The Current Structures of Housing Finance

The change of housing policy in 1971 was dramatic, but it was ill conceived and its consequences were unforeseen. Most significantly, the legislation abolished the principle of investment based cost-balanced rents, which was the cornerstone of low-cost rented accommodation.

Although a doubling of council rents was announced, it was frustrated in effect by the unfolding shock that was dealt to the housing market. The irony, was that the mechanism of rent increases in the 1972 Act (a maximum of 50p/yr) was insufficient to do much more than keep pace with the subsequent rise in general inflation, so rents increased little in real terms. However, there was an entrepreneurial reaction to the promise to double council rents and within three years house prices doubled.

This record inflation in house prices was followed by turbulent times. Three articles in the Guardian by a Professor of Economics from Exeter provided a dozen reasons for the exceptional house price rises, but concluded that without some unknown multiplier, they were insufficient to explain the magnitude of the increases. He failed to consider the effect of the promise to double council rents.[1]

Housing Benefit was restructured to support the new market and became a poverty trap for the poor. In practise, the evolution towards market rents was slow and it was not until the 1980 and 1989 Housing Acts that full market rents were achieved. New households now find that there is little difference between rental costs and the first year costs (highest rate) of a mortgage. The barriers to this 'no-brainer' single option are the deposit and more significantly, the capacity to escape the need for Housing Benefit. The policy of subsidy for the support of a high cost rented sector is a major cause of poverty in the UK. It creates and maintains a severely disadvantaged underclass from which it is difficult to escape.

Unemployment, special needs, the least desirable dwellings and areas, poorly served by other services, makes these households less able to build satisfactory homes or to avail themselves of opportunities, which could increase their income and bargaining power and enable them to move on.

(Housing Policy and Practice. Malpass & Murie 1999)

The Failure of Restricted Objectives

The restricted objectives of social housing are the reason that the system failed and continues to fail the circumstances of exceptional need. Lengthy waiting periods are often the cause of damaging break-up in family relationships due to quite inappropriate circumstances of overcrowding and the dependence of young couples on the established homes of their parents, or even worse, on the impersonal and degrading circumstances of temporary accommodation.

The reliance of policy on designated Registered Social Landlords epitomises the old mistake of separated residual housing provision. The creation of RSLs is a sticking plaster fix, a subsidised alternative albeit a necessary support for the failure of the private landlord "solution". Huge subsidies were promised to encourage new stocks in Housing Associations, on the expectation of surplus income, from the doubling of rents in established council stocks. But this failure and the rising cost of Housing Benefit have reduced this strategy to the gathering of the disadvantaged by RSLs. In addition, their building rate is tiny compared with the loss of rented houses by council sales.

Since 1988, deregulated RSL rents have risen because subsidies on their more recent stock depend on the government's assessment of their progress towards market rents. Because of this, the rising tax cost of housing benefits is cripplingly inefficient.

The Right-to-Buy is already rescinded under the terms of charitable housing associations and by the increasing movement of council stock in large-scale voluntary transfer programmes. Reality has begun to force its logic on the nonsense of encouraging private tenancy by means of housing benefit.

The private rented sector has failed to meet the needs of low-income families in spite of the support of the housing benefit system. Private rents are a consumer service, which has been rejected as too expensive to be a permanent choice by most of the population. For thirty years, the policy of reviving the private rented sector has failed and numbers have continued to decline. Not until quite recently, has there been a minor revival with the spontaneous popularity of buy-to-let, but this has little to do with housing policy. It has much more to do with recent distrust of the Stock Market and an appreciation of the underlying dependability of bricks and mortar investment. It is also appears to be very specialised to the areas of young European immigrant workers and transient high-income workers in the centres of commerce.

Regulated Rents

The fair rent system was applied, not only to council housing, but also to the private rented market. The "reasonable rent" levels determined by local rent officers were profit rents, but they had the effect of curbing excessive rents, which might have been squeezed out of the private market. Tenants in the private sector could seek the arbitration of the rent officer if they thought their landlord’s rent was too high. This legislation also helped to reduce the payment of excessive housing benefit subsidies. Today, the "fair rent" legislation applies only to the remaining council house sector because soon, these regulated rents were considered to be too low. Local rent officers were too "conservative" in their consideration of reasonable rents.

Deregulated Rents

With the failure of the 1972 Act to reverse the decline of the private rented sector, the 1980 Act introduced a package of measures aimed at stimulating the private sector once more. These included easier rules for termination of lettings, the introduction of short period (shorthold) regulated tenancies and the limited introduction of deregulated "assured" tenancies, which took tenants outside the protection of the existing regulated legislation. The choice of names for this housing legislation is very "quaint"! The 1988 Act confirmed assured tenancies as the model for the deregulation of the whole private rented sector and a new financial regime for Housing Associations, which leveraged subsidies to enforce a more determined rise in their rents towards the newly freed rents of the private market.

In effect, the legislation first places actual rents as far out of reach for the low paid as house purchase itself. This can be seen in the graphical comparisons of private rents with house purchase (The Power of Investment – Graph 1). Housing benefit is then applied to make the rents attainable. It is not surprising that this virtual misuse of housing benefit is a poor method of poverty relief and is one that creates new problems. It is too easily open to false declaration and excessive bureaucracy. Worst of all, it creates the conditions of a poverty trap, a situation where loss of benefit can make employment a poor choice for the low paid. In the context of current policy, housing benefit is an increasing cost, which disables the tenants’s ability to solve their own financial and housing problems. It encourages dependency. Government cuts and restrictions, to limit spiralling costs, have lowered the standards of rented housing.

Between 1981 and 1991 the Retail Price Index rose by 26%. The average rents for Housing Association new lets increased by 81% and for HA new developments by 104%. While rent officer, fair rents rose by 26%. The result has been a massive increase in the subsidies required to sustain this policy compared with the bricks and mortar subsidy of early post war policy. The cost of housing benefit alone for 1998 was £11,100,000,000.

The 1980 Act carried this transformation much further by beginning to dismantle public housing stocks with heavily discounted sales under the "Right to Buy" policy. The early post war bricks and mortar subsidies, which provided real housing solutions, are now being wasted. So far, two million houses have been sold with discounts of up to 70% off the market price and the rate of sales is continuing at around 70,000 houses per year. In effect, the right to buy policy has spent billions of pounds in discounts, but provided not one new unit of accommodation, nor solved a single case of housing need.

The housing benefit required to support market rents has locked us into a system of ever increasing taxation. Current policy fails all the vital tests of efficiency, equality and effectiveness.

The Need for Reform

Without complete reform, the measures of alleviation put in place by the present government treat only the symptoms and include selective (by profession) measures, which increase the depth of inequality. The most disturbing aspect of this policy is that the most disadvantaged become disenfranchised. The process of alienation renders them to be most easily ignored by the voting majority.

The reform that is needed is in the financial structures of rented development. It is the task of government to create the structures of investment in rented properties, which allows investment to work also for the benefit of the poor. The advantage of a complementary policy is that this can be done, while serving the majority interest.

The Majority Interest

There is much to concern the voting majority:

It can be argued that all of these problems are the accumulated result of the housing policy of tenure over the last thirty years. A Complementary Housing Policy is directed towards their solution.