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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Affordable Housing Commission issues call for evidence

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.

The Commission has a wide brief to look at the causes and effects of the affordability crisis and to come up with some workable solutions. The call for evidence identifies four groups that are facing affordability issues which the Commission’s work will focus on. These are

  • ‘Struggling renters’: who spend more than a third of their income on rented accommodation (either private or social renting)
  • ‘Frustrated homeowners’: who would be unable to buy a property without spending over a third of their income on housing costs
  • ‘Those reliant on state support’: who rely on Housing Benefit/the housing component within Universal Credit, but receive inadequate support, taking many below the poverty line.
  • ‘Those who face affordability issues in older age’: those whose incomes drop suddenly in retirement but rents remain the same and older owners in unsatisfactory homes who cannot afford to upgrade or acquire somewhere suitable.

Research over the coming months will seek to understand the affordability challenge and work towards a new affordable housing offer. In summary the questions they want to address include: 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 ne 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?

The call for evidence is accompanied by conclusions from a series of Focus Groups undertaken for the Commission, from which a range of conclusions were drawn, including:

  • There was agreement that there is an affordability crisis, but this was often seen to be about first time buyers not renters.
  • Saving for a deposit is a major barrier, but mortgage payments ae seen as being lower than rent in the longer term.
  • People are open to ‘radical solutions’ but home owners and first time buyers see themselves as struggling therefore have little tolerance for targeting assistance to groups on the lowest incomes apart from people with young children.
  • People identified the main causes of the affordability crisis as house prices increasing ahead of wages, high deposits, punitively high rents charged by landlords. People did not identify lack of new housing as an important factor.
  • 25-33% of household income was seen as ‘affordable’, housing costs should never be more than half.
  • Private renting ‘is broken’ and people will make big trade offs to ‘get onto the ladder’.

The Commission is made up of 15 members from the housing world. In addition to Lord Best, they include: Claire Ainsley of the Joseph Rowntree Foundation, Sinead Butters from Aspire Housing, Ian Fletcher of the British Property Federation, Prof Kenneth Gibb of Glasgow University, Robert Grundy of Savills, Lindsay Judge of the Resolution Foundation, Geeta Nanda of Metropolitan Thames Valley, Martin Newman of Giroscope, Jenny Osbourne of TPAS, John Slaughter of the Home Builders Federation, Dan Wilson Craw from Generation Rent, Kate Henderson from National Housing Federation, Jo Negrini from LB Croydon, Gavin Smart from Chartered Institute of Housing.

The Commission’s website has more information on the research priorities, the focus group findings and the Commissioners. People will have their own views about the conclusions of the focus groups, whether the Commission has the right balance of people and is on the right track, but the call for evidence provides a clear opportunity to make submissions on these and related issues.

Submissions should be made to info@affordablehousingcommission.org by 4th April, 2019.

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A vision based on evidence

shelter commission cover

Shelter’s Housing Commission report published yesterday is undoubtedly a major contribution to the debate about how to solve the housing crisis, and I broadly agree with most of its conclusions.

Attending the launch, I found the most intriguing aspect was the frank admission by one of the commissioners, Baroness Sayeeda Warsi, a former chair of the Conservative Party, that her previously ‘ideological view’ and belief in the small state had been challenged and changed ‘by the evidence’ given to the Commission. For her, and the several other conservative-leaning members of the Commission, to support a huge social house building programme – more than 3 million over 20 years – represents an important shift in thinking on the right of centre.

Also noteworthy was the admission by former Labour Leader, Ed Miliband, that he had not been strong enough in his advocacy of social housing at the 2015 general election.

The report of the Commission is a well-written review of housing issues and how we got to the bad place we are now in. At its core the economic case for investment in social rented homes is made forcefully, based on a detailed analysis by Capital Economics which has been published separately and can be read by following the link.

In essence the case for investment is the same as that made by the SHOUT campaign in 2015 (with analysis also by Capital Economics), which is that the cost of meeting the clear need for a large extra supply of homes for social rent is manageable if you take into account not only the long term costs but also the long term benefits – and especially the savings that will be made in benefits.

Shelter’s Commission recommends and models building 3.1 million social homes over 20 years. You can argue over this number and how it is arrived at, but it is plain that we need to reverse the catastrophic switch that has been made over the last 40 years away from spending on investment in new homes towards helping people to afford or pay for homes at or near market prices.

The gross additional cost of the investment proposed by Shelter, estimated at an average of around £10.7 billion per year, is substantially offset by reductions in the costs of benefits, economic growth, spin off savings in health and other services, and increases in productivity, bringing the estimated net cost down to an average of around £3.8 billion per year. (One year’s worth, as it happens, is less than the money being wasted on preparations for a no deal Brexit). The huge programme would only increase public sector net debt by 2%, a relatively trivial amount given the huge increase in human wellbeing that would flow.

The headline figure of 3.1. million extra social homes has dominated the coverage, but there are many more recommendations about other aspects of social housing. The report proposes a new system of consumer regulation to protect all renters (social and private),  major changes to enable the enforcement of standards, and a transformation in the ability of tenants to make complaints and have them resolved. There are recommendations to improve tenants’ ability to make their voice heard, with tenant panels, independent tenants’ organisations and a revived national tenants’ voice organisation.

In support of the programme of new building, the Commission makes some detailed proposals around planning, including reforms which would make land available at a fairer price and enable planning authorities to obtain a bigger planning gain contribution from private development.

These proposals are broadly very welcome although I couldn’t always follow the logic between the discussion in the report and the final recommendations. There were important areas of debate from which no recommendations flowed at all. It does not undermine the report to set out some doubts and questions.

I am not convinced that the proposed consumer regulator should cover both social and private sectors. They are such different beasts and consumer regulation for social housing seems to me to be inextricably linked to economic and governance performance, which would remain with the existing regulator. The comparison that is made with banking, where financial and consumer regulation are separated, does not hold water, and I think it would be wrong to end up with 4 bodies (HCA/Mayor, economic regulator, consumer regulator, and Ombudsman) tripping over each other to hold housing providers to account. It would be too complicated and it wouldn’t work.

The private sector absolutely needs consumer regulation, but I suspect it would be better done by a specialist organisation and be focused on finding ways of regulating small landlords.

Given that the report sets out a vision for social housing, I don’t think it deals adequately with the question of rent. The economic analysis makes fair assumptions about the level of grant that would be available for new build, which would broadly maintain the current social rent regime, but a vision for the sector should include consideration of the best general level for rents – notably whether they should continue to increase faster than inflation – and whether there might be a better system, for example one that is more closely linked to incomes. There are associated questions about how the benefits system might change.

Similarly, the report discusses the problems but makes no recommendations about the terms and conditions of tenancy and the balance of power between landlord and tenant, which has shifted heavily to the former in recent years. I would like to see the return of security of tenure and the end of fixed term tenancies, and a detailed review of the various grounds for possession. It also fudges the issue of right to buy and does not address the increasing management problems being faced on estates by the rapid rise in high turnover private landlordism enabled by the right to buy.

As with the point about regulation, in some ways the discussion about private renting sits uncomfortably in the report. That is not to diminish its importance, but to observe that it feels too much like an add-on. Many good points are made, and important recommendations are made for example about no fault evictions. But it needs something more fundamental in a report which is concerned with a 20-year vision for housing. If the proposed social housing building plan came to pass, over time there would be a steep decline in demand for private renting. We need to think through what implications that would have in practice. How would private landlords react as their market changed? Would landlords generally seek an exit? Should we revisit the policy of encouraging institutional investors in private renting? If prices fell, what would be the knock on effect to home ownership? A major revival in social rent has broad implications for other tenures which need to be addressed.

The crucial thing about the Shelter Commission report, however, is probably not the specific recommendations. It is whether the work they have done, and the reach they have achieved into Conservative thinking, helps to create a change in the political climate which then leads to a far more balanced housing policy across the board.

Five years ago, the few left standing that defended social rented housing were mocked as living in the past and not facing up to the modern realities of market-driven housing policy. We were especially derided by some luminaries in the housing association movement who, thankfully, are more quiet these days. Social rent is back at the centre of the housing debate, in the mainstream where it belongs. The groundswell in favour of it is vitally important but the next stage is the vital one – because winning the political argument has not yet led to many homes being built.

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Rent roulette: from Stalin to Mr Bean via Orwell

Mr Bean’s rent policy

If people rent from a council or a housing association, how much rent will they pay? The answer is anything between 40% of local ‘market rents’ (and sometimes less) and 80%. But is there any logic to the system of rent-setting or is it just inept bungling? All the below rent types are available to homeless households and waiting list applicants who get offered a council or housing association rented home, depending on where they live and the luck of the draw.

  • Social rent – council (lowest)
  • Social rent – housing association (higher)
  • London Affordable Rent (higher)
  • Council rent at above LAR benchmark (higher again but unclear how high)
  • Affordable rent, discounted to c.65% market rate (probably even higher)
  • Affordable rent at full 80% of market rate (highest)  

One of the criticisms of Labour’s 2002 policy for social rents was that it was based on a strict formula which meant that ‘Whitehall’ would set each and every rent in the country, leaving no room for local factors or landlord (or tenant) choice. Some liked to call it Stalinist, a curious word to describe a policy of the Blair government. ‘Rent restructuring and convergence’ as the policy was known, sought to harmonise council and housing association rents (HA rents were often significantly higher) over time, moving both at different speeds to a ‘target rent’ which was calculated on a mix of house values and regional pay rates. The government held a review of  general rent levels which concluded that they were broadly correct at the equivalent of c.40% of market rents. The policy meant that tenants would pay more over time but within a highly structured and predictable policy environment backed by a comprehensive and generous housing benefit system. Most social rents are still based on this formula.

The policy could have been more flexible, but it stood the test of time. Although slow acting, its flaw was the underlying increase in real rents (normally 0.5% or 1% above inflation): over time rents would become less affordable, passing the strain onto the housing benefit system.

Since 2010 a successful but centralised rent-setting system has been replaced by increasing fragmentation descending into chaos for new homes and new lettings. The huge (by anyone’s standards) cut in housing investment in Slasher Osborne’s first Budget – more than 60% – led to the abandonment of the new homes for social rent programme. It was replaced by the abomination of Grant Shapps’ ‘affordable rent’ product at up to 80% of full market rents – impossibly unaffordable for most people and leading to a high dependency on housing benefit (which they then proceeded to cut, putting a vicious squeeze on tenants). Called ‘Orwellian’ by many commentators due to the ‘doublespeak’ of calling something that was unaffordable ‘affordable’, the policy shifted much of the burden of financing new affordable homes from the state to existing tenants.

Of course, the phrase ‘up to 80% of market’ left the door ajar for those who wanted to mitigate the worst impacts of the policy. Some housing associations tried to achieve rents at significantly less than 80% or applied different rates to different size homes to try to keep family homes within reach. Unforgivably, some chose to max their income. In London, even Mayor Johnson realised the policy was ridiculous and approved some schemes at 65%.

Associations were also encouraged or required to enhance their development funds by selling more homes on the open market and by ‘converting’ homes from social rent to ‘affordable rent’ when they became empty and were re-let. Some did as much of this as they could get away with, a few heroic associations refused to convert any social rents.

In a further series of muddled U-turns the government decided to end the ‘convergence policy’ and impose a national rate of rent increase instead. A supposed 10 year rent settlement – increases of CPI plus 1% every year – launched in 2015 was very short-lived and quickly replaced by an annual rent reduction policy of minus 1%, to the anguish of developing providers. Now under May, a new policy has been announced for after 2020 – it’s back to CPI plus 1%.

From the point of view of a new tenant, the system now resembles a roulette wheel played under rules invented by Mr Bean. A new tenant could by random selection get a home at the equivalent of 40% of local market rates or at 80%. The potential impact is obvious: rents for a similar home could range from genuinely affordable to absolutely unaffordable. And I haven’t even touched on the range of ‘intermediate’ tenure rent policies that can be added to the mix.

The new Mayor of London, Sadiq Khan, was left between a rock and a hard place. He was committed to social rents but also wanted to get the maximum funding out of government. Government would never agree to a wholesale return to social rents, so a principled stand would have led to much less overall funding for affordable homes. In the end, Khan and his housing deputy mayor James Murray negotiated a deal which would allow a new ‘London Affordable Rent’ to be charged, based on social rents but significantly less than the national ‘affordable rent’. At its core, Khan’s LAR is set at the target rent that all social rents would eventually move to, but without the long transition. Rents might (on some calculations) be up to 50% higher than normal council rents (but still much less than ‘affordable rent’).

Depending on your political view this is either a clever solution that preserves the principles of social rent or a sell out. I lean towards the former, partly because the Mayor has also ended the practice of ‘conversion’ in his funded schemes, which will keep many more homes in the real social rent bracket and control the activities of some of the more rapacious registered landlords. Whichever way, his is now the regime that underpins rent-setting for new social homes in London.

If you are still with me, the tale has one further twist, brought to light through a freedom of information request submitted by a north London housing activist. This concerns the Mayor’s laudable £1 billion programme of funding councils to build nearly 15,000 new council homes.

But at what rent? The FoI shows that London councils have gone in many different directions. The appalling Westminster did not even bother to apply for any of the money. Some have got funding for new homes which are mainly at social rent, including Newham, Greenwich, Hackney, Haringey and Southwark. Others have gone for rents predominantly at the mayor’s London Affordable Rent, like Brent, Ealing, Hounslow, Islington and Redbridge. And a few, Brent, Harrow, Tower Hamlets, Barking and Dagenham and Hammersmith and Fulham, have gone for some or all of their rents to be above the benchmark rents expected under the LAR scheme. Yet another rent bracket has been created – LAR plus it could be called.

So the outcome is an increasing mish-mash of rent policies which must be bewildering for any potential tenant waiting for a home. One neighbour could be paying twice as much as the other for the same home. In eight years we have gone from a centralised system that had its defects but which at least everyone understood to a system which is totally chaotic and almost random.

From order to chaos or, to adapt a phrase, from Stalin to Mr Bean via George Orwell.

 

(amended 12/12/18 to correct comment about current rent policy, which is an annual -1% not CPI -1%).

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Relative absolutes

There’s a ritual in the House of Commons when it comes to debating poverty. It goes along the lines of Jeremy Corbyn challenging Theresa May about the huge weight of evidence showing rising poverty in this country. May always answers by quoting figures for ‘absolute poverty’, which she claims is declining, whereas Corbyn’s questions are always about relative poverty, which is rising. For the public, a pointless exchange has taken place.

The difference between the two is very important.

Absolute poverty describes when household income is below a necessary level to maintain basic living standards (food, shelter, housing). It can be used to compare different countries and different eras but the criteria are not amended by economic growth. In the normal course of events it would be extraordinary for absolute poverty not to fall over time. The United Nations says absolute poverty is characterised by “severe deprivation of basic human needs, including food, safe drinking water, sanitation facilities, health, shelter, education and information.” In recent years the fall in the UK has been driven by rises in basic incomes of pensioners, many of whom were previously defined as being in absolute poverty.

Relative poverty however describes how household income relates to the median income being achieved in the society as a whole. This is normally measured as a percentage below that median, normally 50% or 60%. It therefore moves along as the society gets richer. It is more meaningful because it describes the extent to which the poorest share (or don’t) in the growing wealth of the country as a whole.

Answering questions about relative poverty by referring to absolute poverty is disingenuous to say the least. It serves to dismiss concerns by obscuring the real debate.

Now, why would the government wish to obscure the debate and confuse people in the process? The explanation comes in the Joseph Rowntree Foundation’s comprehensive analysis of poverty trends and figures, UK Poverty 2018.  The report uses the definition of poverty that a household has an income of less than 60% of median income for their family type, after housing costs. Like most respected commentators, but not the government, it sees poverty as being directly related to the normal standards of living being experienced in the country and not absolute basics.

On relative poverty, the report’s conclusions are stunning; here are just a few:

  • Fourteen million people are in poverty in the UK – that is over one in five of the population (22%).
  • Eight million of these people live in families where at least one person is in work.
  • Eight million working-age adults, four million children and two million pensioners are living in poverty.
  • In 2017 one-and-a-half million people lived in destitution in the UK, which means they could not afford to have what we all need to eat, stay warm and dry, and keep clean.
  • And 365,000 of those destitute were children.

The JRF report makes the following conclusion about the trends:

“During the last 20 years, the UK dramatically reduced poverty among people who had traditionally been most at risk – pensioners and children. This progress has begun to unravel and now poverty overall is rising, and it is the rise in child poverty that is pushing this trend.”

The report also draws particular attention to the rise in poverty amongst disabled people in the last five years – the poverty rate for disabled adults in non-working households is exceptionally high at 67% of all households – and to the fact that poverty rates are higher among all ethnic minority groups but particularly high amongst families of Bangladeshi and Pakistani origin.

The huge impact that housing has on poverty is seen in the figures for housing costs. Traditionally, housing costs have risen for all income groups at a similar rate, and housing costs for all groups fell immediately after the 2008 financial crisis and recession. But after 2009/10, housing costs stabilised or fell for the richest three-fifths of the population but started rising again for the poorest two-fifths. This has been driven by the government’s policies in relation to tenure:

“Rising housing costs have been driven largely by changes in the proportions of families living in different housing tenures. In particular, the fall in home-ownership and expansion of the private rented sector have affected low-income families far more than those who are better off. The proportion of children in the bottom quintile living in the private rented sector rose from 17% in 2005/6 to 37% in 2016/17.”

In addition to rising rents, the report identifies the cause as being the fact that “eligible rents – the amount that Housing Benefit will cover – have been falling behind actual rents paid by low-income families. The reason is that there have been several changes to the rules governing eligible rents since 2010/11 which have had the effect of undermining the safety net provided by Housing Benefit. The result has been that low-income families have faced higher net housing costs, leading to increases in poverty.”

Low pay, reduced benefits, rising housing costs, rising utility costs. The reasons for rising poverty are clear and obvious. And the figures are so bad that it is no surprise that the Prime Minister hides behind irrelevancies whenever she is questioned on the scandal.

 

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Home ownership is the most ‘subsidised’ tenure

It often seems that the term ‘council tenant’ automatically comes with the word ‘subsidised’ in front of it. It is part and parcel of the stigmatisation of the tenure by many politicians and much of the media – and even some within the social housing sector. Following Grenfell, the government in its green paper nodded in recognition of the unfair portrayal of council housing and noted that stigma has a deleterious effect both on the tenure and on the people who live in it. But even as they recognised it, they also repeated their underlying belief in the superiority of home ownership.

Despite overwhelming political and popular support, since 2003 or so home ownership has been in decline as the affordability of housing has deteriorated. For all its efforts, this government has not yet managed to reverse the trend. In his book launched last week, Josh Ryan-Collins showed that this was not just a UK effect, it has happened across what he calls the ‘Anglo-Saxon economies’ where banking systems have been deregulated in  the same way and at the same time. Encouraged by the collateral of bricks and mortar, overly keen banks with liberal lending policies pushed prices up much faster than incomes, hugely stretching price to income ratios. Other countries with different types of bank – notably Germany where banks are regional and based more on co-operative principles – have experienced much less house price inflation and have much less emphasis on houses being investments rather than places to live.

In the UK since 2010 we have seen the amount of public money put into social housing slashed yet there have been many, often costly, initiatives to help slow the decline in home ownership. The net effect is that home ownership is now easily the most subsidised tenure, much more so than social housing, with private renting receiving the least help.

The conclusion that the state gives far more help to home ownership cuts against the grain of conventional thinking. But it has now been very well documented in a report entitled Dreams and Reality? Government finance, taxation and the private housing market published today by the Chartered Institute of Housing and written by housing finance experts Steve Wilcox and Peter Williams. The authors reached their conclusion after an exhaustive analysis, taking account of all types of government intervention in the market, not only spending on grants, loans and guarantees, but also tax reliefs, welfare benefits and regulatory mechanisms which aim to stimulate or control the three main routes by which people get access to housing.

They show that government is directing about £8 billion annually into private housing over the five years to 2020/21, with over half going specifically to support home ownership and the remainder being more broadly aimed at the private market. In contrast, direct funding for new social housing is less than £2 billion annually.

Wilcox and Williams accept that the analysis is bound to be crude because financial support for the sectors comes in different forms – for social housing it is mainly grant spending whereas much of the private market support is via loans or guarantees. Some specifics:

  • In terms of tax reliefs, home owners benefit much more than private landlords: net tax relief for owners was some £29 billion in 2016/17 (£10 billion paid in tax; £39 billion received in tax reliefs) whereas private landlords paid net tax of at least £8 billion.
  • Within the benefits system, tenants receive much more assistance than home-owners, with about £15 billion annually going to social housing tenants and £8.5 billion to private renters.
  • Private renting has a big advantage in mortgage regulation because it can access interest-only mortgages whereas new home buyers have to navigate various restrictions on mortgage availability.
  • Despite the huge increase in general support for the market, the government safety net for those homeowners facing financial difficulty has been much reduced. Support for mortgage interest will soon migrate from paying mortgage interest charges for unemployed home buyers to providing loans – a further erosion.

CIH chief executive Terrie Alafat CBE said:

“This report demonstrates just how much government support is going to the private market, and to home-owners in particular – probably contrary to many people’s expectations. It takes a comprehensive look at the way the government supports our housing system – and we would urge ministers to do the same. Currently just 21 per cent of government investment is going to affordable housing. Rebalancing this budget to support people on lower incomes who can’t afford to buy could make a big difference. It is vital that the government supports councils and housing associations to build more homes for social rent.”

Wilcox and Williams also sneak a look into the future. If home ownership is stabilised at around 60% and if the social housing sector does not grow proportionately, it follows that future net growth will come mainly in the private rented sector. This will lead to a substantial long term increase in the cost of housing benefit (especially as working private tenants retire and become eligible for rent support). Unlike social housing, where housing benefit is retained by landlords and surpluses recycled, HB to private landlords funds profits which are removed from the sector.

‘It serves to make the point’, the authors say, ‘that the continuation of current trends is not a cost-neutral option for government’.

And in a massive understatement they comment that ‘there are questions as to whether we are spending as efficiently as we can in the housing sector, a pertinent point given the general pressure on public finances.’ In particular, they question the emphasis on intervention on the demand-side through Help to Buy and other schemes rather than supporting supply-side initiatives (ie directly building more houses rather than increasing buyers’ purchasing power).

We may have to wait a long time to see ‘subsidised home owners’ replace ‘subsidised council tenants’ in the headlines. But this report demonstrates that government intervention has become critically important to the operation of the private housing market. It seems highly unlikely that the schemes chosen by the government will lead to less volatility and house price inflation. Whatever happens, in future a much sharper focus will be needed on private renting, both in terms of the cost to households in rent but also the cost to government in benefits.

 

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The less social housing we have the more people are talking about why it’s a good thing.

The week’s main news was that the Budget put additional support into home ownership – yet again – by continuing Help to Buy beyond 2021 and extending it to shared ownership –  while doing very little for genuinely affordable social rented homes.

Despite the supposed ‘end of austerity’ the budget for social housing remains pitifully low – as it has been since George Osborne slashed it by more than 60% in his first Budget eight years ago. Of course some changes are welcome if plainly not enough: for example, an extra £500m for the infrastructure fund might unlock some schemes, the go-ahead to the lifting of the HRA cap will enable more councils to build more new homes (but only at traditional council rents if they can also attract subsidy or use cheap land), and some extra cash might mitigate some aspects of the ferocious benefits squeeze.

Jules Birch as always has done an excellent summary and assessment of the Budget fine print which I recommend for anyone interested in a little more detail.

It seems that the less social housing we have the more people want to talk about it. This is probably a good thing – and keeping the idea of social housing in the public eye was one of the purposes of the SHOUT campaign for social housing during the most miserable days of Cameron Osborne and Clegg.

This year we have had the debate around the government’s rather pathetic and thin Green Paper – (Red Brick comment here) – followed by Labour’s more impressive and thought out version ‘Housing for the many’ (Red Brick comment here).

But a much wider debate about the future of social housing has been going on through a number of policy reviews and Commissions, which have broadly said that social housing is a good thing and there should be more of it. These include the Local Government Association’s Housing Commission – final report ‘Building our homes, communities and future’; IPPR’s London Housing Commission – final report ‘Building a new deal for London’; and the Chartered Institute of Housing’s ‘Rethinking Social Housing‘ project and final report. And we currently have Shelter’s Social Housing Commission,  which is due to report shortly.

In the last month, two more Commissions have been launched which will continue the debate – by the Smith Institute and by the Labour Party, where affordable housing will be a big feature of its Planning Commission.

The Smith Institute (founded in memory of John Smith, former Leader of the Labour Party, not some ancient economist) has launched its independent Affordable Housing Commission, chaired by Lord Richard Best, who has a very long track record of supporting social housing, funded by the Nationwide Foundation. The aim of the Commission is to examine the affordability crisis and to propose workable solutions whilst building a consensus for change. Background and how to make submissions can be found on the dedicated website.

Labour’s Planning Commission is led by Andrew Gwynne, Shadow Secretary of State for Communities and Local Government and Roberta Blackman-Woods, Shadow Minister for Planning, and involves a large number of stakeholders. They have issued a call for evidence (responses to labourplanningcommission@gmail.com by 25th April 2019). Its brief includes looking at the range of planning issues that will impact on housing supply, including the process of plan making, planning gain and capturing uplift in land values, improving land supply, and the related building control system.

Both of the new Commissions will have a significant influence over the future debate and should help to keep the pressure building. But next up, it’s Shelter.

 

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