Market rents tell us nothing about what we should do in social housing

It is a common lament on Red Brick that the word ‘subsidised’ appears before the words ‘social housing’ on so many occasions with no explanation or justification or proper comparison with what really happens in the ‘market’ sectors. (See our previous post ‘Who gets subsidised housing?’). It is all part and parcel of a view that ‘markets’ are universally good and efficient and that public provision is invariably poor and inefficient.

A new report from the Centre for London says that social tenants in London are ‘subsidised’ to the tune of £5,300 each per year. They use this ‘fact’ to argue for charging ‘wealthy’ tenants more rent, starting at the London average (£27,000), using a sliding scale until market rent is reached. The extra income would then be used to fund more affordable home building.

This is a proposed variant on the Government’s own ‘Pay to Stay’ scheme which, rather than being graduated, has a single cut off point, below which you pay a social rent, above which you pay a market rent (creating a very steep marginal tax rate).

The proposal is based on a particular theory about what a subsidy is. The Centre for London’s figure of £5,300 is a simplistic calculation which wouldn’t worry the back of a fag packet. They pick the average weekly social rent, take it away from the estimated average weekly market rent for such properties, and multiply by 52. Bingo.

This view of subsidy (in economic theory it is called ‘economic subsidy’ because there is no cash transfer) seems to be uniquely applied to social housing, largely by people who like to exaggerate the cost of social tenants to the rest of us. However, the gap between a better and more efficient socialised system, which produces high quality homes at a low cost, and a very imperfect and failed market model, which often produces low quality homes at high cost, cannot in any sensible dialogue be called subsidy. Social rents are not set by ‘the market’ and never have been.

The strength of council housing is that rents cover costs, including debt interest, and indeed make a profit. There is no subsidy if it is looked at this way. For housing associations, the calculations are different because there has normally been an upfront capital grant to get the home built – but the benefit of building the home will be felt not just by the current tenant but by all tenants in future, possibly for 100 years or more, during which time it will indeed make a profit.

On the Roehampton Estate in Wandsworth, bad policies over many years have led to much of the estate being sold off, and probably one-third of the stock is now in the hands of private landlords letting to students at the local University. The landlords divide rooms and often let a 4 bedroom flat at over £600 per week. Does this lead to the conclusion that the flat next door, still occupied by a council tenant, is ‘subsidised’ by something like £500 a week? Of course not. It only means that the students are exploited by the ‘market’ and the price should be regulated.

Or look at other sectors. What subsidy do you receive by sending your children to a state school? Is it the broad cost of the school divided by the number of pupils? I would say yes. Or is it the difference between a free place and the fees charged by local private schools – ie the market? It would be ludicrous to say so. Similarly, what subsidy do I receive by going to the doctors? Is it the cost of provision or is it the fees charged by local private doctors?

Forgetting the ‘market rent’ subsidy issue for a moment, I have no real objection to the principle of charging more to wealthier tenants, but the Government has failed, and the Centre for London has also failed, to overcome the key issue that you have to means test everyone to discover who has a high enough income to pay the extra. I suspect the Government may try to get away with placing people under a duty to declare their incomes if they are above the defined level, but that approach is at variance with how any other tax or benefit is organised.

The Centre for London’s more complex model would involve full means-testing of everyone. The report makes light of all such issues and assesses administrative costs as being about 10% of the income that would be raised. In truth they don’t know because landlords have never had this function before and would have to set it up from scratch. Would it be total household  income, would it include bonuses and overtime, what happens to people with variable weekly or monthly earnings, are family circumstances taken into account, would there be a mirror image of the bedroom tax, an extra rent for underoccupiers? And what would people make of the choice between seeing their rent double on the one hand and getting up to £100k subsidy to exercise the right to buy on the other?

Moving to a universal means test for social tenants may be a good thing to do in the long term – but only if we switch entirely to an income-based method of setting rents (eg at 30% or 35% of disposable income). That might be worth the effort but is an issue for another post in the future.

Pay to Stay, whether the Government’s or the Centre for London’s versions, imposes an inappropriate market theory on a socialised sector. It is also potentially a bureaucratic nightmare. We shouldn’t touch it with the proverbial barge pole.


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3 Responses to Market rents tell us nothing about what we should do in social housing

  1. Pingback: Frontline Friday 28th June 2013: Our favourite frontline blogs this week

  2. martinwicks says:

    Means testing is never a good thing, for tenants or anybody else. To suggest it is is to concede that there is some justification for the government’s ludicrous ‘pay to stay’ policy and all the gargbage which is based on the idea that council housing is a form of social welfare.

  3. danfilson says:

    I think I should comment that the phrase “people who like to exaggerate the cost of social tenants to the rest of us” rather assumes that Labour Party readership of Red Brick are (a) not social tenants themselves and (b) in the category of taxpayers rather than non-taxpayers. These assumptions may be false. We need to be wary ourselves of falling into the trap of assuming there’s an us and a them, when it comes to talking about benefits, social housing etc. The rest of the article is interesting and I may comment separately on the body of the article.

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