Labour to modernise feudal leasehold system in response to Tory inaction

By Dermot McKibbin

On 11 July there was a debate in the Commons on the Government’s response to the House of Commons Select Committee critical report on the leasehold tenure.

The Government claims to be bringing forward reforms to:

  1. Ban the granting of new leases on houses other than in exceptional circumstances.
  2. Restricting ground rents on newly established leases to zero.
  3. Working with the Law Commission to look at ways to reinvigorate commonhold and improving the process for buying a freehold or extending a lease, or exercising The Right to Manage.
  4. By reviewing charges faced by both leaseholders and freeholders and professionalising and regulating property agents.
  5. By clamping down on unjustified legal costs for leaseholders, ensuring all landlord freeholders belong to a redress scheme and giving freeholders on private estates equivalent rights to leaseholders to challenge communal costs.
  6. By persuading developers to sign up a to public pledge to help existing leaseholders trapped in unfair and costly agreements.

The Government claim to be committed to introducing legislation as soon as parliamentary times allow. However due to the Brexit debate Parliament has been clocking off early and few bills are in fact currently going through Parliament. Ministers have repeatedly promised action to tackle the abuses that leaseholders face, yet with over 60 official announcements since 2010, no new legislation has been introduced. The Government lacks the political inclination to progress this issue as it is too close to the interests of property.

The Government claim in their response that leasehold is a legitimate form of home ownership. However, England is about the only country in the world that has not yet moved away from this feudal form of tenure. The leaseholder has to pay a ground rent to the freeholder and at the end of the lease the leaseholder becomes a mere tenant if no action is taken. The leaseholder can forfeit their lease if they break a term of the lease. There is no legal defence to the freeholder’s right to remove the lease. The relationship is a landlord/tenant one which is feudal in nature and no longer appropriate for the 21st century

Memes, Masters, and Liberalism: RADICAL PEASANT  WE'VE GOT TOGET  RID OF THIS FEUDAL  SYSTEM  IT'S KILLING US.  ARE YOU WITH US?  LIBERAL PEASANT  NO, NO, THAT'S  TOO EXTREME.  JUST WAIT UNTIL  WE GET A NEW LORD.  I HEAR THE MASTER'S  SON HAS SOME  GOOD IDEAS ABOUT

Alternatives to leasehold are available through co-operative flat ownership in Europe, strata title in Australia and condominium ownership in the USA. Closer to home, Scotland, Wales and Northern Ireland have all taken steps towards ending leasehold.

The Shadow housing front bench has recently produced an excellent consultation document called ‘Ending the Scandal: Labour’s new deal for Leaseholders’.

Labour plans five radical changes:

  1. Ending the sale of new private leasehold houses with direct effect and the sale of private leasehold flats by the end of the first term in office.
  2. Ending the ground rent for new leasehold homes, cap the ground rent for existing leaseholders at 0.1% of the property value, up a to a maximum of £250 per year.
  3. Set a simple formula for leaseholders to buy the freehold to their home, or commonhold in the case of a flat, capped at 1% of the property value.
  4. Crack down on unfair fees and contract terms by publishing a reference list of reasonable charges, requiring transparency of service charges and giving leaseholders a right to challenge rip-off fees and conditions or poor performance from service companies.
  5. Give residents greater powers over the management of their homes, with new rights for flat-owners to form residents’ associations and by simplifying the Right to Manage.

The report poses 11 consultation questions which require a response by 30 September to leaseholdconsultation@labour.org.uk.

The document correctly refers to the growth in the number of leaseholders. The precise number is still surprisingly unknown, but is estimated at between 4.3 and 6.6 million: up to one in four of all homes. Over the past 20 years, the proportion of houses built as leasehold is thought to have doubled.

Over 90% of all leasehold house owners say they regret buying a leasehold property and almost two-thirds feel like they were mis-sold. Many leaseholders thought they had brought on the basis they could easily and cheaply convert to freehold ownership, only to later find that a complex and often expensive process makes enfranchisement impossible for them to afford.

According to the report it is increasingly clear that there is a systematic problem with the selling of properties on a leasehold basis. Leasehold mis-selling has the potential to be a new PFI scandal.

In 2018, the Conveyancing Association published research suggesting that 98% of sales of leasehold properties with onerous or doubling ground rents had been in breach of consumer protection regulations. The campaign group Leasehold Knowledge Partnership have estimated that up to 100,000 homes cannot be sold due to a high ground rents and other onerous lease conditions.

At the heart of Labour’s plans to help leaseholders is the opportunity to obtain true ownership of their property through conversion to freehold or commonhold in the case of flat owners. Labour will legislate for a simple buy-out formula that will apply to longer leases, set at a proportion of freehold capital value. Labour will set the maximum ground rent chargeable at 0.1% of the ground rent, with a cap of £250 per year.

For a leaseholder currently living in a house or flat worth £200,000, Labour’s simple new formula would mean they can buy their freehold for just £2,000. This is a significant saving compared to leasehold enfranchisement for a £200,000 property: with 90 years left on the lease and a £250 per year ground rent, the current cost for enfranchisement would be over £6,000 plus expensive legal fees. For properties with ground rents above £250, the cost would be significantly higher still.

Mis-selling of leases is a big issue in the North West. This region has 75 MP’s of whom 20 are Conservative. Approximately two thirds of leaseholders live in London where there are elections in 2020.Hopefully this report will be read and acted upon by all Labour Party members. A House of Commons briefing paper is helpful and the accompanying table has useful regional and constituency statistics. (2)

Dermot Mckibbin, Beckenham CLP

For more information see:

https://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-8047 and its associated tables (Excel Spreadsheet) http://researchbriefings.files.parliament.uk/documents/CBP-8047/CBP08047—Tables-for-download.xlsx

Image credit me.me – https://me.me/i/radical-peasant-weve-got-toget-rid-of-this-feudal-system-4506989

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From social mobility to social justice: how a simple policy announcement started a small war

Most people reading or watching the media during the last few days would have been left with the impression that Jeremy Corbyn had launched a major attack on the last Labour Government. In fact, he made a forward-looking speech to teachers on moving away from an emphasis on social mobility to talking about wider social justice instead.

Jeremy Corbyn (pic: Guardian)

It got little coverage, no surprise there, until it was attacked by Tony Blair with a video and a fanfare, after which Corbyn was widely denounced for disparaging the last Labour government. Much of the vitriol was not in response to what he actually said, or even his own tweets on the issue, but to a strange and incoherent tweet from Momentum in reply to Blair’s video, saying in effect that austerity was Blair’s legacy. A little bit of displacement was all that was needed to make the charge that Corbyn had had a go at the last Labour government.

Blair’s video is a hallmarked example of the spin at which he is so adept (a political talent Corbyn lacks). He takes one line from the social mobility speech – “for decades we have been told that inequality does not matter” – adds in a couple of quotes carefully selected from other speeches in the past, then claims Corbyn is constantly attacking the last Labour government and ‘enough is enough’, before laying out some of Labour’s relatively good record on taking people out of poverty, spending on public services (focusing on health and education), throwing in Labour’s excellent performance on overseas aid as well. So far as I know, none of these are disputed by Corbyn, indeed I frequently hear him attack the Tory record by quoting Labour’s achievements in these areas.

But the facts of Labour’s record was not what this was about. The media skirmish that ensued was remarkable for the lack of nuance. An exception was Sean Fitzsimons‏ (@CroydonSean) who tweeted “My take on the Blair/Brown Government. Solid performer on most fronts. Excellent on NHS, education, and improving incomes of pensioners and middle/low pay with children. Poor on house building, class and wealth inequalities, and North/South divide. 7.5/10.”

For virtually everyone else it was either 0/10 or 10/10. Hatred of Blair on the one hand and hatred of Corbyn on the other. The result of this madness will be no Labour government at the next election.

So, what about the substance of what Corbyn said? He was talking about inequality not just tackling poverty and he was talking about the weaknesses of the social mobility idea. Blair counters by saying inequality diminished under Labour. He compares the bottom decile with the top decile, but it is the top 1% that has become detached from the rest of society and that is what Corbyn concentrates on. Then again, this was not mentioned in his speech. Whether inequality rose or fell largely depends on which figures you pick, and it depends whether you include wealth as well as income. Blair also stresses that social mobility improved under Labour, rather missing Corbyn’s central point.

Whether it is fair to include 1997-2010 in the ‘30 years in which we were told inequality doesn’t matter’ or ‘dropping 40 years of political consensus’ is of course a matter of judgement, but in my view it is fair because it has proved possible to reduce poverty (normally measured by comparing the poorest with the average) without reducing inequality. Andy Burnham on Marr yesterday used a similar rhetorical flourish, saying  that governments have ‘failed the north for many decades’ including when he was in government. Is he to be denounced? Another expert in rhetorical flourishes, Peter Mandelson, probably did the most damage to Labour’s reputation in this area with his notorious comment that he was “intensely relaxed about people getting filthy rich as long as they pay their taxes”.

The idea of social mobility relies too much on counting how many people born into poor circumstances ‘make it’ into the richest group or into political power. Media often reduce it to whether someone born into poverty could become prime minister or find a ‘route out’ though football or boxing – the topic of many a film. It is often associated with the idea of ‘meritocracy’ and has been used to justify a wide range of both progressive and reactionary policies – including grammar schools and paid-for places in private schools, both of which are said to improve ‘social mobility’.

Corbyn was building intelligently on a substantial debate about social mobility in recent months, including important reports by IPPR and by CLASS think tanks.  There has also been debate in and around the current Social Mobility Commission, which has  commented on issues to do with inequality, warning that without major reform social and economic divisions within Britain’s society are set to widen. One of the current Commissioners,  tweeted that “I would personally welcome a shift of political narrative away from upward mobility for some and toward a greater emphasis on inequality, individual flourishing, and tackling the reproduction of privilege.”

I suppose I’m a good example of social mobility, brought up on a council estate in a one-illness-away-from-poverty family and ending up with degrees and well-paying jobs. But nearly all of the young people I grew up with left school at 16 and did not have the luck that came my way. In my view, the social mobility approach focuses on people like me and ‘the ladder out’, changing nothing structural, whereas the social justice approach cares about all the rest and how to create a rising tide that lifts all boats.

Corbyn plans to replace the social mobility commission with a social justice commission, sponsored by the Treasury, which would have a wider brief to undertake audits and impact assessments of policy and suggest changes to legislation.

The quote that caused the uproar was taken from this part of Corbyn’s speech:

“For decades we’ve been told that inequality doesn’t matter because the education system will allow talented and hard-working people to succeed whatever their background. But the greater inequality has become, the more entrenched it has become.”

“The idea that only a few talented or lucky people deserve to escape the disadvantage they were born into, leaving in place a social hierarchy in which millions are consigned to the scrap heap, results in the talents of millions of children being squandered.”

I think this is uncontroversial, not worthy of the fuss that’s been made, yet grounded in reality, and the right way to go.

And the legacy of past Labour governments was fairly judged by shadow education secretary Angela Rayner, speaking with Corbyn, who said

“The Tories like to talk about people like me who had a difficult start but got on in life as evidence that anyone can succeed on their own. But actually my life shows the exact opposite. Any success I have had is thanks to Labour governments that provided the council house, minimum wage, tax credits and Sure Start children’s centre that enabled me to achieve it. That is social justice.”

Rayner also published an article making the case for the change in New Statesman.

So, despite the fury and the apparent division, this shift in emphasis away from social mobility towards social justice is actually something the whole Labour Party should be capable of uniting around.

There are many battlegrounds within the party, but this shouldn’t be one of them. 

 

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Labour’s ‘Land Grab’

In the middle of all the fawning over Trump, the newspapers got their teeth into a Labour story this morning. According to the Daily Mail it was about “the policies of Venezuela” and “Labour’s garden tax: Party unveils new Corbyn cash-grab on your private green space and force the sale of vacant land on the cheap.” The Daily Express said “Jeremy Corbyn proposes ‘bombshell’ tax RAID on hard-working homeowners who have a garden.” The Telegraph’s slightly more moderate headline but equally inaccurate story was: “Jeremy Corbyn unveils plans for ‘progressive’ tax raid on homes and gardens of the middle class.”

Such disgraceful behaviour by Corbyn and the Labour Party attracted my interest, but when I tracked the actual report down I found it was a detailed and thoughtful analysis and set of recommendations around an issue which has huge implications for people who want affordable homes.

Called ‘Land for the Many’: Changing the way our fundamental asset is used, owned and governed it was produced for the Labour Party by seven contributors* including George Monbiot and Laurie Macfarlane – whose work we have covered on Red Brick before. Land is the hidden issue behind the housing crisis and the full report is well worth a read – because if you rely on media portrayals you might get the wrong impression of it.

George-Monbiot

Monbiot sets out his stall in a powerful preface, worth quoting at some length:

Dig deep enough into many of the problems this country faces, and you will soon hit land. Soaring inequality and exclusion; the massive cost of renting or buying a decent home; repeated financial crises, sparked by housing asset bubbles; the collapse of wildlife and ecosystems; the lack of public amenities – the way land is owned and controlled underlies them all. Yet it scarcely features in political discussions.

The sense that even in discussing land we are trespassing is so strong that this critical issue remains off the agenda. Yet we cannot solve our many dysfunctions without addressing it. This report aims to put land where it belongs: at the heart of political debate and discussion. It proposes radical but practical changes in the way land in the UK is used and governed. By these means, it seeks to make this a nation that works for everyone, with a better distribution of wealth and power, greater financial stability, economic security and environmental quality, greater participation in the decisions that affect our lives, an enhanced ability to create our own homes and neighbourhoods and a stronger sense of community and belonging.

Despite the hysterical headlines, the report is not yet Labour policy: it contains proposals that will considered between now and the general election. But the reaction shows what a mountain of bias and misrepresentation Labour has to climb to get a serious debate going on this vitally important topic.

Is any of hysteria justified? Let’s look at the key proposals

  • free and open access to data on land ownership
  • an explicit government goal to stabilise house prices to improve the long-term house-price-to-income ratio.
  • redirect bank lending to productive sectors and reduce speculative demand for land.
  • proposals for a Common Ground Trust to buy land underlying a house, to reduce house prices and bring in the idea of socialised land rents.
  • major reforms to private renting with a cap on rent increases and an ambitious social housing programme.
  • replace council tax with a progressive property tax payable by owners not tenants – with surcharges for empty and second homes and non-UK residents.
  • phase out stamp duty land tax for owner occupiers.
  • replace business rates with a commercial Land Value Tax.
  • new Development Corporations buy sell and develop land to crate new towns.
  • enable public bodies to buy land at closer to current use value, estimated to be able to reduce the cost of affordable housing by 50%.
  • remove permitted development rights that allow offices to be converted to homes without needing planning permission.
  • stronger public involvement in planning.
  • proposals to promote community ownership and control of land and buildings.
  • greater provision of parks and stronger use of the public realm. And a stronger right to roam.

It’s a detailed report, an instructive read, and in my view spot on in its analysis. It follows on from a lot of good work on the land question done by others in the recent past and covered on Red Brick, see Dave Treanor here, London Assembly Housing Committee here and Josh Ryan-Collins, Toby Lloyd and Laurie Macfarlane for the New Economics Foundation here.

The Monbiot et al report is a serious contribution to a genuine debate, so it is enlightening to see how it is treated by the media. Most of it was hugely hostile, and I couldn’t find a word about it on the BBC News or Sky News website. Let’s see if Channel 4 can do a little better. But it shows the real difficulty Labour has in promoting progressive policies for wider debate, and the inherent bias in the mainstream media against leftish proposals, even when they are as strong and beneficial as these.

When the headlines say ‘an end to council tax’ or ‘an end to stamp duty’ then the public might have a chance of understanding what it’s about.

 

* The seven authors are : George Monbiot (editor), Robin Grey, Tom Kenny, Laurie Macfarlane, Anna Powell-Smith, Guy Shrubsole, Beth Stratford.

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How many council houses should Labour plan to build?

Labour’s programme for the next general election needs to be bold and radical but also practical and achievable. There are a number of different estimates of how many affordable homes are needed and of what type. Here we try to unravel the figures and ask – how many council homes should Labour plan to build?

A new group called Labour Campaign for Council Housing aims to ‘radicalise Labour’s housing policy to ensure our party tackles the housing crisis when in government’. Fair enough. It rightly says that there is a crisis of availability of affordable housing, and that Labour’s priority should be to build social rented homes. It wants councils to build ‘at least’ 100,000 of these, with an extra 55,000 contributed by housing associations. It argues for £10 billion grant a year to fund councils to build them, or £100,000 per home.

No one can argue that this isn’t ambitious. The government currently spends less than £2 billion annually on building affordable homes, and few of these are let at social rents. Labour’s green paper, Housing for the Many, promises a programme of 100,000 affordable homes annually of which ‘the majority’ will be for social rent. It would finance this, in part, by raising grant to £4 billion annually, the level achieved by the last Labour Government in its final years. But the new campaign believes this is not enough: ‘these commitments would not meet the scale of ambition needed to solve our housing crisis’.

So they call for 155,000 social rented homes to be built, and expect two-thirds of these to be new council housing. The target comes from a Shelter report published earlier this year, A Vision for Social Housing. However, the report was out of step with other projections of housing need. For example, Crisis and the NHF published a detailed assessment by Glen Bramley showing the annual need for new social rented homes to be 100,000 across Great Britain, with 90,000 needed in England. There are various differences in the ways the two projections were done. Bramley’s assesses a much bigger existing backlog of unmet need, for example. But the main difference is that Shelter assumes that all new needs in the categories it identifies have to be met by building more social housing, whereas Crisis provides a dynamic assessment in which new building influences the whole housing market – as indeed it would in practice – changing the behaviour of landlords and renters as more affordable homes are provided. As might be expected from someone who has been modelling housing needs for years, Bramley’s model gets closer to the real dynamics of the housing market.

Another report calling for a similar level of social rented output came from Capital Economics, written for SHOUT and the National Federation of ALMOs. They argued that building 100,000 social rented homes a year would be justifiable in terms of savings in benefits and the wider effects of the extra construction activity on the economy and on government incomes. Essentially, while Crisis addressed the demographics and affordability, Capital Economics shows the feasibility of the programme. Both, in broad terms, back up Labour’s target.

Let’s have a closer look at the target suggested by the new campaign. For housing associations to contribute 55,000 homes would mean a huge shift away from affordable rent and shared ownership, but at least they have built close to that overall number in the recent past. But in calling for 100,000 new council houses to be built annually the new campaign seems to take little account of councils’ capacity. The last time they built as many as 100,000 homes per year was in the mid-1970s: in fact, you have to add up all the council houses built since 1985 before you get a figure exceeding 100,000, amounting to over 30 years of councils’ output.

Of course, many local authorities are now gearing up to bigger building programmes, taking advantage of the government’s removal of the caps on their borrowing last November. The government believes that within a few years they might build 10,000 units annually, as compared to fewer than 5,000 now. This looks a reasonable assessment, but any progress beyond that depends on overcoming a number of serious constraints. These include access to land, having the skills to run a large new-build programme and being able to finance the extra borrowing involved from rental income. But the biggest constraint is access to grant. Labour’s plan to increase grant to £4 billion annually would help enormously if the money were to be refocussed on social rented homes. Councils could also continue to make use of developer contributions, which already finance nearly half of affordable housing output. Nevertheless Labour’s 100,000 affordable homes target is already an ambitious one, especially if the social rented element is to be close to 90,000 annually.

Now the new campaign argues for a target more than 50% higher, and one which relies much more on councils building than on housing associations. They want to raise the affordable homes budget to £10 billion annually, with grants of £100,000 per unit. The ambition is commendable, but why set a target that many will regard as far too high, and one which bears no relation to the sector’s capacity – especially that of local authorities? Do they really expect an incoming Labour chancellor to set a housing budget which is five times its current level and to be able to spend it from virtually a standing start?

The advantage of the target set in ‘Housing for the Many’ is that it is realistic, costed and grounded in reality: it’s rightly ambitious without being pie in the sky. With strong commitment, it’s capable of being delivered over a five-year period. The new campaign arguing the case for council housing is warmly welcome, but we have to make sure that Labour is able to deliver its current target before we set an even higher one that might be a step too far.

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Voluntary Right to Buy: should housing associations be ‘proud to be involved’?

The headline is based on an Inside Housing article this week by a director of a national housing association, Stonewater, which is one of those taking part in the government’s pilot scheme in the Midlands. Sue Shirt says they are ‘unashamedly supportive of the VRTB’ and ‘proud’ to be selling off their houses, estimating that around 170 will be sold in the pilot period (presumably in most cases houses currently let at social rents). She gives two main reasons for this. One is that they are giving tenants what they want. The second is that (unlike with council housing right to buy) they plan to replace every home sold. She says that it keeps tenants in their communities whereas otherwise they would move out to buy. In Stonewater’s view, VRTB ‘helps the social housing journey’ by enabling financially secure tenants to buy instead of rent.

VRTB

Superficially, of course, Ms Shirt has a point. No doubt the lucky buyers of Stonewater houses are over the moon, especially as they have qualified for discounts of up to 70% – or £82,800 outside London – the same levels as for council right to buy. They’ll have to raise a mortgage but instead of paying rent they’ll have a valuable asset to pass on to their children or to sell or let out at a later date. In many ways it’s surprising that the pilot scheme isn’t proving more popular. Stonewater has so far completed just 11 sales, and if it reaches its projected level of 170 it will have sold just two per cent of its stock in the region. That’s a lot of effort to reach such a small proportion of tenants, and the government is said to be considering extending the pilot scheme to raise more interest.

What is missing from Sue Shirt’s assessment is any examination of the wider picture if the pilot scheme does turn out to be successful. Of course, one reason why a housing association like Stonewater is willing to take part is that it gets full and instant recompense for the hefty discounts it has to give, so they can aim to have one for one replacement of their own stock. The money comes from a Treasury pot of £200 million created for the purpose. An extended scheme would need more money. Failing some magic by the chancellor, the only sources are the rest of the housing budget or reviving the Treasury’s original plan, which was to force councils to sell their high-value council houses and hand most of the money over to subsidise housing association discounts.

Either way, a lump sum worth up to £82,800 to one ‘financially secure’ tenant who buys their home comes at the expense of the same amount invested in new social housing for people who are struggling to rent, let alone buy. It is not the narrow perspective of whether Stonewater replaces one for one, the essential point is that the money available in the housing system will produce fewer additional homes in total for people in need.

Sue Shirt says that the ‘crucial point’ about VRTB is that it helps more people into much-needed, modern, energy-efficient housing. But this is a very suspect argument. After all, tenants exercising VRTB are in a nice comfortable home already, and while the mortgage they will now pay releases a receipt that Stonewater can reuse, that’s only because the rest of the sale price will be made up by the government.

A supposed advantage is that VRTB buyers stay in their home when they might have moved out to buy elsewhere. While this may be advantageous for the community in the short term, it ignores the issue of what happens when the buyer eventually moves. A house that could be relet at social rent may well end up in the private rented sector, as is frequently the experience with the council RTB. It will be let at higher rents – costing more in housing benefit if that is needed – and quite possibly with minimal management, causing problems for other tenants in the area.

While the pilot scheme might involve selling a relatively small number of homes, up to 3,000, the real danger lies in its potential success. This could have two effects. One is that it hastens the day when all housing associations are persuaded into a ‘voluntary’ scheme by attractive offers about how fast they can access the receipts, without answering the crucial question of where the money will come from once the Treasury’s £200 million has been spent and what the impact of that will be on other programmes. Back in 2015, when it was planned to use ‘council high value sales’ to fund the VRTB, in Selling off the Stock CIH showed that a popular VRTB scheme might require all the receipts from selling high-value homes, leaving no money for replacements.

The second effect will be to prolong the right to buy in England when it should be on its last legs. It was scrapped in Scotland in 2016, it died in Wales earlier this year and soon it may be gone in Northern Ireland too. Only in Whitehall do politicians continue to find ways to breathe life into a policy that’s not relevant to today’s problems. Let’s put some more nails in its coffin, not try to revive the corpse.

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“A decent, affordable home ought to be a human right. Under Labour, it will be” says Tom Copley AM

We wanted to draw your attention to today’s edition of Labourlist, which is guest edited by Tom Copley, Labour’s housing spokesperson on the London Assembly and chair of the London Labour Housing Group.

 

No surpise, Tom’s edition has a heavy housing focus. In addition to his overview, there are articles by

  • Karen Buck MP on her groundbreaking private member’s Act – the Homes (Fitness for Human Habitation) Act

  • Cllr Farah Hussain, Cabinet member for housing in Redbridge, on the Homeless Reduction Act and why the Act will fail unless more resources are put in.

  • Mayor Phil Glanville of Hackney on achieving high standards in new build homes.

  • Cllr Linda Woodings from Nottingham on the challenges facing councils who want to build new council houses.

  • Mayor Sadiq Khan on his approach to tackling the housing crisis in London.

Some good reads here and some clear statements of what Labour is doing in Parliament and on the ground. As Tom concludes:

Tom Copley:

This is just a small snapshot of what Labour is doing where we are in power. But we all know that to truly solve the housing crisis, we need a Labour government. A decent, affordable home ought to be a human right. Under Labour, it will be.

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Poverty and deprivation are increasing in outer London – is London in danger of going the same way as Paris?

By Glyn Thomas

Chipping Barnet CLP

The left-leaning think tank The Smith Institute has published a new report called The unspoken decline of outer London; why is poverty and inequality increasing in outer London and what needs to change?”  The report is supported by the Trust for London.

Outer London is now in economic decline.

In the past, the popular view was that poverty in the capital was confined to the inner London boroughs and that the leafy outer Boroughs were full of affluent Tory voters.  That is no longer the case.  The report shows that poverty, inequality and deprivation are rapidly shifting from inner London to outer London.  60% of all Londoners living in poverty are now based in outer London, a total of 1.4 million people.  This figure has almost doubled in the past 15 years, from 32% in 2004.  If we don’t act now, London will end up like Paris.  In Paris, the arrondissements in central Paris are very affluent whereas the outer suburbs [the banlieues] are deprived and disadvantaged with all the tell-tale signs of deprivation ie poor housing, lack of employment opportunities, high crime and racial tensions.

Smith Institute Report Cover 2019

Mayor needs to support the outer London Boroughs.

The report is a timely alarm call to the Mayor of London and all Londoners particularly as the Mayor is preparing the next London Plan at the moment.  The report warns that growth across London has already become unbalanced with employment opportunities increasingly located centrally.  Unemployment is higher in outer London that in inner London.  High rents have priced poorer Londoners out of inner London.  The report calls for a radical rethink to rebalance London’s economy and deliver inclusive growth for all Londoners.  Better paid jobs and affordable housing for local people are desperately needed in outer London.  A greater emphasis is needed on supporting the poorer London boroughs which have suffered from government cuts.

Paul Hunter, Deputy Director at the Smith Institute said:

“London is becoming a divided city.  The ‘trickle out economics’ of city centre growth and turbo charged house prices is not working for outer Londoners on low incomes, who struggle with housing affordability issues and access to good jobs.  That is why we are calling for a more balanced approach to economic development of the capital.  This would mean reassessing infrastructure and regeneration projects to help spread growth across the capital with a much greater focus on tackling poverty.”

Adverse effects of City Centralist policies.

The report suggests that the current ‘city-centralist’ approach to planning is changing the pattern of economic growth adversely particularly for people on low incomes.  The rise in housing costs together with the effects of the so-called ‘welfare reforms’ have driven more low income people into private renting in outer London.  Housing Benefit claims in the private rented sector are up 17% in outer London but down 13% in inner London.  One solution to this is that Mayor should support the introduction of rent controls or rent regulation throughout London.  Rent regulation is commonplace in large cities in continental Europe; Berlin is a very good example of this.  The report also calls for a step change in investment in outer London and that new funding and policies should seek to promote better paid, higher skilled jobs there.  The emphasis should be on local jobs to reduce the costs and stress of commuting.  On housing, the report suggests that the GLA and Boroughs should pilot ‘affordable housing zones’ using publicly owned land to create areas where housing is more affordable including new forms of low cost housing where costs are kept low in perpetuity.

Deputy Mayor for Outer London.

The report recommends that the Mayor of London should create the role of Deputy Mayor for Outer London to be a champion for outer London who would work with the GLA to deliver a new vision for outer London.  There is also a strong case that the now defunct Outer London Commission should be refashioned into an Outer London Inclusive Growth Taskforce with a remit which includes tackling poverty and inequality as much as securing economic growth.  A new vision for London’s suburbs and town centres is needed when strategic decisions are being made.

Axing Crossrail 2?

On transport policies, the report is more controversial.  It recommends that the GLA should review the £30bn of Crossrail 2 funding with a view to redirecting investment in outer London.  But Crossrail 2, like its predecessor Crossrail 1, is designed to improve rail links not only inside the metropolis but also for the Home Counties where a large part of London’s labour force lives.  Many of these work in the financial services industry.  Good transport links are important to maintain the City of London’s competiveness as a world wide financial hub.  It was largely pressure from the Corporation of London to improve London’s transport systems that persuaded policy makers at City Hall to support the development of Crossrail 1 and the Overground network.

If Crossrail 2 was axed, people would still have to commute into London.  But the existing suburban rail services cannot cope at the moment.  So much of the future commuting would be by road thus increasing urban congestion even further with its serious implications for air pollution.  Notably, there is no mention of the problem of air pollution anywhere in the report.  Also it is doubtful that if Crossrail 2 was axed that the money saved would be spent on London’s infrastructure.  It would simply go back to the Treasury.

Improving London’s orbital networks.

The report is right when it suggests that a much greater focus from the GLA and TfL on orbital transport networks in outer London would enable inclusive growth and create new jobs in outer London.  But increasing the number of buses on the roads would not be the solution; that would make the already serious problem with pollution even worse.  The London Borough of Croydon has shown the way forward; trams.  These street running vehicles are pollution-free and inexpensive to run.  With the development of new types of electric trams based on enhanced battery power, large disruptive and expensive civil engineering works would not be necessary to develop new routes.  The proposed West London Orbital Railway should also be supported.  This line would run from West Hampstead/Hendon to Old Oak Common on existing lightly used freight lines. On route, it would interconnect with the Tube and Overground services at Harlesden.  At Old Oak Common, it would interconnect with Crossrail 1, HS2 and the services to Heathrow airport.

Conclusion

Overall, the report is an important contribution to planning for the future of the metropolis.  Its arguments are backed up by detailed analysis and statistics.  I think that it should be given very serious consideration by policy makers at all levels.  Whilst I have some reservations about some of the public transport policies contained in it, I think that the report should be supported by those who have London’s interests at heart.  I recommend it to readers of Red Brick and hope that they will support its recommendations.

Glyn Thomas

 

The Smith Institute is an independent think tank which provides a high-level forum for thought leadership and debate on public policy and politics. It seeks to engage politicians, senior decision makers, practitioners, academia, opinion formers and commentators on promoting policies for a fairer society. For more information visit www.smith-institute.co.uk @smith_institute

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Feudalism, Toxic Leases and a Parliamentary Select Committee

By Dermot Mckibbin

Beckenham CLP

Introduction

A bi-partisan leasehold reform inquiry report by the House of Commons Housing, Communities and Local Government Select Committee has trashed the English leasehold tenure system.

leasehold sel cttee report 2019

Using strong language, the report concluded that:

“Too often, leaseholders, particularly in new-build properties, have been treated by developers, freeholders and managing agents, not as homeowners or customers but as a source of steady profit. The balance of power is too heavily weighted against leaseholders and this must change. Our report sets out recommendations for how this might happen”

These recommendations included that:

  1. Commonhold should become the primary model of the ownerships of flats in England and Wales, as it is in many other countries
  2. Mis-selling in the leasehold sector should be investigated by the Competition and Market Authority.
  3. Documents in the purchase of properties should be standardised so that the key features of the lease are fully transparent.
  4. Incentives to use a particular solicitor should be abolished.
  5. Retrospective legislation is required to remove onerous ground rents and permission fees from existing leases.
  6. There should be a new system of consultation for leaseholders affected by major works in privately -owned buildings.
  7. The Government must ensure that freeholders are not allowed to recover their costs from their leaseholder where the leaseholders have won their case at a tribunal.
  8. The current law allows freeholders to recover the lease from the leaseholder through the strict legal right of forfeiture. This should be abolished.

Leases in English law date back to feudal times. Once your lease expires even if you have paid a lot of money for it, you become a mere tenant of the freeholder. All leaseholders pay a ground rent to the freeholder.

In virtually all other English-speaking countries this form of tenure has been abolished and replaced by some type of communal ownership of the freehold.  The Commonhold and Leasehold Reform Act 2002 introduced the commonhold tenure whereby the freehold title would be shared by all residents in the block. Commonhold failed as it was not made compulsory for new developments and require the agreement of all leaseholders in a block to transfer to this tenure. In practice this was impossible to obtain.

If a leaseholder does not pay their service charges, the freeholder can apply to court to have the lease forfeited and the leaseholder loses the right to live in the property. This feudal practice should have no place in modern Britain.

The Committee were anxious to see commonhold becoming the primary model of the ownership of flats in England and Wales, as it is in many other countries. There is no reason why the majority of residential buildings could not be held in commonhold; free from ground rents, lease extensions and much greater control for residents over service charges and major works.

The Committee were concerned that leading developers had in the past sought to use their dominance to exploit customers through the imposition of onerous ground rents.  They were also disappointed that leading developers were unwilling to respond to their requests for more information as to the number of leasehold properties sold with ground rents exceeding 0 .1% of the value of the properties.

Leasehold houses

There has been much press coverage of volume builders such as Persimmon and Taylor Wimpey building houses with leases. Some of these properties were sold with dodgy freeholds to third parties. The influential Leasehold Knowledge Partnership estimate that there are 100,000 new build leasehold flats and houses that are unsellable due to onerous ground rent terms.

The Prime Minister is on record as saying that, other than in exceptional circumstances, she does not see why new homes should not be built and sold with the freehold interest at the point of sale. Government figures in 2015/6 estimate that there were 1.4 million leasehold houses and 2.9 million flats. The fact that there are over one million leasehold houses tend to reflect the high profits of leading developers. There is a little need for leasehold houses unless the freeholder wants to use such properties for income generation purposes.

To make matters worse John Healey MP has uncovered official figures showing Help to Buy has been used to purchase 17,586 leasehold homes since 2013. The Government claims that they cannot stop this until the scheme expires in 2021.

Government response

On 28 March 2019 the Government announced via a press release that that 40 leading developers had signed “a pledge” to crack down on toxic leasehold deals. Developers will contact current leaseholders with ground rents that double more than once every 20 years and offer them a ground rent linked to RPI.

One leaseholder with a Taylor Wimpey ground rent calculated that under her lease a doubling ground rent is just short of £2 million for the duration of the lease (250 years). Doubling stops after 50 years. If the ground rent was linked to RPI at the current rate of 3.3 % per annuum, the total ground rent is £25.7 million. The fact that some lenders will not provide mortgages for such inflation linked ground rents is ignored.

The pledge will not apply to leaseholders who have sold at a loss to get out of this mess. Nor will it apply where the ground rent has been sold on to a third party. The developers have not been asked to pledge not to build leasehold houses for which they are being subsidised via the help to buy scheme. The Government’s response has been condemned by the Chair of the Commons Select Committee. The response does not address all the recommendations made by the Committee.

This issue is going to run and run especially as many Tory MP’S are concerned at how their constituents are being treated. The select committee received a record number of over 600 responses to their inquiry. The national leasehold Facebook campaign has over 6000 followers. The Leasehold Knowledge Partnership group now believe that leaseholders could in fact form 25% and not 18% of all homes in England.

Political implications

Even though leasehold reform is often not discussed in Labour circles, politicians cannot afford to ignore the issue. The Government estimates that in 2015/6 there were 4.3 million leasehold dwellings in England. This equates to 18% of the English Housing Stock. In the same period there were 1.4 million leasehold houses and 2.9 million flats. These figures contrast with 4.5 million private rented households and 4 million households who rent from either a local council or a housing association. (See English Housing Survey Headline Report 2017-18).

An excellent House of Commons briefing paper provides helpful regional and constituency trends. After London, the North West had the largest number of leasehold transactions. 58% of all leasehold houses were built in the North West. This region has 75 MP’S in Parliament of whom there are 20 Tories.  There is a constituency breakdown to show the highest proportion of leasehold flats. This also includes leasehold houses only.

Leasehold reform should be a rich campaigning area for Labour. The Tories are too close to propertied interests to tackle this issue properly and yet claim to be the custodians of a property owning democracy. On the one hand the Government promises to make commonhold compulsory for new developments and yet cannot immediately stop the help to buy scheme from subsidising developers building leasehold houses with dodgy freeholds.

If Labour is to win the next election, the culture within the Labour Party must change. All sections of the party must recognise that the leasehold housing system is broken and needs to be fixed. Labour should campaign to expose Tory failings and present some of the positive solutions contained in this parliamentary report.

Dermot Mckibbin

For more information see:

  1. https://www.parliament.uk/business/committees/committees-a-z/commons-select/housing-communities-and-local-government-committee/inquiries/parliament-2017/leasehold-reform-17-19/

 

  1. https://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-8047
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SHOUT’s evidence to the Affordable Housing Commission

Last week we published Dave Treanor’s excellent evidence to the Affordable Housing Commission, focusing on the issues of taxation, housing subsidies, land, and construction, and making a number of comparisons with the experience in Germany.

Today we’re highlighting the evidence submitted by SHOUT, the campaign for social housing @4socialhousing . As it is a long read, the full evidence has been published on Medium and can be found here.

SHOUT’s evidence starts by examining the definitions of ‘affordable’ and ‘social’ housing which have become increasingly bizarre over the past ten years as the government has sought to hide its dreadful performance in delivering homes for people on low incomes. It concludes that traditional social rent is the only housing product which reliably provides genuinely affordable homes to people on the lowest (in and out of work) incomes across the whole country.

Social rent is an exceptionally robust model of housing provision, and remarkable in the degree of self-financing it involves. It meets four key objectives:

  • First, tenants pay a rent that is genuinely affordable (on all definitions).
  • Second, rents broadly cover the costs of providing homes over the long term.
  • Third, rents at these levels minimise the requirement for housing benefit, making it easier for people to make work pay.
  • And fourth, long term very substantial savings in benefits fund the initial subsidy required to get the homes built in the first place.

The evidence takes an overview of the central issue of rent. Based on research by Capital Economics, it concludes that the current policy of rent reductions is unsustainable, that the single national policy for rent should be replaced by regional assessments, that the future policy of rent increases is only sustainable if there are corresponding increases in benefits, and that investment has become far too dependent on rent surpluses, there must be a resumption in grant for social housing if we want to build much more.

The core of SHOUT’s case remains the economic assessment undertaken by Capital Economics which showed that a programme of 100,000 extra social rent homes a year is not only feasible but would be an econnomically sound long-term choice for the country to make. It is also probably the only policy that woul make it possible for the government to achieve its stated goal of building 300,000 new homes a year by the mid-2020s.

Capital Economics’ main findings included:

  • in almost all parts of the country, the cost to the welfare system of supporting low income households in private rented housing (and, to a very considerable extent, in homes at Affordable Rent) is greater than supporting equivalent households in homes at social rent;
  • the decline in the stock of social rent homes, and rising private rents, means that the cost to the welfare system arising from the housing costs of low income households has increased very fast in recent years: it has nearly doubled in real terms in the last 10 years, and now accounts for over 37 per cent of housing benefit spend;
  • if this trend were to continue, expenditure on housing benefit would increase, by the end of the OBR’s long-term forecast period in 2065-66, to £197.3bn in nominal terms, or nearly £62bn a year at today’s prices, with the private sector component more than quadrupling, to £38bn at today’s prices;
  • set against the significant risk to fiscal sustainability of carrying on with current policy, a policy of resuming the development of homes for genuinely affordable rent at scale “is fiscally sustainable and economically efficient.”  It would bring about “a sustained structural improvement to public sector finances – by reducing spending on welfare payments and stimulating higher tax receipts.”  Other things being equal, public borrowing would be 0.5 per cent of GDP lower by 2065-66, and the stock of public debt 5.2 per cent of GDP lower;
  • if the increased investment in new homes were scored as public expenditure, the proposed policy would initially, of course, lead to an increase in public spending and borrowing, as the up-front investment in new housing would be greater than the welfare savings achieved early in the policy. However, the report (written in 2015) notes that the impact would be very modest (peaking at 0.13% of GDP in 2020-21).
  • opinion in the markets would be very sympathetic to investment in tradeable and income-generating assets which would help address the longstanding economic risks caused by inadequate volumes of housing development, and there are ways the Government could support investment without it scoring in the public spending totals (to which we return below);
  • the estimates of benefits and costs in the core analysis is very cautious, limited to the direct cost of building new homes, welfare savings and increased tax receipts from higher construction activity.  However, there would be significant additional socio-economic benefits in terms of health, wellbeing and education.
  • In a subsequent report, Capital Economics concluded that the analysis remained  robust whatever the outcome of Brexit fiasco.

The evidence also makes the case strongly for a policy of protecting the existing stock of social rented housing and ending the practice of running it down through right to buy, ‘conversions’ to so-called affordable rent, ill-considered estate regeneration and unjustified market sales to generate finance for new build.

Finally, the evidence calls for a range of new policies, including:

  • to resume security of tenure with a clear framework of rights and responsibilities
  • to strengthen consumer regulation
  • to further devolve housing responsibilities, and
  • to greatly strength the voice of tenants in relation to both policy and management.

 

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Evidence to Affordable Housing Commission

By Dave Treanor

The Affordable Housing Commission, organised by the Smith Institute, funded by the Nationwide Foundation and chaired by Lord Richard Best, has issued a call for evidence as it gets under way.  It poses a number of questions:

What does affordability mean in different areas of the country? How does it link to the welfare system? Why has housing become unaffordable and what are its effects? What policies have been put in place and have they been working? How can supply be increased and what are the roles of the tax system, government funding, housing providers, and the planning system? What other areas of policy need to change – eg infrastructure, institutions, governance, public attitudes?

Most policies on affordability tackle the symptoms and not the causes of the housing crisis.  Housing becomes unaffordable when the cost increases by more than earnings.  If we fail to understand why this has happened over the last fifty years, we’ll repeat the mistakes of the past.  Subsidising housing for those priced out of the market merely tackles the symptoms and will never provide a cure. It often helps one group of households at the expense of others.

If the workings of the housing market are to blame, why is the problem so much worse in the UK than across most of Europe. Why does the same thing not happen in Germany?

I sought to answer these questions through an in-depth study of housing policies in ten European countries, and wrote it up in Housing Policies in Europe  [1]  The book contains the evidence behind the conclusions and proposals in this paper, all referenced back to its sources.

Impact of taxation of affordability

Taxation in the UK is more biased in favour of owner-occupiers and against tenants than anywhere else in Europe.  This makes a home the most profitable investment anyone in the UK can make. The more they can invest the wealthier they will become.  In Germany taxation is almost tenure neutral.

dave treanorHouse prices in Germany are more stable than in the UK, and on average across the country have become more affordable over the last thirty years, with prices rising on average by less than earnings. Rented housing is taxed no more heavily than home-ownership. Germans get as good a return net of tax by investing in their industries as they would from buying their own home. This takes much of the heat out of their housing market. It may also help explain the success of German manufacturing.

In cash terms a mortgage may be just as hard to pay as rent, but unlike rent it is an investment in an asset that rises in value and does so by more than the mortgage payments on it.   In most years house prices in the UK rise at a higher rate than the interest their owners pay on their mortgages, and sometimes by more than the total income earned by the household.  And yet these gains are completely free of taxation. Rents rise with inflation, and in response to rising house prices, typically doubling every ten years. Mortgage payments fluctuate with interest rates but do not generally rise over time. Once the mortgage is paid off the owner lives rent free.  None of this additional spending power is taxed.

Most home-owners would think it outrageous to even think about taxing these gains, and fail to recognise the extent to which they benefit compared with those that rent.  This widens the gap between the rich and poor, transferring wealth from the young who generate most of it through their hard work to an older generation that owns most of the housing. The gap between rich and poor is growing ever wider.  The biggest gap is found between those owning and those renting their homes.  Yet housing benefit is seen as welfare and is being cut and capped, while the wealth tied up in a person’s home is increasingly exempt from inheritance tax.

The best solution would be to tax home-owners on the benefit of living rent free in their own home, as was done until this was abolished in the seventies.[2]  Failing that a fair equivalent might be to allow tenants to offset rent against the tax they pay on their income.

Favourable taxation and other subsidies to promote owner-occupation result in higher house prices, benefitting existing owners at the expense of those less fortunate, adding to affordability problems.

Stamp duty which is paid by the buyer should be replaced with capital gains tax paid by the seller of a property. Tax the one making the gain, not the one struggling to climb the housing ladder. The lack of tax on these gains inflates prices higher up the ladder. Stamp duty discourages mobility and is a disincentive to down-sizing, whereas a tax on capital gains would only be incurred to the extent the property had increased in value, and the liability would be triggered but not increased by the transaction.

Inheritance tax rules also discourage the elderly from downsizing, by shielding part of the value of their residence from taxation.

Private rental sector

Private rental tenancy terms in the UK are amongst the worst in Europe, making home-ownership the only sensible option, adding to the demand putting pressure on house prices.[3]

Tenants in the UK are treated with very little respect.  How can anyone make a home in a property where the landlord can repossess at two months’ notice?

There are a number of reasons why housing in Germany tends to be of better quality and more affordable than the UK. There are few circumstances where a tenant who pays their rent and abides by the terms of their tenancy can be evicted. They take pride in looking after their homes, with more control over repairs and maintenance. It is not uncommon for tenants to upgrade their kitchens and bathrooms by agreement with their landlord who may contribute to some of the cost. In the UK this is only possible where you own your own home. As a result, many middle-income Germans are content to live in rented housing.

Generally, elsewhere in Europe tenants can only be evicted if they break the terms of their tenancy agreement and are often less dependent on a landlord for day to day repairs and maintenance.  Many families are happy to live in good quality rented housing, without paying extortionate rents.  We must end no-fault evictions. But that is not the whole story.

The way to make housing more affordable is to tackle the underlying causes of house prices rising faster than earnings. That requires long-term changes in housing policy, much longer than our electoral cycles tend to promote. The poorest will always suffer the most from any shortage and require additional help, but focussing all subsidies at the bottom end of the market deepens the poverty trap. Subsidies to help the poorest tenants enable them to pay higher rents, raising costs for those that just fail to qualify. Solutions are required that impact across the whole of the housing market.

The German approach to social housing has also played an interesting role, and could hardly be more different from council housing in the UK. None of it is intended to remain as social housing forever. In return for subsidies from local, regional or central government to deal with a shortage of affordable housing, new homes are built and let to low-income households from a housing waiting list at no more than 80% of market rents. After an agreed period of between twenty and thirty years the obligation to let at below market rents tapers off. Most of this housing was originally provided by not-for-profit housing companies, some of which were set up by the municipalities.

Much of the privately rented housing in Germany was constructed with subsidies and initially let on social housing terms by a mix of private and non-profit landlords.  These were professionally managed on generous tenancy terms, laying the foundations for a much fairer private rental sector. Even so, two-thirds of rented housing is now held by individuals who typically let one or two properties. The rest is provided by a combination of municipal companies, co-operatives and private companies.

The UK is quite exceptional in the proportion of welfare support provided through personal housing subsidies, an unfortunate biproduct of which is to raise market rents, particularly at the lower end of the rental market.

If UK housing associations had invested in secure market rent over the last thirty years, there would now be a substantial stock of well managed housing on which nobody was extracting capital gains.  The growth in buy-to-let demonstrates how profitable that would have been. It would have reduced the pressure on rents and improved the choice of housing for those who cannot afford to buy and would never reach the head of the queue for social housing. It is never too late to change.

We should learn from the German experience. It requires little if any subsidy for a social housing organisation to develop secure market rent alongside more affordable options. Some are already doing it on a small scale. I can think of few policies that could have more of an impact at such a low cost. All it needs is the political will to do it and encouragement from those regulating the sector.

Instead, private landlords are blamed for competing with first-time buyers and bidding up prices. They are burdened with heavier taxation, all of which is paid out of tenants’ rents. Imposing fairer tenancy terms would have been a far more effective way of rebalancing competition between first-time buyers and buy-to-let landlords, and less likely to push up market rents. A drop in the availability of rented housing is never going to reduce rents or improve the choices faced by tenants. The few studies of the effect on house prices of purchases by landlords show less of an impact than is commonly assumed.[4]

Excessive borrowing fuels the growth in house prices

If more money flows into the housing market than is spent on construction and renovation it can only have one result: higher house prices. This is true whether it comes through banks’ lending additional money raised on wholesale markets, from parents passing wealth down to their children, or from help to first-time buyers, or from overseas investors finding housing in the UK a safe haven for their money.

Mortgage lending in the UK is relatively unconstrained. Where demand outstrips supply and getting onto the housing ladder is clearly profitable, the amount they will pay is only constrained by how much they can borrow.

Most mortgage loans in Germany are restricted to 80% of the property value, limiting the amount a household can afford to pay, unlike the UK where excessive borrowing fuels the growth in house prices.

With mortgage interest rates at below 3% it soon becomes cheaper to buy than to rent, adding to incentives to climb onto a housing ladder.  Saving for the deposit is the most significant constraint.

Quantitative Easing, cheaper credit for banks and reductions in the bank base rate following the financial crash reduced the cost of investment in housing without making it any more affordable: the reduced cost and increased availability of borrowing was all captured by existing owners and developers in higher house prices. Above all it boosted land prices, increasing the pressures on affordability.

Failings in the business of housing construction

The market in potential building sites is controlled by a diminishing number of major developers who control the supply of new housing, and will only build in a rising market.

The supply of land for housing is restricted by planning regulations and constrained by the green belt, so it does not increase in response to rising demand.

In order to ensure a regular supply of sites the construction companies build up land banks, or buy options securing sites on pre-agreed terms. Developers and land dealers assemble potential sites, using their expertise to take them through planning, adding considerably to their value in the process.

The price a developer is prepared to pay is based on the expected value of the properties that might be built on each site over the next ten years. The land market ‘prices in’ the expected increase in property prices.

It should also take account of local planning requirements. But in competing for potential building sites developers become adept at minimising the affordable housing liability, arguing it would make the development unprofitable. They run rings around councils in negotiating planning permission and s106 planning gain commitments.

The latest National Planning Policy Framework (NPPF) includes measures intended to make the viability process more transparent. It clarifies that the land value used in assessing how much affordable housing would be viable should be based on the Existing Use Value of the site under current planning consents (plus a premium to incentivise development), and not the potential value it might fetch in the market taking into account any likely change in permitted use.  If the developer overpaid for a site that is their problem. In theory that should ensure that any requirement in the Local Plan to include a proportion of affordable housing is reflected in land prices, ensuring it is deliverable.

But in practice local authorities are also expected to meet targets for the delivery of new housing, weakening their position in negotiating with developers.

Land banking contributes to the problem.  If house prices rise by more than the cost of constructing them, the increase in value flows through to the land. When house prices rise by more than expected, land prices go up at an even faster rate.  But the corollary is also true: when house prices fall, land prices fall even further.  That is what happened following the financial crash in 2009. As a result, many smaller construction companies found themselves in breach of their loan covenants, with insufficient assets to cover their debts. They could not afford to build their way out of trouble, particularly in a housing market where demand had collapsed.  This became a great opportunity for the bigger and richer construction firms to buy up the smaller and weaker ones largely for their land banks, giving them ever tighter control over the housing market.

It is never in a developer’s interests to release newly constructed homes at prices below those they expected when they bought the land several years previously, or in sufficient quantities to lower the prices being paid.

The property development companies are some of the biggest donors to the Conservative Party, and persuaded the government that the only way to get the housing market moving again after the financial crisis was to boost demand with lower interest rates, Help-to-Buy schemes, and by reducing the obligations on which planning permission was granted.

All that achieved was to increase house prices, while construction remained in the doldrums. Before ‘Help-to-Buy’ new house building in London averaged 42,392 units a year. Since ‘Help-to-Buy’ it fell to 35,274 per year.   London house prices rose 48% since it was introduced in 2013.

What the government could have done as prices rose was to introduce an annual tax on land value to discourage the hoarding of potential building sites. In an optimised market construction companies would buy sites a few months before they were ready to build on them, and the supply of land would become much more responsive to any increase in demand. Construction would be opened up to new building companies, breaking the monopoly of the big players. The profits of developers should derive from their ability to add value through good design and efficient delivery, rather than speculation in property prices.

Capturing hope

More of the unearned profits arising from public investment and planning decisions should be captured for the benefit of the community, rather than going into the pockets of landowners.

Public housing built in the thirty years after the war was largely self-financed from rents and the sales income it generated. Councils built on bombsites, or land bought at slum-clearance prices, with loans financed by the Public Works Loan Board and repaid from rents, requiring little or no subsidy.

New Town Corporations paid little more than agricultural prices for land and repaid their entire borrowing from the added value of the developments. This paid for the delivery of whole towns including their infrastructure, creating 32 communities and housing 2.8 million people.  They paid £4.75 billion back to Treasury in 1999 and have since then yielded an additional £1 billion in profit. [5]

All of this was ended by a court case in 1974 that reinterpreted the 1961 Land Compensation Act, requiring public bodies acquiring land through compulsory purchase to pay the ‘hope value’ arising from potential future development on top of the value under its current planning status. In practice this affected all land valuations, and put an end to self-funded new towns and council house building. It also added to the cost of roads, railways, airports and other infrastructure development. It represented a massive transfer of unearned wealth to landowners and led to a massive reduction in public sector housing construction.

The arguments for and against retaining ‘hope value’ in compulsory purchase valuations were explored in a Parliamentary Inquiry that reported in September 2018.[6]  Labour proposes to change these rules and 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 council 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.[7]

Previous initiatives by Labour governments to capture some of these gains were thwarted by the owners of potential development sites hanging on to them in the hope that things would return to the way there were following the next election.[8]  What we really need is a cross-party consensus.  But, council tax is in serious need of reform, and if a Labour government replaced that with a Land Value Tax, an incoming government might find that harder to reverse.

Dave Treanor

dave@treanor.co.uk

[1] See Housing Policies in Europe available as a free download from www.m3h.co.uk/publications

[2] Schedule “A” tax against which they could offset interest on their mortgage

[3] See www.treanor.co.uk/blog/Fixing_our_rental_sector.pdf

[4] ‘Buy-to-let mortgage lending and the impact on UK house prices: a technical report’ by Ricky Taylor, published by the National Housing and Planning Advice Unit (abolished by the Coalition government in 2010).

[5] https://publications.parliament.uk/pa/cm201719/cmselect/cmcomloc/766/76602.htm

[6] https://publications.parliament.uk/pa/cm201719/cmselect/cmcomloc/766/76602.htm

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

[8] https://redbrickblog.wordpress.com/2018/01/24/taxing-speculation-in-land/

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