespective of location relative to the line of route. Such a scheme would avoid the unfairness of excluding some property owners suffering blight, and should be widespread enough to ensure that the aim of providing confidence to the property market is achievable.

In paragraph 5.2.22 of the consultation document the Government says that it “accepts the Deloitte advice that property bond schemes which are not defined by a specific boundary would attract many more valid applications for bonds than options defined by a specific boundary”. However, the Government also expresses the concern that such unfettered schemes “would be very likely to lead to much higher administrative costs, to cover the necessary costs of robust, independent property valuations” and that these costs “are hard to predict with any degree of confidence”. The Government also describes these costs as “up-front”; this demonstrates a serious misinterpretation of the HS2AA proposals, which only require that a valuation is determined “if and when [a property owner] seeks to sell to HS2 Ltd when an open market sale is not possible” (HS2AA leaflet).

The Government also appears to be overlooking its own view, as expressed in paragraph 2.1.1 of the consultation document, that:

“Once a project is built and in operation, the local property market tends to return to normal as the actual impacts are less than first feared. It is normal for the perception of blight to contribute to the overall effect of a project on property prices, usually as a result of uncertainty and fear. Once that uncertainty and fear has been replaced by certainty, adverse impacts on property prices tend to dissipate.”

I agree broadly with this, and it is a very strong argument for having a well-designed property bond scheme. It means that delaying decisions by property owners to sell, which is one of the aims of such a scheme, is likely to lead to fewer properties having to be purchased by the Government, since it should be easier for properties to be sold on the open market at the latter end of the construction period. This should mean that the Government will save money by having to pick up fewer tabs.

Despite the potential that a property bond, as proposed by HS2AA, may offer the Government retains a firm grasp on the wrong end of the stick (paragraph 5.2.22 of the consultation document):

“… there is no evidence available to show that those significantly higher costs would be likely to achieve corresponding benefits”.

Such is the firmness of that metaphorical grasp that the Government appears to be prepared to pre-empt the outcome of the consultation on this issue (paragraph 5.2.23 of the consultation document):

“We do not therefore propose to introduce any property bond scheme that does not feature a clear boundary to define eligibility”.

In my next posting I will reflect on what Deloitte and the Government have said regarding defining this “clear boundary”.


3 responses to this post.

  1. Posted by Barbara Mortimer on November 23, 2013 at 5:39 pm

    I have just discovered your excellent blog and will recommend it to everyone. Thank you for taking everything apart in such detail – it is really useful. There are few people left who actually look at what words mean and it is essential in this case – George Orwell would envy their talent for double-speak. I haven’t read the whole blog yet, but I wonder if you have looked into the 15% question? I agree with you that it is unfair to take a 15% drop on a “reasonable” asking price.I argued with the representatives of HS2 Ltd that it is actually mathematically illogical, in that 15% is an average that takes account of over-optimistic asking prices, but under the Hardship Schemes we have to ask a “reasonable” price. The outliers should be left out, because there aren’t any outliers at the other end – i.e. people asking less than the market rate – to make the average meaningful. Hah! Much good it did me. I did an exercise using the information on Zoopla, looking at the properties in our village, and found that if people were to sell at 15% less than the current estimated value, then everyone who purchased since mid-2004 would make a loss on what they originally paid. While this can happen if you are in a property for a very short time, for it to happen when you have been there for nearly 10 years is unheard of, and of course would make moving impossible.


    • Thanks for the kind words Barbara and it is a pleasure to welcome you to the site.
      You may have noticed that David has also raised the 15% issue. The two of you have made me realise that this important matter has slipped through the cracks in my analysis; although I have mentioned it, I haven’t discussed the matter at all really.
      After I have returned from the Westminster lobby I will get an additional blog posted to redress this omission. At least the pair of you have given me some pointers to start with.


  2. Posted by Barbara Mortimer on November 25, 2013 at 6:16 pm

    Yes, I’ve now looked at what David said and followed his link. It looks on Hometrack as if the 12% (which DfT state is the basis of their 15% – no explanation for the additional 3% – pure malice?) was simply a blip in 2009 as a result of the crash. The normal average does indeed look to be about 7% and it is completely wrong to use 12% as representative. HS2AA have referred to this but haven’t made all that much of it – presumably because they are recommending that the Bond scheme should supersede the hardship scheme anyway. But perhaps we really need to in case DfT turn down the Bond again.


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