Beware false prophets

As the Lyons Commission starts its work, plenty of ‘solutions’ to the housing crisis will be put forward, especially ones that purport to allow more investment in social housing at little extra cost in subsidy or borrowing.  While we ought to welcome new ideas, we also have to be wary of easy fixes that won’t work on the scale required. Already several are emerging.

Most recent is Nicolas Boys Smith and the organisation Create Streets. They want to replace high-rise estates in London with high-density, low-rise housing. They claim this can increase housebuilding at no cost to the taxpayer.  Unfortunately there are so many holes in their plans for how to go about it that the basic notion, which might not be a bad one, is more likely to cause problems than solve them. They want to finance the schemes by extra borrowing, to be paid for using a mixture of surpluses of rent over running costs, private market sales and recycled right to buy receipts. But more borrowing does – oddly enough – add to government debt, even though costs could be met from rents and other sources. More importantly, though, the idea can easily be seized on to justify the sort of project that Andy Slaughter MP wrote about in Red Brick recently: redeveloping existing estates in ways that marginalise the existing residents, because the best way of paying for the extra borrowing is to replace their homes with high-cost units for sale or market rent. This could easily mean more of the social cleansing already favoured by Hammersmith and Fulham.

Some of the plans on offer purport to solve the borrowing problem more directly, by taking it off balance sheet. Again, of course, new ideas are welcome, but in this field so many solutions have been offered in the past that it seems unlikely that anyone will find a genuine new one, other than changing the borrowing rules. Last year David Orr said we should scrap ALMOs and replace them with municipal housing companies. More recently, Richard Parker made what sounds like the same suggestion, albeit applied to parts of a council’s stock not to the whole stock. 

Now these proposals need to be taken seriously, as both their proponents are members of the Lyons group. However, the obvious disadvantage in both cases is that they involve stock transfer and, unlike with an ALMO, the new body can’t be controlled by its parent council if the new borrowing is not to count towards public sector debt.  This is exactly the conundrum which the National Federation of ALMOs tried to get to grips with in its 2011 report Building on the potential of ALMOs to invest in local communities. And it has to be admitted that the report wasn’t successful, as only one ALMO and its council have pursued any of the options the NFA put forward.

This is why the NFA have returned to campaigning for a change in the borrowing rules as the most effective way of releasing councils’ potential to build more homes. Simply stated, the problem is that municipal companies in which councils only have a minority stake are stock transfers on the lines of those in Bolton and Rochdale (both former ALMOs where the councils gave up their majority control). If the councils retain a controlling stake, then there is no change in their borrowing status. And it’s a pretty safe bet that almost all the places where councillors and tenants are willing to give up council control have already done so.

Finally (for the moment), we have Mick McAteer of the Financial Inclusion Centre, calling for the issue of social housing government bonds. These would ‘fund a housing programme on the necessary scale’. But they would of course again be public borrowing, and in any case would be unlikely to compete with the terms offered by the Public Works Loan Board. A much better option is the LGA’s idea of a Municipal Bonds Agency, but if this goes ahead it is vital that it is set up in a way which helps councils avoid any new debt being counted as public borrowing, as John Perry argues in Public Finance. Here, for sure, is a model worth pursuing, but one which would only achieve its full potential if linked to a change in the borrowing rules.

A big test of the Lyons review will be whether it can steer its way through these proposals, successfully sorting the wheat from the chaff. But this observer, for one, will be disappointed if Lyons doesn’t conclude that – while new ideas may help in some circumstances – there’s no getting away from two fundamentals. One is the need for ongoing subsidy for new building, so that rents can be kept down to genuinely affordable levels. The other is a change in the borrowing rules or the lifting of the borrowing caps, so that councils can build on a similar basis to housing associations. The Lyons Review will be a let down if it doesn’t give these the prominence they deserve.

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One Response to Beware false prophets

  1. I agree entirely private sector finance is only going to pay for new properties where a profit can be made. however the majority of the need is by people who cannot afford to buy and in one way or another it involves increasing public expenditure. Rents could be increased to some extent from present social housing but not to so called ‘affordable housing’ levels which would help. Another avenue would be to do more to encourage owner occupation and give less encouragement to the Private Rented sector which has been the main cause of the rising cost of housing benefit .Do all political parties need reminding that the majority of people aspire to become owner occupiers ?
    Graham Facks-Martin

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