by Professor Peter Ambrose
Visiting Professor in Housing and Health
- We need to understand how this huge call on the HB budget (£21bn per year) arose. It arose because of the failures in financial management over the period 1980-2005. The financial deregulations of the early 1980s allowed house purchase lending to spiral out of control thus driving house prices to unprecedented levels and with them rents – which by various mechanisms reflect house price movements and consequentially housing benefit. Simultaneously the Housing Act 1988 allowed landlords to charge a market rent, thus leading rents to spiral after 15th January 1989. This removed rent controls from the Rent Act 1977 scheme yet again inevitably increasing housing benefit. So it remained until the bubble burst.
- This is absolutely not the responsibility of a widow who has lived in her two-bedroom council flat in west London for 22 years; but she received a phone call from Kensington and Chelsea council warning her about her ‘under-occupancy’. Her misdemeanour is that she has a spare bedroom so that her grandchildren can visit – like the vast majority of people in this country. Now she is understandably worried, fears for her future and cannot sleep. Most owner-occupiers probably have at least one spare room for visiting friends and family; they would not take kindly to being warned as to their occupancy behaviour.
- This difference in value judgement reflects the popular fiction that somehow tenants in ‘social housing’ (whether local authority or RSLs) are ‘subsidised’, and therefore can reasonably be pushed around, whereas owner-occupiers have ‘stood on their own two feet’, got themselves properly indebted and consequently live independently of public support.
- This picture is 100% wrong on several counts. Since the 1920s purchasing owner-occupiers have been massively subsidised by exemption from capital gains tax, Schedule A Tax and, until very recently, by mortgage interest tax relief. In fact each owner-occupier was receiving about twice the state subsidy per household compared to households in the public rented sector throughout the period up to about 2000, when most current owner-occupiers were in the buying stage, Moreover, depending on when they enter and exit the market, purchasers stand to make capital gains that at times far exceed the income from their actual work. This route to wealth, at least on paper, is denied to those not in a position to buy – i.e. those in the poorest third of households. How much more regressive could the system be?
- In recent years changes in public sector housing finance have meant that a reverse subsidy is at work. Much more than £1 billion has been abstracted annually from the council housing sector accounts as rent policy has shifted from the former ‘pooled historic cost’ principle that delivered low rents with minimal subsidy to a formula that feeds local private house values into public rent levels. This is another effective way to penalise lower income households living in high housing value areas – and to subsidise the rest of society from the rents of the poorest third.
- Had house prices risen with general inflation since 1980 the average house price now would be about £60,000, clearly much more in line with incomes. How do house prices rise much faster than other economic indicators (give or take the periodic downturns)? Loosening the regulation of lending in the 1980s resulted in money flooding into a housing market in short supply so forcing up prices. The lending institutions initiate periodic bouts of excessive and highly profitable lending from which, if it all goes wrong, they can be sure of massive public funding bail outs. These bail outs, the cost of the latest one was estimated at £750 billion, have inevitable impacts on every public spending programme that most helps the vulnerable. So home owners’ increased paper wealth comes at the expense of increased stress, hardship and health risk among those who can never aspire to play the home ownership game. We see it all around us. Everywhere one looks there are regressive effects.
- Irresponsible ending policies have forced up prices in the housing market in short supply, while linking council and RSL rents to the housing market forced up rents. This had led directly to the rising housing benefit bill for the tax payer and more difficulty in transferring into work for the benefit recipient.
- Underlying much of the problem of low housing output, and a worsening shortage of genuinely affordable homes, is the chronic problem of the mismanagement of land policy in relation to development land. Periodic instability and sharp credit-led upward movements in house prices produce similar movements in the price of development land; its value is determined by expectations about sales revenue for houses built upon it by means of the ‘residual’ calculation.
- Under arrangements in place since the 1947 Town and Country Planning Act development land has thus been a speculative commodity. Its value has often been massively increased by publicly-funded infrastructure such as new motorways and mass transit lines, and by the granting of development consents, and very little of this ‘betterment’ gain has been recouped in taxation for the public purse. Typically large financial institutions with long investment horizons, and/or major house builders, buy up land at agricultural values even before it is zoned for development. They then hold it to await the right time to develop, or perhaps trade in it before development takes place. This means that in some states of the development cycle house builders make more profit from land speculation than from producing housing and this helps to explain the lack of innovation and the outdated management practices of the UK house building industry (compared to, for example, those in Japan or Sweden).
- The 1947 planning system has the inherent defect that it seeks to ‘plan’ development by the largely negative mechanism of giving or withholding of planning consents. It has very little power to mobilise the resources of land and investment that actually need to be applied to produce new housing of a given mix in a given period. In the past some positive powers have been applied in the form of council house building programmes. But there has been minimal funding for such programmes for many years. A large-scale programme of publicly funded house building is now urgently needed.
- The model of relying on planning gain agreements to provide ‘affordable’ housing as a concomitant to private housing developments has two fatal flaws. In periods of market downturn and low confidence there is very little private building anyway and even if the intended ‘affordable’ component is high it amounts to little in practice. 50% of very little is very little.
- The other fatal defect is that there is no meaningful definition of the word ‘affordable’. It was shown in 2008 that, using a variant of the Minimum Income Standard methodology, it is possible to determine what price or rent is truly affordable to households of any given type in any location. But this evidence base is not used and ‘affordable’ is taken to mean anything less than market price or rent. This frequently leads to so-called ‘affordable’ housing being available at prices and rents that only the rich locally can afford.
- A comparative study in the late 1980s of housing provision in ‘growth regions’ in France (The Toulouse area), Sweden (the E4 Corridor) and the UK (Berkshire) showed that the Swedish system of land management, which effectively precluded land speculation, performed better in terms of matching housing output to employment growth than was the case in Berkshire. In the E4 Corridor more housing was produced, at a greater range of rents and prices to meet all incomes and with minimal effect on development land values. The effects in Berkshire were totally different. The output was lower, about 88% of it was speculative for home ownership, thus narrowing choice, and both land and house prices escalated. In other words the housing infrastructure to support the growth of the local economy was much better managed in the Swedish than in the UK case.
- There are a number of policy steps that could be taken to correct this long-term defect in the land supply system. At a small scale much more development could take place using some variant of the Community Land Trust (CLT) model which uses for housing development land that has been cheaply or freely provided from some source, is held freehold in some public or community ownership and upon which housing for rent and sale is built on a leasehold basis. The effect here is to remove the land from the private market in perpetuity and to ensure that rises in value, and future redevelopment rights, remain in public or community ownership.
- Since it would take some time and serious state investment to develop the CLT model on a large scale some fiscal steps to preclude or reduce land speculation are possible. One would take the form of an annual tax levied at a very low rate (maybe 5% or less) on the value of land zoned for development but not yet built on. This would act as a strong disincentive to potential development land being held for speculative rather than development purposes.Conclusion
- Ironically a reduction in spend on housing benefit and other demand side subsidies to housing would make perfect sense as part of a long term programme to re-balance the supply/demand ratio of support to nearer the 80:20 it was in the early 1980s (the ratio is now the reverse). Demand side support works to bid up prices and rents and landlords’ profits – supply side subsidy in the form of cheaper land or finance, or similar incentives, directly stimulates housing output and produces jobs in the construction sector. The increase in supply would gradually reduce demand pressures, dampen down prices and rents and reduce the call on housing benefit. But this transition must not be achieved at the cost of placing new burdens on the poor and vulnerable.
- Capping the housing benefit before taking steps to reduce prices and rents in relation to incomes, and to stimulate the output of affordable housing, is the most recent of decades of governmental decisions which have failed to provide fair and affordable housing or to make the most cost-effective use of scarce public resources. This is in no way the fault of people who have been housed by local authorities in expensive rented accommodation. Their incomes and their health should not have to carry the burden of these policy errors by being forced to pay off rent arrears against poverty incomes, and their lives should not be disrupted by evictions which separate them from their families or uproot them from their communities. This social destruction contained in the budget is based on the false premise that tenants in ‘social housing’ (whether local authority or RSLs) are subsidised by the tax payer unfairly when it is the owner occupiers who have received the greatest share of housing subsidies.