So what’s not to like about social renting?

I have posted below my contribution to the CIH series of essays on ‘Where is housing heading?’, which is published today. It’s therefore a longer-than-usual post.

The essay presents the core arguments in favour of social rented housing and the urgent need to re-start a programme of building new homes which will be available at tradition social rent levels and with security of tenure. It is highly critical of the Coalition’s so-called ‘affordable rent’ scheme, with its high rents and reduced tenants’ rights.

The CIH series has already published a number of fascinating and excellent essays including ones by Jules Birch, Vidhya Alakeson, John Perry and Grania Long. Another essay on social housing is published at the same time as mine, by Keith Exford. We haven’t collaborated or compared notes, so it will be interesting to see how close or far apart our views are!

CIH say: “It’s two years since the UK government published its housing strategy Laying the Foundations, and we are now 18 months ahead of the General Election. The Chartered Institute of Housing (CIH) is taking this opportunity to pause and consider developments since 2010: where we have ended up, what’s worked, what hasn’t, what we’ve learnt about the policy positions of the main political parties and where things might be heading next. We’ve commissioned a series of leading commentators to give us their views in the run-up to the election, and we hope the resulting essays will stimulate debate over the critical period we are about to enter.”

I would like to dedicate my essay to my friend Richard Crossley, a stalwart of social housing and tenant involvement, who died recently.

So what’s not to like about social renting?

It is not possible to consider the role of social rented housing except in relation to the housing system as a whole. Previous essays in this series have shown how the tectonic plates of housing tenure have moved markedly over time in response to economic conditions, social expectations and political ideologies. Over the past century we have moved from a dominance of private renting towards a parity between home ownership and social renting and now there is a strong trend back to private renting, with the other two tenures in decline.

That the housing system is in crisis is hardly in doubt. Not so very long ago, when I started my local government career in housing in Camden in 1976, I well remember a senior professional telling me it was the wrong business to be getting into because ‘the housing crisis is nearly solved’. It is hard now to imagine a time when it seemed possible to ‘solve’ huge problems like housing. At that time, mammoth strides were being made. Councils and housing associations were building large numbers of genuinely affordable homes, matching those built by private enterprise for home ownership. Intervention in the private rented sector was at its peak, with systematic inspections and assertive municipalisation tackling the worst landlords. A real safety net for many homeless people was on the horizon and allocations policies were being relaxed. Home ownership was rising and widening its appeal as mortgages were responsibly liberalised. Landlords and poorer home owners could get generous grants to repair and improve their homes. New forms of tenure, like part-rent/part-buy, were being discussed as new ways to offer variety and choice in the market.

There was genuine optimism. But in the years that followed it was all thrown away. Council housing investment tightened following the IMF crisis and its decline accelerated for ideological reasons under Thatcher after 1979. Councils were prevented from municipalising housing and both new build and rehabilitation programmes stalled. The much-heralded ‘third arm’ – housing associations – grew in status but crucially never came close to matching the number of homes that were previously provided by councils. Private enterprise continued to build in parallel with economic cycles. The pattern was set that has lasted since. The hole left by councils was never filled and the housing system could no longer respond to rising housing demand and need. Since that watershed period, we have failed to build enough homes of all types to meet the needs of the population and we have allowed, indeed encouraged, house values (and hence rents) to soar through successive bubbles, making homes increasingly unaffordable.

Although wholly discredited, the theory of ‘trickle down’ still infects housing policy – the belief that building executive homes in Cheshire or Hertfordshire will somehow eventually assist people in housing need in Manchester or London (in reality such additional supply leads to a more rapid rate of household formation before the trickle has got very far). For example, in the debate about building New Towns in the south east, the assumption is still made that somehow this additional general housing supply will benefit those in housing need in London.

We have failed to match the distribution of prices and rents in the housing system to the distribution of incomes. Inequality has grown and so has insecurity: the number of people with very low incomes in the ‘flexible labour market’ with zero hours contracts, casualised labour, irregular self-employment, and part-time work. The correct housing policy response to these changes is that homes need to be cheaper not more expensive.

For thirty years housing policy has suffered from the erroneous analysis that it is more efficient to let markets set rents and then to subsidise the individual household to find somewhere to live. Even worse was the growing belief that social housing rents should be closely linked to whatever the market comes up with. As a consequence, housing benefit has been rising and investment grants falling, to the extraordinary point where 95% of the money put directly into housing by Government is in the form of benefit and only 5% in the form of investment. People on low incomes, in or out of work, are charged increasingly high rents, making them more reliant on housing benefit and creating extraordinarily high marginal tax rates.

A rational housing policy would deliver homes in a way that is consistent with the income distribution and thereby maximises the advantage of working. Only a traditional form of social rented housing offers what is needed to people near the bottom, whether they are in or out of work.

Misguided policies have been compounded by the demonization of benefit recipients, including social tenants. The perceived wisdom that social tenants are ‘subsidised’ and that many of them live the life of Reilly on benefits is as dominant as it is inaccurate: but the prejudice is reinforced by the media, some politicians, and even some in the housing business, every day.

Better public understanding of the real pattern of flows of subsidies, discounts and tax reliefs (economically they are the same) in the housing system would transform the debate. All of the tenures are subsidised. One policy alone, the right to buy, has cost £50bn in discounts over 25 years. New social rented housing receives an initial grant per dwelling to enable it to be built but subsequently receives nothing towards running costs.

Different people draw different conclusions from each part of the patchwork of assistance to housing. But the most important lesson is that the system is expensive and incoherent, badly geared towards meeting primary housing objectives (increasing supply and making homes affordable), and detrimental to the wider economy. The narrative is even more damaging if you take a wider view of property and land taxation as a whole. Not fit for purpose is something of an understatement. In particular, the primary forms of support for home ownership over the past 50 years, from MITR to Help to Buy, have bolstered demand not supply: they have been hugely expensive and largely counter-productive. In renting, we have stopped funding the most efficient and value-for-money sector, social renting, and instead expanded subsidy to the least efficient and lowest value-for-money sector, private renting, a policy change that is now driving a very rapid increase in the cost of housing benefit.

Of course I do not argue that the world of social renting is some perfect nirvana. Many mistakes have been made in social renting over the past 50 years as well. I would name the failure of imagination in urban planning and its inability to create mixed neighbourhoods across the piece, the disaster of system-build and some gross errors made in the design and construction of large estates during the heyday of building in the 60s and 70s. And it is the case that social rented homes have often been badly managed both by councils and housing associations.

But my point is that the model of social rented housing has been tried and tested and it works. It is a wheel waiting to be reinvented. Targeting subsidy at building homes in the first place, with no subsidy for subsequent running costs: this is the most efficient use of resources. The focus is on construction and there are strong multipliers in the wider economy so that the Treasury gets a big slice of its money back. Rents rise over time while borrowing costs flatline, so the pooling of rents allows a cross-subsidy from older properties to newer properties, helping to keep them all affordable. Social landlords can borrow money to build at the best possible rates. Housing Associations get a return on their investment over the lifetime of the loans they take out; councils currently make a surplus on their activities with no general subsidy. Cost-plus rents mean there is a need for housing benefit but at much lower levels than that required for private rented homes.

So what’s not to like about social renting?

Neo-liberals assert that markets lead to an optimal use of resources. Economic theory would tell us that high prices lead to more homes being provided so that an equilibrium price is achieved over time to the satisfaction of those providing and those buying or renting the homes. And the evidence is?

It is a particular nonsense to have a dysfunctional housing market, inflated by demand subsidies, and then to require social rents to be tied to it, whether at 40% or 80%. Once council housing started to make a profit, people hostile to any form of public housing provision switched from complaining about cash subsidies to claiming that it was subsidised simply because it was sub-market. Of course it is fair enough for economists to identify the ‘economic subsidy’ or ‘opportunity cost’ involved – ie how much you could get for it if you sold it in the market instead and applied the money to some other activity – but it is unrelated to the cost of provision. In the real economy, where there are tens of thousands of market distortions caused by taxes, tax reliefs, imperfect competition, and even geography, the notion of economic subsidy makes little sense. Staying in hospital, for free, involves a taxpayer subsidy for the cost of treatment and the cost of occupying a hospital bed. No-one goes to BMI Healthcare, asks how much they would charge, and then says the subsidy for an NHS bed is the difference between free and private fee levels.

Social rents should be linked to the net cost of provision of the stock as a whole adjusted by local or regional variations in incomes. Hence rents in London would be higher than rents in Newcastle, which everyone would agree is fair.

Labour’s social rent policy, introduced in 2001, followed a review which concluded that social rent levels were set at broadly the right levels but needed to rise gradually over time (in those days incomes tended to rise faster than prices) to help fund investment. The outcome was too formulaic and centralised, with little local flexibility, but was quite well accepted, predictable and stable.

Since 2010 rent policy has gone haywire, but the underlying principle is that social rents will be much higher than in the past. A rapidly reducing proportion of ‘social housing’ lettings have been for ‘social rent’ under Labour’s policy and a rapidly increasing proportion have been tied to irrational and volatile market rents through the Coalition’s ‘Affordable Rent’ regime. Actual rents vary between 50% and 80% of the local market rate as determined in negotiations between providers (when bidding for contracts) and the Homes and Communities Agency or the London Mayor. As the investment programme was cut by 60% during George Osborne’s first spending review, it was always underfunded, so providers are required to help fund new build by selling some existing property and ‘converting’ a proportion of their existing social rented homes to ‘Affordable Rent’ levels when they are re-let. Councils building new council homes are charging a variety of rents to ensure that schemes are viable. The picture now is chaotic. A new ‘Affordable Rent’ tenant living next door to a social rent tenant might be paying as much as twice the rent, with less security of tenure.

The central argument deployed against an expansion of social renting is that it would require additional borrowing to fund a larger grant programme and that this cannot be afforded. Currently the programme is around £1.5 bn a year: chickenfeed in public expenditure terms, almost within the margin of error for housing benefit. Builders buy materials and newly employed workers spend their incomes. Tax revenues rise and benefit payments fall. Homes are let at rents that might be half the price of private lets, saving hugely on housing benefit in every future year. The net cost to the Treasury is significantly below the gross cost.

The new campaign group, SHOUT (Social Housing Under Threat), in its submission to the Lyons Commission, argued that half of Labour’s proposed target of 200,000 homes a year by 2020 should be homes for social rent. They estimate that the cost of these proposals would rise to £6bn a year by 2020 (an increase of £4.5 bn over current spending plans). A proportion of the cost would be borne by the private sector through planning gain and some of the grant could come in the form of free public land. There would be savings in other programmes, such as health. It would be an ideal form of investment because there are no additional revenue costs – management, maintenance, renewal and debt servicing would be paid for out of rents.

This kind of programme is achievable if housing is a genuine political priority. Additional spending on grant would clearly be an extra public spending commitment. But the headline cost is, according to SHOUT, “well under 1 per cent of planned 2013-14 spending; the equivalent of less than 1p on income tax, or just 13 days of welfare spending; and less than 15% of the planned cost of HS2.“

To achieve a new social rented programme of this size, changes will be needed to how both local authorities and housing associations operate. In the council sector there is considerable capacity for additional prudential borrowing within business plans following the reform of the housing revenue account subsidy system. Despite being a self-financed trading activity, borrowing by councils is artificially constrained by Treasury conventions which are different in the UK compared to the rest of Europe. By switching to international measures of public borrowing, it is estimated that councils could build an additional 12,000 homes.

For housing association programmes, additional private borrowing to match additional grant is already ‘off balance sheet’ and does not add to public borrowing. The issue here is a different one. It is hard to generalise because it is a more diverse sector than ever, but too many large housing associations have lost their way and have actively pursued a path away from social renting. They see themselves as large development and regeneration companies. They are not accountable and have lost sight of their mission to provide homes for the homeless and badly housed. Of course their activities contribute to the overall supply of housing but they detract from what should be their core product – social rented housing. Their mission should be rebooted.

Even if we begin to build many more social rented homes again, the gap between supply and demand will require a system of rationing and allocation. The question still has to be asked ‘who is social housing for?’

The mix of tenants living in social housing has changed over the years. In the 1950s the rents of high quality single occupation new council homes were often higher than in the multi-occupied poor quality private rented sector, and were out of reach of the poorest. Many families were deliberately excluded by devices such as assessing ‘housekeeping standards’. Council housing became focused on meeting the needs of the ‘respectable’ skilled and semi-skilled working classes rather than the unskilled. Homes were often allocated against unclear and unpublished criteria and frequently involved councillors making individual letting decisions. Judgemental attitudes, discrimination and favouritism were common. It was a long struggle to move to transparent housing allocations policies based on assessments of housing need, with no means test, with individual lettings decisions made objectively against public criteria by officers.

It is commonplace to be told that ‘the problem’ with modern social housing is that it is let on the basis of housing need and that too many poor and vulnerable people have been congregated together on ‘sink estates’. Thatcher pursued a deliberate policy of residualisation and a shift towards the American model of a small welfare housing sector, turning off the supply tap and selling hundreds of thousands of the best homes to better-off tenants. No-one should be surprised that over time this obligated the sector to restrict access to the most desperate applicants. In my view it was right, and still is right, to prioritise housing allocations to those objectively assessed as being in the greatest housing need, and the length of time they have been in need, and not on income or employment or community contribution or other factors. In the circumstances of a sector forced into decline it was right to focus resources in this way.

It was also inevitable that residualisation would have implications for housing management down the track. In my view many landlords failed to identify the challenge or to rise to it. Better and more intensive management was required but blaming the people was easier than fixing the problem. It would be wrong to respond to difficult management challenges by housing even fewer people in the direst housing need, just as it is wrong to be reverting to the 1960s by excluding homeless families from social housing by recycling them back into insecure private renting. It is a worthy aspiration to want social housing to house a wider cross-section of society, but it is a pipedream in the current circumstances.

In this short essay I hope to have conveyed the view that social rented housing has been a huge factor in the improvement in housing conditions in our country and in breaking the automatic link between poverty and bad housing. Over the last 35 years it has had the life squeezed slowly out of it by ideology and bad policy. But it can be reinvented. And the benefits of doing so could be great.

Steve Hilditch

May 2014

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4 Responses to So what’s not to like about social renting?

  1. Tom Chance says:

    A very interesting article, lots of good ideas.

    Could you expand a bit on your paragraph about trickledown, and certain kinds of supply increasing the rate of household formation?

  2. Toby Lloyd says:

    Steve,

    I hope you’re well. Would very much welcome your views on @Shelter and @kpmguk recently published plan to build 250,000 homes per year by the end of the next parliament – including lots of social housing. It’s all at http://www.thehomesweneed.org.uk

    Thanks toby

    Toby Lloyd Head of Policy 07702 734 805

    [cid:image001.gif@01CEDBA6.D1A3CC70]

    [cid:848BEE8C-6821-4241-B6FA-727D43E86FEA]

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