‘Happy clappy’ is not the right response

It was a first for the National Housing Federation to get a serving Prime Minister to speak at one of their Conferences. It’s obviously a feather in their cap, proving that government takes them seriously. But there was a degree of fawning in the audience – ‘rapturous applause and a partial standing ovation’ said Inside Housing, ‘it’s fair to say she is smashing it with this audience’ tweeted Polly Neate of Shelter – that is not shared by those who need homes now.

So, are we to believe that one speech with some warm words means that housing associations are now ‘a trusted partner’ of government? And that an announcement of a tiny pot of money starting in four years’ time means they will get long-term guaranteed funding sufficient to do the job? David Orr’s inadvertently accurate comment that ‘the penny has dropped’ sadly told the real story. Yep, a penny, thanks Ma’am.

The truth is closer to this: ‘the movement’ has been played by the PM’s political adviser Gavin Barwell, easily the best of the many housing ministers we have had over the last 8 years (for the simple reason that he actually knows something about the subject). He also knows how to get favourable headlines with a well-placed non-announcement, an unchecked promise of money, and a bit of flattery. May said what they wanted to hear and in glowing terms: she praised the movement’s Victorian pioneers and the campaigning innovators of 50 years ago and commended the modern non-profit businesses. And no slagging off like there was from her predecessor.

That perceptive commentator Isabel Hardman saw this as one of a kind of speech that May makes. She is very keen to talk about her mission to tackle ‘burning injustices’ like mental health and housing. “What is missing from speeches on either topic is the sort of government action that might match up to a ‘personal mission’” says Hardman in the Spectator. “This is the nub of the problem: there isn’t enough money coming forward to solve these ‘burning injustices’, nor enough room for those who want to think radically about housing policy or indeed the provision of mental health care to do so.”

The doyen of housing bloggers, Jules Birch, was feeling generous. “When was the last time a Conservative prime minister made a speech more favourable to social housing?”, he asked in Inside Housing, whilst also noting that this week’s promise of £2 billion was even flakier than last year’s. Jules makes his judgement largely on the bit of the speech that was not about money. Here May spoke in carefully crafted Barwellisms, with housing associations taking more of a lead in developments, being more ambitious, being able to ride the business cycle, and praising the non-profit nature of their role.

It is also true, and a relief, that some of Cameron and Osborne’s most extreme policies have been reversed or forgotten about. And I welcome the major contrast in her language with that of Cameron and Osborne, both of whom disliked housing associations and hated social housing. Speaking positively about social housing, especially if it is taken up in the media, is a start.

But what does it add up to? It feels like the boxer who has the opponent on the ropes, about go down, and stops hitting quite so hard. The money means nothing and was not explained in the context of the next spending review, it is probably no more than existing puny budgets rolled through into future years. Jam tomorrow, but spread very thin. It contrasts with a major report for London First this week showing the vast increase in both public and private capital spending that is needed to achieve the government’s stated aim of 300,000 homes a year – a 40% increase is required with 65% in London, they estimate. Put another way, housing’s share of UK GDP must grow from 2.3% to 3.3%. Unlike May’s promise, these really are big numbers.

The love now showered on housing associations creates nothing more than a scumble, a thin veneer. Underneath, social housing is still seen as a holding pen for people who really should want to be home owners. And home ownership is where the real money is going. The view that people who rent are inferior to home owners is at the root of stigma, and it has not changed. Policy reversal is also very partial: the Osborne cuts in housing investment have not been restored, the welfare reforms are still destroying lives, homelessness is still rising, rents are far too high in all sectors, and the bedroom tax is still in place. And it was noticeable that she managed to irritate the Tory chair of the Local Government Association, Lord Porter, for implying that housing associations were the keepers of the legacy of council housing.

A few good headlines for the Prime Minister followed her speech, it must make a relief from Brexit. Most of the national press and broadcast media swallowed it whole, repeating the ‘extra money’ line with no analysis, as if the cheques would be arriving next week rather than 2022. But even with May’s welcome new language the old tropes refuse to die. The BBC’s commentary included the statement that in the 1980s ‘those who couldn’t afford to buy were left in sink estates’, eliciting a complaint from John Popham who called it a slur on social housing tenants. His excellent YouTube video can be found here. (By the way, you can subscribe to his channel through the link). As is their way, the BBC just denied that it was inappropriate, but also referred to another programme about sink estates to make their point. Of course, ‘we value your feedback’.

Not being quite so battered is an improvement of sorts. The total hostility of the previous era towards social housing seems to be ending, and that creates an opportunity. But it requires an altogether more assertive stance which includes councils as well as associations. For the millions in desperate housing need, happy clappy is not the right response.

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Fixing the broken housing market – Labour Housing Group fringe meeting at Labour Conference with Melanie Onn

lhgconf18

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The Help to Buy gravy train

Some people suffer because of the housing crisis, others do quite nicely out of it thank you. Land owners are perhaps the best example of those who have traditionally coined it in. Nothing much has changed since Winston Churchill, way back in 1909, called land ‘the mother of all monopolies’, criticising  ‘the enrichment which comes to the landlord who happens to own a plot of land on the outskirts of a great city, who watches the busy population around him making the city larger, richer, more convenient, more famous every day, and all the while sits still and does nothing.’ And still they do.

But attention has been drawn more recently to another group of people who have been  achieving great riches from the miseries of others – the housebuilders. You might say that at least housebuilders produce something of use, unlike the landowner, and the point is valid. But recently the vast profits being made by the volume housebuilders have been substantially donated by the government, free gratis and for nothing.

The housebuilders’ own special magic money tree is called Help to Buy. In an excellent article in the Times on 8 September, Property Correspondent Tom Knowles showed how the average profit made by housebuilders on each home has doubled since the scheme was launched. Knowles’ analysis showed that ‘the top five builders in Britain are making an average profit of £57,000 on each house they sell, compared with a mean average of about £29,000 in 2007’.

On Red Brick we have criticised Help to Buy from the time it was launched in 2013 because it is a subsidy on the demand side of housing – it enables people to spend more on housing without necessarily increasing supply. A little bit of economics tells us that in the longer term it is likely to be self-defeating because more demand with no more supply will lead to price increases. Far better, we have consistently said, to apply whatever public finance is available to boosting housing supply not demand.

At the launch of Help to Buy the argument was made that the scheme would boost supply by giving developers confidence that they would have buyers for their output – after all, no-one builds what they cannot sell. Yet Knowles confirms that the total number of new houses being delivered is much the same as it was ten years ago. He uses Barratt as evidence: profit per house has doubled since 2007 (he uses that date because it was the last full year before the global crash), but it is building only 411 additional homes. He provides a fascinating chart to illustrate the detail, repeated below.

builder profits from the TimesSource: The Times, 8 September 2018.

Knowles quotes analysts who confirm that the largest driver of today’s profits is Help to Buy. One assesses that housebuilders would be making £22,000 less profit on each house built for first time buyers if Help to Buy was not in place, and concludes that ‘someone is gaming the system’.

One of my favourite analysts, Neal Hudson, who puts good stuff on Twitter @resi_analyst, is quoted saying that shareholders had become ‘the main priority’ for housebuilders since the financial crash. ‘The over-arching factor has been big pressure from the City,’ he is quoted as saying. ‘The priority for them is profit margin not the number of homes built.

One housebuilder chief executive was paid £75 million in a bonus last year, putting even bankers to shame. I suppose you could argue that no-one would turn down a nice earner, even if it is on the back of a government scheme designed to tackle the housing crisis. And, of course, it is government policy that is to blame. Since 2010 housing finance policy has been turned on its head. Instead of providing grant to enable genuinely affordable homes for those on low and medium incomes, Government help is now aimed at supporting the private housing market – and not very successfully it seems. The Chartered Institute of Housing’s Housing Review estimated that support for the private market is taking nearly 80% of current investment compared to just over 20% going as support for affordable housing.

At local level, the riches flowing into the pockets of the housebuilders should stiffen the resolve of councils who are fed up with developers pleading that schemes are ‘unviable’ due to modest requirements that a proportion of new homes should be affordable.

In this debate, profits per home of around 20-25% of the cost are taken almost as a given, a fixed cost. I can remember a developer telling me that the rule of thumb in building costs was ‘one-third for land, one-third for construction, and one-third profit’. In our Brexit-dominated world, construction costs are likely to inflate rapidly in the near future. So, if anything is to be done it must be to bear down on the other two elements: land and profit. We have posted a lot recently about land and taxation: another good step would be to tackle the Help to Buy gravy train.

 

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Housing Green Paper consultation on consumer regulation: the sector response will make or break the government’s proposals

The government’s Social Housing Green Paper fails to meet its promise to be a ‘fundamental rethink’. But it contains a number of U-turns in policy towards the sector and its tenants. One welcome change is in the approach to consumer regulation. In this post, two of the key players in the delivery of consumer regulation under the last Labour government, Ross Fraser* and Roger Jarman*, consider the direction the government is now taking.

By Ross Fraser and Roger Jarman

Prior to the 2010 election, social housing tenants were beginning to see the fruits of Labour’s commitment to consumer regulation of social housing.   Audit Commission housing inspections, focused on service quality, had been part of social housing since 2000.  A new consumer-focused regulator The Tenant Services Authority (TSA) had been set up in 2009 and was beginning to have an impact.  A National Tenants’ Voice (NTV) had been set up to enable that ‘voice’ to be heard in national policy development.

Then, as one of the first Tory-led coalition government housing policies, Secretary of State Eric Pickles and Housing Minister Grant Shapps conducted a ‘bonfire of regulation’, winding up the Audit Commission and the National Tenants’ Voice, abolishing the TSA and transferring its regulatory powers to the Homes and Communities Agency whilst reducing its scope for consumer regulation to a minimal level.  Then came the Grenfell Fire and now, in direct response, the Government’s new Green Paper exhibits a complete policy U turn and proposes a new regime of consumer regulation and the creation of a national voice for tenants.  In other words, the government is proposing to replicate the Labour government initiatives which Pickles and Shapps scrapped with such haste and enthusiasm.

Although the Green Paper has generated much discussion in the housing media, not a single commentator has noted the quiescence of the sector in 2010 and 2011 at the ‘bonfire’ of consumer regulation.  No local government or housing trade body contested its abolition – indeed much of the sector was only too glad to see the back of (we paraphrase) ‘over-prescriptive consumer regulation that paralyses innovation and imposes excessive burdens on landlords’.

Post-Grenfell, there is a renewed recognition that social landlords need to raise their game on resident engagement and standards of service quality.  The Local Government Association (LGA) is working hard on a guide for councillors on the benefits of tenant involvement and how councils can learn from the best local authority and Arms Length Management Organisation (ALMO) practice.  The National Housing Federation is going even further and plans to issue a formal ‘offer to tenants’ at a national level, underpinned by ‘local offers’ by individual housing associations.  Both initiatives are welcome – and by implication raise the question of the balance of responsibility between government and the sector in terms of embedding a lasting and workable model for consumer regulation.  This is important as without the wholehearted support of the sector, this iteration of consumer regulation may not succeed either.

So what does the Green Paper’ propose?   Key suggestions include:

  • Improving and speeding up how complaints are resolved
  • Empowering residents by giving them access to comparative data on landlord performance
  • Enabling the Social Housing Regulator to intervene where registered providers (a term that primarily covers housing associations but also includes council landlords) are providing a poor landlord service
  • Potentially extending consumer regulatory scrutiny to Tenant Management Organisations (TMOs) and ALMOs
  • Reviewing and improving current consumer regulation standards – including a new approach to defining Decent Homes
  • Linking access to Social Housing Grant and future government/sector strategic partnership funding to landlord performance on key comparative performance indicators related to ‘issues of key importance to residents’
  • Enabling residents to have their voice heard more effectively at a national level
  • Giving tenants more choice about who delivers landlord services and how they are delivered

Undoubtedly these are vital issues to be addressed and we discuss them in more detail below.  However, the proposals focus entirely on the delivery of management and maintenance services and the quality of resident involvement.   What the Government has yet to recognise that tenants want a more effective say over the policy decisions made by social landlords.  Two examples will suffice.

One of the biggest decisions that social landlords have to make today is over the balance of expenditure between building much-needed new homes and the maintenance and improvement of their existing housing stock.  When, after the 2015 election, the Tory government introduced the ‘4-year 1% rent cut’ much of the sector sought to protect development programmes by cutting back on, or delaying, planned maintenance and other capital works programmed for coming years.  Most landlords didn’t tell their tenants they were doing this, let alone consult and seek to persuade them that this was the right policy decision.  Equally, tenants are increasingly concerned about social landlord rent levels, lack of landlord research into local rent affordability and the abhorrent practice of converting social rent relets into new ‘affordable’ (sic) rents.   There is nothing in the government’s Green Paper that will empower residents to challenge landlord decision-making in these areas.   A key litmus test of the forthcoming LGA and NHF initiatives will be whether they tackle these issues.

Returning to the government’s proposals, some are eminently sensible.  The Government proposes a single housing ombudsman (subject to a specific separate consultation) and to speed up and simplify the current complaints process.  This is a good plan.  Also welcome is the proposal to empower the Social Housing Regulator to intervene where there is systemic failure of the landlord service, with the bar set higher than the current lamentable ‘serious detriment test’ which focuses solely (and not very well) on health and safety.  Reviewing current consumer regulation standards – especially the Decent Homes standard – is right and essential.  Enabling residents to have their voice heard better at a national level – presumably (although the Green Paper isn’t specific) through a reconstituted National Tenants’ Voice – is imperative and no time should be lost in making this happen.

Other proposals, whilst well-intentioned, need to be carefully designed if they are to have any impact.

Tenant access to comparative landlord data is essential – as charges to tenants and leaseholders comprise 95% of social landlord income, they have a moral right to know how well their landlord is performing.  Tenants and their representative or support bodies like TAROE Trust, TPAS and a National Tenants’ Voice could use this information to challenge landlords to improve and regulators to act where they don’t.

But, as TPAS CEO Jenny Osbourne has pointed out, until tenants are able to exercise choice over their landlord, there is a limit to the empowerment that performance league tables can achieve.   This is undoubtedly true but the only time that any government has sought to enable this, via the Tenants’ Choice scheme in 1988, the initiative was quickly dropped due to sector opposition and tenant frustration with the complexity of the process.  Instead, in the Green Paper, the government floats the options of tenant-initiated, stock transfer to community-based housing associations or (subject to a review of the model’s effectiveness) TMOs or increased deployment of other tenant-self-management options.   But what if tenants don’t want that responsibility and just want a better landlord?  Most would likely prefer regulatory intervention as the means of securing that goal.

Linking landlord performance to access to grant or strategic partnership opportunities will certainly focus the minds of housing providers.  Most will redouble their efforts to improve.  However, as was evident to the Audit Commission housing inspectorate, others will focus effort on ‘gaming’ the data – and poor performers will complain that everyone else cheats and they are the only honest brokers – and it will need great rigour in data collection, validation and challenge if accurate clean data is to become the norm.  Landlords will have to increase their staff resource – and vastly improve their IT systems – if good quality data is to be provided, inevitably increasing costs. Which, in our view is a good thing and not something to complain about.

Then there is the technical issue of what performance indicators to collect and how to measure them.  A particular issue arises where data is drawn from complex and extensive surveys – either of property and tenants.  How can this data be validated by an external body?  Will all surveys need to follow a set model, or will the data validator have to check the methodology of every survey?  How will performance on health and safety be monitored, especially given the confusion between the government, the sector and suppliers as to what – post Grenfell – constitutes adequate protection against fire?

Who will collect, validate and publish the data?  The assumption in the Green Paper is that the Social Housing Regulator will undertake this role.  The Green Paper references the excellent work of the Scottish Housing Regulator in this respect.  In our view – and we admire what Michael Cameron and his Scottish colleagues have achieved – this would be a mistake.

The first thing that any poor performer does – and we know this from experience – is to challenge the technical basis of the KPIs and the validation methodology.  It will be far easier to rebut this criticism (whilst responding positively to constructive challenge) if the data used by the regulator is collected and validated by the sector itself.  And in sector institutions like HouseMark and HACT already lies the skills in developing data collection systems and and validating landlord performance data.   HACT is developing common data standards for the sector, now with HouseMark support, and these will be vital in raising the quality of data collected. There is no merit in spending public money in replicating existing sector initiatives.  Even more important, social landlords need to ‘own’ this data and use it for sector-generated improvement.

The Social Housing Regulator should have the power – on an exceptional basis – to audit the systems used by providers to derive data on their performance.  This will ensure that the sector knows that ‘gamed’ data will be subject to official checks – with false performance data resulting in the regulatory sanctions that currently apply to inaccurate financial returns.   If the sector cannot demonstrate a commitment to accurate performance data monitoring, then – and only then – should the Social Housing Regulator step in and impose its own system.

It’s time for the sector to stand up and demonstrate its commitment to transparency.  And by the sector we mean both councils and housing associations.  Any suggestion that the ‘transparency deficit’ is solely a housing association issue is both wrong and ideologically-driven.

Another issue is what triggers regulatory intervention.  The former chair of the Social Housing Regulator Julian Ashby has sensibly suggested that the regulator should focus on ‘systemic or serious failures’ of landlord services with the Housing Ombudsman tackling individual complaints.  But how do we define ‘systemic or serious failures’? Will tenants have a powerful say in developing this definition and monitoring the regulator’s execution of this responsibility?

Clearly, the culture of the Social Housing Regulator will need to change. The Green Paper suggests some new and appropriate appointments to its Board.  Presumably, new executive staff with expertise in resident engagement will be recruited to an already high-quality regulator.  However, if tenants are to have confidence in consumer regulation, the whole process will need to be completely transparent.  For any regulator – not just the SHR – this will be a major cultural change.

Finally, the Green Paper asks whether the regulator’s remit should be extended to ALMOs and TMOs, whilst recognising that this might cut across local democratic accountability as expressed in the council’s role as client.  In our view this is a real problem but a fixable one.   Protocols can be established between the SHR and trade bodies such as the LGA, ARCH and the NFA.  The example of how the Audit Commission Housing Inspectorate certified ALMO performance – using data collected by a sector body (HouseMark) and with regular and transparent engagement with the LGA – seemed to work quite well in securing the release of over £20 billion in decent homes funding approvals between 2003 and 2010.

In short, consumer regulation will only work and command broad support if it is a partnership between MCHLG, the Social Housing Regulator, the sector and tenants.   In designing a new system, the views of tenants and their representative and support bodies should be the prime consideration.  Policy making in social housing has rarely taken this form in the past.  Let’s make sure it happens now.

*Ross Fraser was Chief Executive of HouseMark between 2001 and 2016

*Roger Jarman was Head of Housing at the Audit Commission Housing inspectorate between 2000 and 2010

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LHG response to Social Housing Green Paper – does anyone actually believe that the Tories have been listening?

Labour Housing Group, an affiliate to the Labour Party which promotes socialist housing policies within and outside the Party, has today released a statement in response to the Conservative Government’s Social Housing Green Paper.

The statement contrasts the Tory green paper and the one produced by Jeremy Corbyn and John Healey for Labour earlier in the year: the difference could hardly be starker: “Theirs fiddles at the edges and is going nowhere, while Labour’s is a genuine agenda for reform and the re-establishment of social rented housing at the heart of the housing system” says LHG.

LHG Spokesperson Sheila Spencer said: “In the aftermath of the Grenfell tragedy the government said its green paper would be a “fundamental rethink of social housing in this country”. Instead, it has been sneaked out in the middle of everyone’s summer holidays. It has little of importance to say and holds out no hope that this government will tackle the housing crisis or the stigmatisation of social tenants”.

LHG’s statement attacks the two main deficiencies in the Tory green paper:

  • no announcement of more funding to build social housing, and
  • a wholly inadequate response to the stigmatisation of social tenants.

Sheila Spencer says: “Tenants must be astonished to read that the key policy proposal for addressing the stigma they often experience is to set up street parties and best neighbourhood competitions.”

The few positive points in the government’s green paper – a return to proper regulation of consumer standards, and to a ‘tenants’ voice’ of some sorts, a review of the Decent Homes Standard and the development of a more level playing field between council and housing association landlords – are an admission that much of the policy since 2010 has been wrong.

Sheila Spencer said: “When Labour left office in 2010 there was a strong regulatory system, proper inspection of landlord services, a national tenant voice. Above all there were high levels of investment in new social housing. That was all swept away by the Tory Coalition Government. And the disastrous Tory Government which followed has so far had to retract its own housing policies not once, but 7 times. They should apologise for getting everything so wrong.”

The full LHG response to the Social Housing Green Paper is set out below.

LHG Statement on the Social Housing Green Paper

So much for a “fundamental rethink of social housing in this country”. The Tory Social Housing Green Paper – finally published on August 14th after having been announced in September 2017 – is seen by most commentators as a damp squib, unlikely to do anything to revive the social housing sector, or to remove the damaging stigma felt by many tenants around the country.

Despite the statement “Social housing remains central to our supply ambitions, providing a stable base that supports people when they need it”, it is not clear that the Government thought the issue of social housing was serious enough for any proper consideration. The Green Paper was sneaked out, trailed first in a press statement and then a short summary document, early in the morning, with the full document released later in the day – outside the main Parliamentary session, in the middle of everyone’s summer holidays. No proper scrutiny, no formal discussion for some months, and a media strategy that is cynical in the extreme. Could there have been any less sense of importance given to this topic?

There is a total contrast between this Green Paper, prepared and delivered with all the resources of government, and the one produced by Jeremy Corbyn and John Healey for Labour earlier in the year. One fiddles at the edges and is going nowhere, whilst the other is a genuine agenda for reform and the re-establishment of social rented housing at the heart of the housing system.

The Social Housing Green Paper – “A new deal for social housing” the first-ever housing green paper from a Conservative government – does at least get rid of some more of the Tories’ worst plans for social housing. No less than seven policies announced under the Housing & Planning Act 2016 have now been disposed of, including making councils sell off their highest value council properties, and ending security of tenure for council tenants. However, it fails to show any grasp of the ways in which social housing could help overcome the housing crisis, and especially the desperate need to provide many more genuinely affordable homes.

Though the Government says it has been listening to council and Housing Association tenants, they might have been astonished to hear that the key policy proposal for addressing the stigma they often experience is to set up street parties and best neighbourhood competitions, to “bring people together across housing tenures and generate a sense of pride”.  The Green Paper tries to blame landlords for the growth of stigma, ignoring their own Party’s actions and policies. In truth, they cannot really understand why anyone would want to be a tenant, and so instead of realistic suggestions for increasing the value with which social housing is regarded, there are yet more proposals to help tenants to move into home ownership.

The Green Paper shows little understanding of how social housing estates have changed since the Right to Buy. In some places RTB has brought about sustainable home ownership, but in too many others it has simply led to the enrichment of individuals who have either let at much higher rents, or sold on for others to do so. It has been a huge policy error to allow social housing to become private rented housing in such large numbers. Mixed tenure estates involving high levels of private renting are harder and more costly to manage, but the paper does not discuss these issues, let alone propose how to deal with some of them. A separate document published at the same time announces a consultation on proposals to change the way Right to Buy receipts can be spent, and suggests “reforming the commitment” that every additional home sold is replaced on a one-for-one basis nationally, a commitment that has never been honoured in the 8 years of the Coalition & Tory governments.

A proposal to introduce performance league tables on which funding for housing will be based has been met with lukewarm reaction. More significantly, borrowing caps will remain in place, and there is no commitment on the numbers of social housing dwellings to be built, nor any funding to achieve an increase. This is without doubt accepted by most commentators as the most crucial housing issue today, but not, apparently, by this government. By contrast, Labour’s commitment to build 100,000 genuinely affordable homes a year, achieving 1 million over a decade, is not only explicit, but underpinned by a series of policies to make this target achievable, the severity of the challenge being matched by the Labour Party’s seriousness about how to meet it.

There are a few positive points in the Green Paper. It heralds a return to proper regulation of consumer standards (though experience tells us that a centralised, overly financially focused approach does not work and local authorities should be given more of a role in holding Housing Associations to account), a clearer framework for dealing with complaints about landlords, proper tenant involvement, and a return to a tenants’ voice organisation of some sort – though there is some irony in the Tories trying to become the champions of tenant involvement, when one of the Coalition Government’s first acts was to scrap the carefully-constructed National Tenant Voice set-up. Our view is tenants will see straight through this.

Also suggested is a return to a proper partnership with Housing Associations, and more of a level playing field between council and housing association landlords, taking a step back from a world in which this part of the non-LA part of the sector loses its purpose of meeting housing need for the public good. However, the start of the voluntary Right to Buy for Housing Association tenants, announced in the same week as the Green Paper, establishes a £200m fund to enable one-for-one replacements which could have been far better spent on building new stock.

There is also support expressed for community-led housing, but this is linked to a proposal to transfer more council stock to community-led associations, rather than support for community-led initiatives for developing housing stock in a variety of tenures.

Finally, there is a welcome proposal to review the Decent Homes Standard, introduced by Labour in 2000, but not reviewed since 2006.

So no new money and no change to the borrowing cap which would allow councils to get on with building much-needed social rented housing, no recognition of the housing crisis caused by their own welfare benefit policies, and no real attempt to tackle the stigma associated with public sector housing. Is anyone ready to believe the Tories’ claim that they have been listening?

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Social housing green paper: not fundamental, and not much of a rethink

When it was announced by housing secretary Sajid Javid back in September, the social housing green paper was described as the start of a “fundamental rethink of social housing in this country”. Now that it is finally published after several postponements, the strong impression on a first read is that there has been little thinking and certainly nothing fundamental going on in government over the past 11 months.

Three things in particular strike me from this first reading.

First, the top news is that it signals the abandonment of much of the ‘Cameron Housing Policy’ imposed since 2010 and enshrined in the 2016 Housing and Planning Act. If it was an honest document it would say ‘we got it wrong’ when the Coalition dismantled the social housing regulatory system when taking office in 2010. Now indicated are a return to proper regulation of consumer standards, proper tenant involvement, a clearer framework for dealing with complaints, more of a level playing field between council and housing association landlords, and a return to a ‘tenant voice’ type organisation.

In his introduction the new housing secretary James Brokenshire almost confirms the point: “There is a powerful case for strengthening the Regulator so it not only focuses on the governance and financial viability of housing providers, but also on how residents are treated and the level of services they should expect.” Well, that is pretty much what the Tenant Services Authority and the Audit Commission were doing in 2010 before they were abolished. The idea that is floated of linking funding to performance also takes us back into new Labour territory.

Second, the government has said a lot about the stigmatisation of tenants since the Grenfell fire. And it says it again here. But there is a contradiction at the heart of their thinking. They cannot really understand why anyone would want to be a tenant and so there are proposals for yet more routes into home ownership. One section is headed “Ensuring social housing is a springboard to homeownership”, enshrining the notion that the most important thing is to aspire to home ownership.

The attitude that people who rent are inferior to people who buy is at the heart of stigma. So the Prime Minister, in her introduction, is wrong to try to pin the blame on landlords: “Many people living in England’s four million social homes feel ignored and stigmatised, too often treated with a lack of respect by landlords who appear remote, unaccountable and uninterested in meeting their needs.” I think she should look more closely at the long-term attitudes of politicians in her own party and the mainstream media.

Third, and most importantly, the GP totally fails to show any grasp of the ways in which social housing could help overcome the housing crisis, and especially the desperate need to provide many more genuinely affordable homes. Here there is a total contrast between this GP, prepared and delivered with all the resources of government, and the one produced by Jeremy Corbyn and John Healey for Labour earlier in the year. One fiddles at the edges and is going nowhere, the other is a genuine agenda for reform and the re-establishment of social rented housing at the heart of the housing system.

Some other points that strike me on this first reading of the green paper include:

It shows little understanding of how social housing estates have evolved since the Right to Buy. In some places RTB has brought about sustainable home ownership, but in too many others it has simply led to the enrichment of individuals who have either let at much higher rents or sold on for others to do so. It has been a huge policy error to allow social housing to become private rented housing in such large numbers. Mixed tenure estates involving high levels of private renting are harder and more costly to manage. The GP has no discussion of these issues let alone proposals to deal with some of them.

The GP says it is dealing with all of social housing including leaseholders, but the section on leaseholding is so scant it is almost insulting. It shows little appreciation of one of the key weaknesses of right to buy: service charges. Many leaseholders have faced financial ruin due to major works bills and, because many struggle to pay their service charges, they are often the group most likely to oppose local improvements.

There are several proposals that should be welcomed, even if they are really just ending a previous bad policy. For example, deciding not to implement the 2016 Act’s provision that ‘flexible tenancies’ should become mandatory. The GP says these will remain open to local discretion. In addition the forced sale of ‘high value’ council homes to fund housing associations right to buy will not proceed. That is a relief. And finally, I would welcome the commitment to revise the Decent Homes Standard, which has not changed since 2006. It should incorporate wider standards for the estate environment and be much stronger on health and safety and especially fire safety.

I had hoped that there would be a clear announcement that the government will fund a replacement for the National Tenant Voice which it wound up in 2010. Instead it makes noises suggesting that support will be forthcoming for a new ‘independent platform for tenants, based on widespread engagement, to enable them to have their voices heard more effectively at a national level.’, which is what the NTV was.

There were two areas where a little chill ran down my spine. First the GP says that the government are considering “a new stock transfer programme to promote the transfer of local authority housing particularly to community-based housing associations.” New proposals would be needed only if such a programme was not voluntary.

Second, there is a section on Universal Credit that is a work of fiction totally unrelated to the actual experience people are having with the benefit. It reads like a Duncan Smith speech from five years ago: “Universal Credit is designed to mirror the world of work, to give people control over their lives and encourage them to take responsibility for their financial affairs.” Surely no-one believes that any more?

Finally, I note that the GP strikes a negative tone about tenant management organisations, which I think is not justified despite the debate about who was responsible for what prior to the Grenfell fire.

There will be no Parliamentary scrutiny of the Green Paper until the Autumn, and it may have passed into deserved obscurity by then. But there are a few areas where the government needs to be pushed to deliver, and a few others where it should be pushed to stop before it has started. Taken in the round, this Green Paper does not affect the debate about the housing crisis and the status of tenants in society one jot.

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This media manipulation doesn’t serve the people

The housing/local government department has always been well known for its late announcements – last day before Xmas and last day before Parliament breaks up were always favourites. But they have excelled themselves over the homelessness strategy and the green paper.

We are left to wonder – is the purpose of a media operation in a government department to provide fair information for public consumption or is it just a cynical exercise to promote the government’s interests?

First, after many months of high sounding promises, the Social Policy Green Paper did not see the light of day in February or June or July. It missed the Parliamentary term, and therefore avoided Parliamentary scrutiny. Second, yesterday the ‘Homelessness Strategy’ was ‘published’ in the form of a ministerial statement and quite a lkot of partial press briefings over the weekend. The actual strategy was not published until much later when media attention had moved elsewhere. Third, today’s Green Paper has similarly been trailed in a press statement and a short summary document early this morning. The actual GP has only just been published as this is being written (the benefits of two screens!). 

The media have thus got their stories about the contents without reading the document. And analysis will there be none as everyone has moved on. The industry is left ‘welcoming’ ‘small steps’ which hardly makes it sound controversial, although some did well yesterday to get media interest in the fact the the homelessness strategy promised £100m but had no or very little ‘new’ money.

In a democracy where the written media is broadly right wing and the broadcast media follows the written press, this is a disgrace. It means real comment is left to small but important operators like Inside Housing and 24 Housing who will take the trouble to read the thing – published online as I write – and bloggers who have held back from comment until the full contents are known and can be appraised.

Government is meant to be for all of us, not just to manipulate information to protect Ministers from scrutiny and almost certainly well-deserved criticism.       

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Part 2: The capture of hope

Part 1 of this two part post can be seen here.

By Dave Treanor

How much of the profits arising from public investment and planning decisions should go into the pockets of landowners and how much should be captured for the benefit of the community? Parliament held an inquiry into Land Value Capture as part of its consultation on changes to the National Planning Policy Framework (NPPF), the new version of which has just been published. (Note 1)

This paper is the second in a series on the issues being examined by the Inquiry, looking at the impact of ‘hope value’ arising from potential future uses of a site on compensation for compulsory purchase. Part 1 examined the effectiveness of s106 and CIL.

In the thirty years following the war the majority of new homes were built by the public sector. By the mid-fifties the UK was building more than 350,000 homes a year, and this rose during the sixties, peaking in 1968 at more than 450,000.  Public sector involvement in housing construction fell dramatically under the Thatcher government of the eighties and has never recovered since. The volume of new homes being built fell by a corresponding amount and has rarely reached 200,000 a year since.

Local authorities bought brownfield sites at slum clearance prices and developed modern housing mostly for rent as council housing. New Town Corporations purchased land at a small margin over agricultural prices, developed schools and community facilities, built homes and industrial estates and contributed to the cost of developing the transport networks.

This was explained in evidence to the Land Capture Inquiry by the Town and Country Planning Association (TCPA) who said ‘The new towns programme, using development corporations, paid back its entire borrowing for the delivery not just of infrastructure but the whole of the towns, 32 communities and 2.8 million people.  It paid back the debt to Treasury at £4.75 billion in 1999 and has gone on yielding, since that time, about £1 billion to what is now Homes England and Treasury through a land value capture model.  The original development corporations were so profitable that they were lending money to other people’.

The Land Compensation Act 1961 set the terms of compensation to be paid to a landowner where their property was compulsorily purchased, consolidating principles established by legislation and refined through the courts over the previous 100 years. A Compulsory Purchase Order (CPO) should not leave the property owner in any better or worse position financially.  ‘The value of land shall […] be taken to be the amount which the land if sold in the open market by a willing seller might be expected to realise’.  Under a ‘no scheme world’ rule the valuation should ‘exclude any increase or decrease in value which is entirely due to the scheme underlying the acquisition’.

At the time this was interpreted as meaning that land would be acquired at a price based on its Existing Use Value (EUV), subject to current planning consents, with an amount in compensation for disturbance, plus a premium to be paid to the landowner to incentivise release of the land for development. This is now known as Existing Use Value Plus (EUV+).

EUV can be assessed in two ways.  The first is an analysis of market evidence of the prices achieved in sales of comparable sites subject to similar planning constraints. The second is to calculate a ‘residual value’ as the net present value (NPV) of future revenues the site would generate based on its current use. In practice both methods are usually applied as a cross-check on each other.

The development of Milton Keynes would raise the value of all land in the vicinity, but that should be ignored in any compulsory purchase.  That view held until a court case in 1974 determined otherwise.

In 1970 Milton Keynes Development Corporation acquired just over 300 acres of land from Bernard Myers, offering £230,700 – just over twice agricultural values. However, Myers challenged the compensation award on the basis that his land might, in the absence of the Milton Keynes scheme, have been used for housing development and so was in fact worth £636,070. In 1974 the Court of Appeal upheld the principle that he was entitled in law to this additional ‘hope value’.

Ever since then CPO valuations have included the hope value arising from market expectations of potential future uses of the site, which in practice brought it into all valuations. It closed the door to self-funded new town developments. It also added to the cost of infrastructure developments such as roads, railways, and airports.

The case against amending the 1961 Act to exclude hope value was put to the Inquiry by a leading CPO barrister (Barry Denyer-Green) (2) who argued that acquiring land at less than its open market value might contravene Article 1 of the European Convention on Human Rights (ECHR) (3). This required the public interest to be measured against the rights of the individual. Public interest can justify expropriation of a person’s assets at below full market value, as happened under the Leasehold Reform Act 1967. But the greater the loss to the landowner the more this has to be justified by a strong public interest reason. An individual may have bought the property at a price that reflects hope value.  If the property was then compulsorily purchased at less than they paid for it, they would have a case that this was not compatible with the Convention.

The counter argument is that planning policy can be used to drive down land value to such an extent that there is precious little hope value left.  In written evidence to the enquiry Daniel Bentley (Editorial Director, Civitas) and Thomas Aubrey (Adviser, Centre for Progressive Policy) explain how this should work (4).

‘The trade in land takes place at values that reflect public policy constraints, including above all the use to which it may be put. This is why the market price of a hectare of land limited to agricultural use in a remote location may be, for instance, £20,000 per hectare, while land in the South East with residential planning permission and no planning obligations may be worth £5 million per hectare. If that land with residential planning permission is subject to a Section 106 agreement requiring a certain amount of infrastructure and affordable housing, the market value will fall, perhaps to £3.5 million. All of these values are market values, reflecting the planning conditions in each instance that are underpinned by legislation … This approach would bring England and Wales in line with the compensation arrangements in Germany, France and the Netherlands, which largely operate under a principle of non-compensation: market values are paid, as is often pointed out, but those values reflect the fact that compensation is not awarded for potential development value’.

Under proposals drawn up by John Healey, the shadow housing secretary, the 1961 Land Compensation Act would be amended to specifically exclude hope value arising from the potential for future planning consent. He suggests that would cut the cost of building 100,000 council houses a year by almost £10 billion to around £16 billion. “Rather than letting private landowners benefit from this windfall gain – and making everyone else pay for it – enabling public acquisition of land at nearer pre-planning-permission value would mean cheaper land which could help fund cheaper housing.”

The Inquiry recognised that a considerable proportion of the uplift from infrastructure development is on existing property, so mechanisms are needed that potentially capture value from existing property as well.  Some of that will come through things like capital gain or stamp duty. Wider mechanisms should form part of a comprehensive system. Land Value Taxation was mentioned as one way of tackling wider issues.

The price of housing is largely determined by the market in existing properties. The absence of taxation on the rising value of owner-occupied housing fuels the growth in house prices higher up the housing ladder. It also makes owning a home the most profitable investment a household can make. CIL and s106 do nothing to capture any of that. These issues were not addressed, being outside the scope of the Land Value Capture Inquiry.

All Parties recognise the need to build more housing. The Conservatives have sought to achieve it by lowering mortgage costs and helping more first-time buyers into the housing market.  The effect was to increase demand: house prices have risen dramatically in London since Help to Buy was introduced, while construction has fallen. They also reduced the burdens on private sector developers by allowing them to renegotiate s106 agreements making marginal sites more profitable, and permitting the conversion of offices, shops and light industrial properties to housing without the need for planning permission.

Labour’s approach is different. They recognise the vital role of the public sector in housing construction. Under John Healey’s proposals a Labour government would establish an English Sovereign Land Trust working with local authorities to buy land at prices close to existing use value. With the ‘hope value’ removed, the cost of building a two-bed flat in Wandsworth, south-west London, would be cut from £380,000 to £250,000.  In Chelmsford it would fall from £210,000 to £130,000 (5).

The former Conservative planning minister Nick Boles acknowledged that the huge windfalls gained by some landowners were inequitable and that the current system of capturing the uplift in land value through section 106 agreements was “incredibly inefficient”, because private developers could afford to outwit planners with expensive lawyers and consultants.

One witness pointed out that there are three parties to any planning decision: the landowner seeking the best value for the site, the planning authority looking to finance affordable housing and infrastructure from the planning gain, and the developer acting as midwife between them, unable to build unless they can get a profitable deal acceptable to both.

Landowners often take a very long-term view. In a rising market, why sell today if it will fetch more tomorrow? In a falling market they will only sell when the time is right. If they believe planning gain is being too tightly applied they will bide their time.  Where a developer secures a site based on optimistic forecasts the holding costs are relatively low, so it is usually in their interests to delay building until market conditions are more favourable.

Consequently, the business model on which housing construction operates is highly dependent on rising house prices, and grinds to a halt at the first sign of a downturn. No builder will release more properties into the market than the current price level will sustain, which is why large sites take ten to fifteen years to build out.

The Inquiry recognised that Public sector development of housing for rent is relatively unaffected by such constraints.  It can have an important counter-cyclical impact on the construction industry.  Since the decline in public sector involvement construction has failed to meet demand arising from demographic changes.  The Inquiry did not discuss the wider impact of land banking and speculation in potential building sites, which it may have considered to be outside its remit.

We can only hope these concerns lead to a consensus on sustainable long-term solutions to the housing crisis, addressing both the supply of housing, and escalating costs. The issues were thoroughly debated at the Inquiry into Land Value Capture.

In response the revised NPPF has reduced the scope for developers to wriggle out of affordable housing obligations under s106. But it does nothing to help local authorities assemble sites at existing use value to make new housing more affordable. That would require revision of the 1961 Land Compensation Act to remove the ambiguities that make CPOs so slow and cumbersome to use, and the introduction of fairer property taxes.  What hope is there for that?

NOTES

[1] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/728643/Revised_NPPF_2018.pdf

[2] Q225 of http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/housing-communities-and-local-government-committee/land-value-capture/oral/85154.html

[3] Article 1 of ECHR: Protection of property

Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.

[4] http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/housing-communities-and-local-government-committee/land-value-capture/written/85910.html

[5] https://www.theguardian.com/politics/2018/feb/01/labour-plans-landowners-sell-state-fraction-value

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Capturing planning gain (part 1)

Following Roger Jarman’s Red Brick post on reforming residential property taxes, Dave Treanor’s two-part post looks at capturing planning gain, taking acount of the Parliamentary inquiry into ‘Land Value Capture’ and this week’s revised National Planning Policy Framework. Today’s part looks at s.106 and CIL. Tomorrow’s will look at the level of compensation paid to landowners in a compulsory purchase.


By Dave Treanor

How much of the profit arising from public investment and planning decisions should go into the pockets of landowners and how much should be captured for the benefit of the community?

A new National Planning Policy Framework (NPPF) has just been published (July 2018) (Note 1). During consultation on the changes Parliament set up an inquiry into ‘Land Value Capture’.  The consultation invited evidence on whether planning gain contributions under section 106 and the Community Infrastructure Levy (CIL) are adequate measures for capturing increase in land value.  Do they bring sufficient money to local authorities to provide the infrastructure that developments often require? What new methods might be employed to achieve land value capture and what examples exist of effective practice in this area, including internationally?

The uplift in land value resulting from planning consents is £9 billion a year, of which less than £2.8 billion is captured by the Community Infrastructure Levy (CIL) and Section 106 (2).

Successive Labour governments since the war have legislated to capture at least some of these windfall gains for the benefit of the community. Each time it has been reversed by the next Tory government. When he was Communities Secretary (before promotion to Home Secretary) Sajid Javid declared his intention to tackle the hoarding of land by developers and make better use of the uplift from planning gain to support local infrastructure and development.  The Tories are alarmed at the fall in home-ownership, which they have always regarded as their best constituency.

S106

Section 106 of the 1990 Town and Country Planning Act was introduced by a Conservative government. It captures some of the increase in value when planning permission is granted to fund the inclusion of affordable housing in a development and improvements to schools, local transport and other infrastructure to deal with growth in the local population.  Despite some limitations it has been the single most effective mechanism for capturing planning gain, with a direct impact on the market price of land.

An extension of ‘permitted development’ in October 2015 provided automatic consent for offices and light industrial properties to be converted into housing, so they no longer make s106 contributions. Section 106 only applies on schemes with 10 or more units (now reduced to 5) making it harder to finance affordable housing in rural areas where developments are often small.

It is up to each planning authority to set out its own polices in planning guidance. Under the London Mayor’s Supplementary Planning Guidance, for example, the requirement is for 35% affordable housing, rising to 50% on regeneration of council and social housing estates.

The development of brownfield sites is inherently risky, and the value added by planning consents is sometimes insufficient to deliver the affordable housing. Section 106 provides flexibility so as not to prevent an otherwise beneficial scheme being built. Where it would not be economically deliverable at the levels expected in planning guidance the developer can negotiate a reduction in the affordable housing requirement to enable it to proceed using a Financial Viability Assessment (FVA).  The Inquiry heard evidence that this option was being abused resulting in reductions in affordable housing.

An FVA analyses future revenues that could be achieved with the new planning consent to assess a Gross Development Value (GDV). It includes sales receipts, the present value of future rents net of management and maintenance costs, and income from any commercial premises or community facilities.   These are compared with the costs of delivering the scheme, including clearing the site and compensating existing occupants, construction, and all associated fees and taxes. This is known as the Gross Development Cost (GDC). The Residual Site Value is then calculated as the GDV less GDC including a margin for developer’s profit.

A scheme is considered deliverable if the Residual Site Value is greater than the Benchmark Value, defined as the value below which a reasonable land owner is unlikely to release a site for redevelopment. Critically under Section 106 this excludes hope value arising from potential changes in planning consent to permit more profitable uses of the land. It should reflect policy requirements and planning obligations and, where applicable, any Community Infrastructure Levy.  Benchmark Value sets a cap on the land value a developer can use in a Financial Viability Assessment to justify a reduction in the affordable housing required.

A study by the RICS in April 2015 found that the ‘market value’ was not being applied correctly by valuers in assessing Benchmark Values, and ‘if market value is based on comparable evidence without proper adjustment to reflect policy compliant planning obligations, this introduces a circularity, which encourages developers to overpay for a site and try to recover some or all of this overpayment via reductions in planning obligations’. (3)

A High Court judgement in April 2018 (4) ruled that in assessing Benchmark Value under s106 the price paid by the developer or landowner is not necessarily relevant: if they had paid more than the site was worth based on current planning consents and planning policies this did not entitle them to negotiate a reduction in planning obligations. The judge also recommended that the widely used guidance on viability assessments by the RICS should be revised ‘in order to address any misunderstandings about market valuation concepts and techniques, the “circularity” issue and any other problems encountered in practice over the last 6 years, so as to help avoid protracted disputes of the kind we have seen in the present case and achieve more efficient decision-making.

This judgment is expected to lower landowner’s expectations of how much a site is worth, based on speculative pricing achieved elsewhere. It means the Existing Use Valuation plus a premium sufficient to make it worthwhile for the landowner to sell (EUV+) takes precedence over the price paid for the site or any market comparisons in assessing the Benchmark Value.

The appropriate level of premium is perhaps the hardest element to judge, and this lack of clarity can be exploited by expensive lawyers and consultants.

The lack of clarity on the likely outcome of planning gain negotiations leads to uncertainty and undermines its impact on the market price of land.

To make matters worse, planning authorities are required to publish their calculations while the assumptions and calculations used by developers in their financial viability appraisals were treated as commercially confidential.  The case for this was incredibly weak since the owner of the land is not in competition with anyone, and only they can benefit from the negotiations. Planning authorities, including the London Mayor, are now making transparency a condition of applying for planning permission.

In a significant change, the new NPPF (para 57) reinforces the expectation that developments must comply with affordable housing requirements and downgrades the role of viability assessments, removing confidentiality from them.  ‘Where up-to-date policies have set out the contributions expected from development, planning applications that comply with them should be assumed to be viable. The weight to be given to a viability assessment is a matter for the decision maker, having regard to all the circumstances in the case, including whether the plan and the viability evidence underpinning it is up to date, and any change in site circumstances since the plan was brought into force. All viability assessments, including any undertaken at the plan-making stage, should reflect the recommended approach in national planning guidance, including standardised inputs, and should be made publicly available’.  This puts the onus on the developer to demonstrate that local circumstances affecting their scheme have changed since the affordability requirements were assessed, justifying a reduction.

For the transparency to be effective the information has to be provided in a way that enables the assumptions to be benchmarked.  Larger sites are invariably developed in phases over as much as fifteen years. Separate appraisals are carried out for each phase and each type of housing on offer, and then consolidated to produce an overall appraisal.  The costs and charges on which these are based are first assessed at current prices and extrapolated into the future based on expected levels of inflation in each of them. That is how financial appraisals are constructed (5).

Unless transparency requires development costs and future revenues to be quoted at current prices it becomes impossible to compare them with other schemes to test how realistic they are.  Expectations of growth in each type of revenue and cost and the years over which they extend should also be benchmarked and are relevant to the overall viability assessment.  But the precise phasing of individual costs and revenues has a relatively small impact in judging viability, and in any case will be optimised and adjusted in response to market conditions as the scheme progresses.

There is a strong case for setting up a benchmarking club for local authorities on s106 which can analyse trends in land pricing, construction costs and associated fees, providing evidence planning authorities can use to challenge the assumptions behind Financial Viability Appraisals presented to them by developers. The added transparency should have a direct impact on land valuations.

It is always easier to negotiate with a competent partner, and delays and confusion from local authorities in dealing with s106 can cost developers money. Developers sometimes accuse planning authorities of using this as leverage in negotiations.

Barratts claim to deliver target levels of affordable housing in most of their developments with only 15% requiring negotiations on viability. But a study by the Campaign to Protect Rural England (CPRE) in 2017 presented a less optimistic view, reporting that around 48% of affordable homes in rural areas had been obviated by means of viability assessments (6).

Clarifying the rules would be in everyone’s interests, except those most adept at gaming the system.

CIL

The Community Infrastructure Levy (CIL) is intended to ensure that infrastructure costs incurred in supporting the development of an area are funded wholly or partly by owners or developers of land in a way that does not make development economically unviable.  It was introduced by the Planning Act 2008 as part of the Labour government’s response to the Barker Review of Housing Supply. Where implemented it applies to any development creating more than 100 square metres of additional floor space or a new dwelling.

CIL is charged per square metre of gross internal floorspace at rates set out in charging schedules published by the planning authority. The rates can differ according to the type and size of development. Social housing is often charged at zero or reduced rates. Unlike s106 there is no discretion to vary it to suit the circumstances of a particular development.  But there is scope to agree what infrastructure will be funded by the charge to support a particular development.

A lengthy consultation process is required to amend the charge rates, so once set they are rarely changed. That certainty is helpful in having a predictable impact on land prices but means there is little opportunity to fine-tune the rates. If they are set too high that could have an adverse impact on more marginal developments in run down areas. If too low there may be insufficient money to fund the infrastructure needed. CIL has only been implemented in 43% of local authorities, largely because outside the high demand areas there may be insufficient added value to tap into, and a fear that it might further discourage investment.

Local Plans

The NPPF put Local Plans at the centre of the planning process so that it is plan-led.  The latest edition (July 2018) requires them to be reviewed and updated every five years.   ‘Plans should set out the contributions expected from development. This should include setting out the levels and types of affordable housing provision required, along with other infrastructure (such as that needed for education, health, transport, flood and water management, green and digital infrastructure). Such policies should not undermine the deliverability of the plan’.

Policy levels of affordable housing should be viability tested in drawing up the plan.  The GLA’s ‘London Plan Viability Study’ published in December 2017 in support of the London Mayor’s Supplementary Planning Guidance is a good example (7). The Inquiry suggested that on larger sites covered by a local plan the planning authority should seize the initiative and not wait for proposals from developers before commissioning its own viability assessment, so that it starts from a well-informed position (8).

Town and Country Planning Association (TCPA) pointed out that ‘some of the most successful land value capture models are accompanied by powerful public-sector bodies that act as the master developer.  They work in concert with the private sector, which delivers most of the development, but you have that oversight from a master developer.  The Dutch, Austrian, German and Danish models all, to some degree, work on that basis’. 

Stephen Ashworth, a solicitor from the planning team at Dentons summarised this position: ‘A local planning authority can afford to be firm if it has development plan policies in place that provide a stronger justification for a decision to refuse a scheme that is not of an adequate quality of development, that does not provide an appropriate public realm or that does not provide the affordable housing.  However, if it has development plan policies in place that very clearly signal that those are its requirements, then it should be able to expect the Secretary of State’s support on appeal and it should be able to have a robust debate with a developer or landowner about what is going to be provided, and it ought to win that argument.

To date, we have suffered considerably from local plan policies that have been hedged and caveated, and the Department needs to take some responsibility for that because they used to go around saying, “You ought to add qualifying wording into planning policies.  You will normally have 35% affordable housing or you will have public realm subject to viability”.  That should be excised.  There is no place for that.  Particularly if you are moving forward with a plan policy that is properly viability-tested, there is no need for that sort of qualifying wording because the moment you put that in, you offer the opportunity for debate and, if you have that sort of debate, some local authorities will, on a number of occasions, be persuaded to lower their standards in order to be able to grant a consent and see some development.  In practice, I suspect they could say no, if the local plan policy supports them, and still get the development’.

In other measures the new NPPF tightens the Delivery Test, putting additional pressure on planning authorities to identify sufficient sites where they have previously failed to meet new housing targets. Social housing is included in the definition of affordable housing. There is a requirement for 10% of all new housing to be low-cost home-ownership, with exceptions for professionally managed build for rent with tenures of at least 3 years.

Part 2 of this review will look at the level of compensation paid to landowners in a compulsory purchase. The inclusion of the ‘hope value’ arising from potential future uses for the land put an end to self-funded new town development.  How is that justified and could it be reversed?

NOTES

[1] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/728643/Revised_NPPF_2018.pdf

[2] https://progressive-policy.net/2017/03/estimating-land-value-capture-england-updated-analysis/

[3] Para 3.48 of ‘Homes for Londoners: Affordable Housing and Viability Supplementary Planning Guidance’, Mayor of London 2017

[4] Islington v Parkhurst Land Limited: In this case the developer had bid £13.25 million for a site that was only worth £6.75 million once the planning obligation for affordable housing was taken into account.

[5] I can vouch for that having designed the software social housing organisations use for their financial viability appraisals https://www.m3h.co.uk/products/development/m3pamwin-lite  For many years I also ran a Benchmarking club on development appraisal assumptions.

[6] http://www.cpre.org.uk/media-centre/latest-news-releases/item/4602-developers-renege-on-affordable-homes-as-countryside-faces-housing-crisis

[7] https://www.london.gov.uk/sites/default/files/london_plan_viability_study_dec_2017.pdf

[8] See for example the Old Oak and Park Royal Development Corporation’s viability study at https://www.london.gov.uk/sites/default/files/50._whole_plan_viability_study.pdf

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Addressing the housing crisis: time to reform residential property taxes

By Roger Jarman*

 

Taxes and human behaviour

Remember the Window Tax? It was introduced in 1696 under William III in part as an alternative to levying a tax on income. Inevitably the new tax prompted the bricking up of tens of thousands of windows as property owners acted to avoid it.  Taxes produce revenue to fund public services but they also influence human behaviour – look at the consequences of introducing the Window Tax.

In fact for many years governments have used tax not just to fund public services but to change our behaviour too. The tax on tobacco products is a classic example. There are recent examples too. Witness the charge levied on the use of plastic shopping bags.  Only this year the sugar tax was brought in to deter consumers from buying food with excessive amounts of the sweet stuff. And the Scottish government is looking to introduce taxes on drinks based on their alcoholic content in a bid to tackle the consequences of the consumption of strong beers, wines and spirits.

So how do taxes on residential property affect behaviour?

Our residential property taxes affect human behaviour in a range of (largely) negative ways and this has detrimental effects on the mechanics of the housing market.

In essence the ‘consumption’ of residential land and related products in this country is under taxed – and this influences how people engage with housing as an economic good.

For instance, there are no capital gains levied on the sale of a householder’s principal residence. And council tax (a property-based tax) has become increasingly regressive and does not attempt to allocate housing resources more equitably. Bizarrely householders in £30m properties in Westminster can now pay less in council tax than owners of modest bungalows in the North of England. In any case council tax is levied to pay for local services. The tax does not generate revenue for a broader range of public services.

Changes to inheritance tax have also incentivised excessive consumption of owner occupied property. When Chancellor in 2015, George Osborne introduced provisions that mean a couple’s primary residence worth up to £1m will be free of any inheritance tax liability from 2020. This increases inheritance tax allowances for couples by £350,000 compared with the position in April 2016. Inevitably some older owner occupiers will ‘upsize’ to more expensive housing to exploit this new tax break.

Stamp duty land tax (SDLT) provides significant revenue for the Exchequer. However once again this is a tax which encourages perverse behaviour.

SDLT is a transactional tax that penalises mobility. The levy does nothing to encourage baby boomers to downsize to more suitable accommodation. Indeed when coupled with the changes in inheritance tax there are precious few financial incentives to encourage older owner occupiers – probably under occupying large three and four bedroomed accommodation – to move to smaller, more appropriate housing.

Intriguingly the government has used changes in the tax regime to discourage investment in one part of the residential housing market – the private rented sector (PRS).  Partly in pursuit of its goal to increase owner occupation, the Conservative government elected in 2015 introduced measures that take away a number of tax reliefs from private landlords (especially those funding their business through mortgages and other debt finance). SDLT has also been increased for private landlords (over and above what other purchasers pay).

And of course these new taxes have influenced the behaviour of some private landlords. The latest official figures show that the size of the PRS in England declined by 46,000 units in the year up to March 2017. This reverses the relentless growth in the PRS from the mid 1990s when Buy to Let mortgages were first introduced.  By 2020, when mortgage tax relief for private landlords is completely withdrawn a significant number of private landlords will have sold off at least a proportion of their property portfolio.

The favourable tax treatment of private landlords has ended. But the tax framework for owner occupied housing encourages over consumption of private property in the UK and reinforces the role of housing as an investment good in the economy.

Private housing and the UK tax regime: what is the problem?

·       Taxes influence human behaviour and distort the operation of free markets

·       In the UK, residential property is under taxed relative to taxes on income and the consumption of most goods and services

·       As a result, residential property has become as much an investment good as a consumption good in the UK economy

·       This has pushed house prices and PRS rents to unaffordable levels

·       The ramifications are enormous – from increased levels of homelessness as households are evicted from the PRS to severe overcrowding in all housing tenures

Bad news

This is bad news. Money has poured into the housing sector as other investment opportunities have shrunk (think private pensions). But this has not necessarily boosted the production of new homes – rather funds have been invested in existing stock by both owner occupiers and, in the past 20 years, Buy to Let landlords. And with supply restricted we have inevitably witnessed significant increases in house prices and rents.

With wages suppressed after the financial crisis, affordability ratios have rocketed. Even in London in 1997 the average house price was only four times average salaries. Now that ratio is 1:15. In some parts of the country private tenants can pay over 50% of their income on rent.

In part through the operation of the tax system, we have created a ‘dysfunctional housing market’ (as acknowledged by the government). The current orthodoxy is that the housing crisis would be overcome by a massive increase in house building. This is a fallacy. To have any effect on the affordability of housing, experts have estimated that this country would need to build 750,000 homes a year (against a current build rate of around 200,000 homes a year). Neither the market nor the public sector could produce that number of properties in the current context – and the cost would be enormous both financially and environmentally.

The most equitable, efficient and effective way to address our housing crisis is to radically reform the tax on residential land and property. This would immediately reduce the attractiveness of housing as an investment good and influence behaviours accordingly.

So how do we reform our property taxes?

Historically the state raised revenue by taxing land holdings or the produce derived from land. Our ancestors knew a thing or two. This form of tax has always been difficult to avoid/evade and relatively simple to collect.

Over the years this type of tax has reduced, particularly as a proportion of the total tax taken by the state. Taxes levied on income and consumption (VAT, excise duties, etc) has soared and now accounts for some 85% of all taxes levied in the UK. Taxes on inheritance, land, property, wealth and corporations make up a small proportion of all taxes collected in the UK.

As a country we need a more balanced approach to the taxes we levy. We need better methods of taxing residential property and land thus generating a wide range of benefits – in general but more specifically to help create a housing market that works for ‘the many not the few’ .

The two principal taxes on property need to be reformed: council tax and SDLT.

If a new land value tax is discounted because it is deemed too radical we have to work on reforming council tax. First there should be an immediate revaluation of properties so that more valuable properties are subject to significantly increased tax rates. And the revaluation should occur regularly – perhaps annually. After all, keeping abreast of changes in property values should be relatively straightforward given the development of web platforms such as Zoopla and Rightmove.

There is also a strong case for getting rid of the single person discount that applies to one person households under the current council tax regime.

Under this reform a proportion of the council tax so raised would go to the Central Exchequer rather than to the local authority where the property is sited. This would enable the distribution of resources from areas of high housing wealth to poorer parts of the country.

Overall imposing an increased annual charge on property would result in more efficient use of the nation’s housing stock. With some households subject to financial penalties for the overconsumption of property, a proportion would move to properties which attract less tax. The tax would put a brake on house price inflation and could actually result in price falls. Over time affordability would improve and prospectively there might be a return to the long-term 1:4 salary/house price affordability ratio.

A reformed council tax regime should be introduced over time so that households could adjust their consumption of housing to the tax levied. Also provision should be made so that a charge could be placed on the estate of the householder who chooses to remain in his/her property and where the new tax cannot be covered by current income. In such cases the tax would only be levied on the death of the householder.

Coupled with the introduction of a reformed council tax regime, SDLT should be completely overhauled. There is a strong case to retain differential stamp duty rates for the purchase of second homes and investment properties but generally SDLT should be dramatically reduced. (Intriguingly a reform of this kind might actually be welcomed by estate agents as they would see business activity increase significantly as households move to reduce their tax bills).

Properties left empty could be subject to more tax penalties – through the council tax regime – for remaining void. This would build on changes already introduced by the government.

Private housing and the UK tax regime: what is the solution?

·       Council tax should be reformed so that much more revenue is secured from higher value properties (than currently)

·       Property values should be regularly reviewed so that taxes levied reflect up to date price levels

·       A proportion of council tax raised should fund local services but a significant amount should go to the Exchequer for distribution more widely

·       Council tax reforms should be phased in and provisions introduced to enable households unable to pay the higher tax to defer payment

·       Stamp duty should be reformed to encourage mobility in the owner occupied sector

 Time for reform

Social geographer Professor Danny Dorling and others are right. There is broadly the right number of homes in this country relative to our population. It is the distribution of that property that needs to be addressed and ensure that the 20 million or so spare bedrooms are used more productively.  Reforming property taxes would help achieve a better distribution of housing resources in our country – and reduce the propensity for people to treat housing as an investment good and over consume this vital asset.

Maybe the time for reform is here.

Certainly the topic is creating more interest. The Resolution Foundation is pressing for reform and the IPPR has set up a Commission looking at the best ways to reform property taxation in the UK for the benefit of the housing market and the economy more generally. Furthermore the Select Committee for Housing, Communities and Local Government is looking at a related subject – the effectiveness of current land value capture methods associated with house building activity.

Probably most significant of all, Number 10 has a new Housing Adviser – Toby Lloyd.

Lloyd was Head of Policy at Shelter and co-authored the seminal ‘Rethinking the Economics of Land and Housing’ (Zed Books). He knows how taxes distort the operation of the UK’s housing market.

Now if only Toby could have as much influence on government housing policy as his predecessor Alex Morton, the architect of the highly regressive and pernicious Housing and Planning Act 2016.

We live in hope…..

 

* About Roger Jarman

Roger has almost 40 years experience in the housing sector.  He has worked as an academic and in local government as well as for a number of central agencies. He had spells as a senior manager at both the Housing Corporation (1991 – 1999) and the Audit Commission (1999 – 2011).

He currently works as a housing consultant and trainer with a wide range of clients including local authorities and housing associations. He also helps run several small housing organisations in London either as a paid official or as a non executive director.

Note: This is an updated version of a blog first published by Housing Quality Network in June 2018

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