Housing Green Paper (2007)

Homes for the future: more affordable, more sustainable

Consultation Document:

Submission at the personal invitation of Ian Wright MP Parliamentary Under Secretary of State

Bernard Ready. Former Labour Councillor on Colchester Borough Council, responsible for a building program of 1,800 council houses in Colchester during the early 1970s. Personally experienced a transformation in the life of my family in 1948, when we moved into a brand new council house.

Financial Structures of Affordability

Introduction

I welcome the many new initiatives of the Green Paper, but it's intentions are compromised by financial structures, which have not been clearly recognised and which affect the possibilities of creating affordable housing and avoiding the social isolation of low income families. The historical development of UK Housing Policy is unique and this needs to be understood in order to explain the instability of the housing market, which has persisted throughout the varied economic circumstances of the last thirty-five years.

'we still can't explain the pattern of behaviour in the UK'.

Andrew Farlow, UK House prices: a critical assessment, January 2004. Oriel College, Oxford.

'In the decision, taken earlier this year, not to join the Economic and Monetary Union for the time being, the structure of the UK housing market was identified as a key difference from the rest of Euro area.'

Geoffrey Meen Regional Housing Supply Elasticities in England, Geoffrey Meen, October 2003

Affordability is the key concern of the voting public, but affordable housing within the Conservative financial structures of housing policy is not possible, nor is it reversible under the policy of the "Right to Buy". The homeownership and rented housing sectors are fundamentally interdependent and complementary, but uniquely in the UK, they are divided by their financial structures.

Housing and the Capital Market

Housing is a fundamental need, but because of its price and durability it is an investment, which usually requires a long-term loan. Nevertheless, the benefits of investment under the capital market are powerful and they make homeownership quite cheap, when measured over the period of its consumption. The problem remains that in the early years of a mortgage repayment costs are very high.

For low-income families the initial cost of repayments is prohibitive. Without a loan, the free market has another solution. A landlord makes the investment and sells accommodation by rent as a consumer service. As the value of the house increases, the rent increases and the tenant has no share in the investment. The market works against the tenant in a private market.

It is because the free market makes this fundamental distinction between a consumer service and investment, that so often, it has the effect of making a distinction between the rich and the poor. It is the task of government to create structures, which allow investment to work also for the benefit of the poor, just as it does to provide pensions for all in old age.

The Lessons of Previous Investment Policies

It was for these reasons that government and other organisations in the countries of Europe made special arrangements to provide for the fundamental needs of accommodation following World War II. While the innovative ideas of the UK's Welfare State were widely copied by other countries in Europe, the development in the UK of large building programmes using "the instrument" of local government was not. With the events of subsequent development, that difference is now marked by the availability of low cost rented housing:

In Europe by its widespread availability
In the UK by its virtual absence

Council housing was an investment structure to provide affordable housing. Government provided the subsidy to make rents affordably when the initial loan repayments were high. But the powerful effect of investment in the stock gradually removed the need for subsidy.

Governments then, created the structure, which allowed investment to work for the benefit of the poor. In 1948, 60% of the population lived in private rented accommodation, much of it in slum conditions, so the provision was made for the majority of the working population. As the financial power of investment reduced the need for subsidy, low cost balanced rents were equivalent to the benefit yielded by the investment of home ownership. Financially, the two systems of ownership and rented council housing were different, but they both benefited from investment in the capital market and they yielded a financial benefit, which differed only in its timing. Home ownership and council housing were financially complementary.

Post war Europe developed a diverse base of low cost rented housing, through a variety of agencies. In response to large scale war damage, schemes were started by Trade Unions, Churches and a variety of charitable agencies as well as by government. In the UK, a more centralised approach was used by Aneurin Bevan; to give his programme the control he needed, he chose to use the instruments of local government.

While Labour and Conservative governments competed in house building for the early years, two huge disadvantages of the choice to employ local government as the instrument for low cost rented housing emerged.

Politics is at the roots of local government and building programmes were restricted by political expediency rather than responding to housing need. Just as homeowners experience, costs in the early years of any borrowing programme are high. The need to include a subsidy from the local rates was a political issue and access to council housing became increasingly restricted. While the need for rates subsidy declined and eventually vanished as the stocks matured, this restricted access became ingrained in the institution of council housing. It began to evolve from general provision to a limited form of welfare housing.
The second disadvantage was that, ultimately, local authorities are controlled by central government. It was this uniquely British phenomenon that allowed Mr Heath to abolish our low cost rented system at the stroke of a pen, when he announced the doubling of council rents in 1971.

The Previous Failure to Reform

By the 1960s council housing was, by far, the dominant provider of rented accommodation. Average subsidies fell below the mortgage subsidies for house purchase (1968 subsidies: £157 million on 5.5 million council houses and £300 million on 9 million private houses). Investment had resulted in a rented system capable of sustaining new building programmes on cost balanced rents, well within the affordability of people on average incomes. But without reform, access was restricted to the 'deserving poor' and building programmes were reduced to cater for this narrow view, thus making them less able to serve the critical needs of the homeless.

Residualisation and politicisation made the achievements of investment in housing vulnerable. Unlike the Health service, which genuinely catered for the vast majority of the electorate, the average tenant was poor. A wider rented housing need existed, young couples saving to buy and a generally wealthier more mobile population were not served by a rented system with restricted access and long waiting periods. Unlike the Health Service, the investment in housing was not protected by the public, when Mr Heath disconnected rents from cost-balanced budgeting in order to encourage the private rented sector, nor when Mrs Thatcher sold council stock at a third of the market price "to persuade thousands of people to vote Conservative for the first time".

By 1969 in Great Britain, total stock exceeded the number of households for the first time with 50% owner occupied and 30% council housing in spite of the restricted access. Most Local Authorities outside of cites were fully capable of maintaining low cost balanced rents while supporting moderate new building programmes.
(http://www.ukhousingpolicy.com/Archive/Local.htm)

The lesson of history is not that council housing failed, but that its success was made vulnerable by the failure to adapt it to the changing needs of the population as a whole.

The Financial Structures of UK Housing Policy

In spite of the political restrictions, the presence of a low cost rented alternative to house purchase provided a powerful restraint on house prices. But in 1972, the UK rented sector was transformed from an investment-based system into a consumer service, which has evolved into rents equal to the cost of a new mortgage (prices first exploded in 1971 when the intention of the 1972 Act was announced).

It is clear from the graph that in 1971 a watershed change took place in house price inflation.

Before 1971: With the exception of a single year following the war, house prices remained within the 10% inflation band and roughly followed the trends of general inflation. Throughout the most enormously changing economic conditions, this period was characterised by the availability of low rents. Over the period, a change of quality took place, from rent controls and slum conditions to the low rent and high standards of council housing.
Since 1971: House prices have been wildly unstable, apparently disconnected from general inflation, even during recent years, which are boasted to be the most stable period of the economy for 200 years. The first explosion of house prices in 1971 was an entrepreneurial reaction to the change in housing policy, but it signalled a fundamental change to the sensitivity of the housing market and the critical choices now faced by emerging households, which has driven the market into persistent instability.

The Problems of a High Cost Rented Consumer Service

The loss of the low-cost rented sector marked a watershed change in the stability of the UK housing market. A low cost rented alternative is not only a widespread general need, it is essential to control the level and stability of house prices. The unique transformation to a high cost rented consumer service has caused even more significant changes in our social structures, which are magnified by the growth of general wealth. The poor are now distinguished more clearly than ever before by the disadvantages of the "property-less poor". While the policies of residualisation burdened the poor in the past, the tenants of council housing were never so separated from the opportunities and aspirations of the majority population.

Within the current profile of UK incomes, some 30% of the population cannot afford a mortgage loan at current prices and at least 20% will never surmount the financial barriers to homeownership. The high cost rented sector provides an expensive transitional refuge for those above the threshold of affordability. For those below, it is a trap, which swells the escalating costs of Housing Benefit and secures them little sympathy from taxpayers.
"Nearly 40% of first-time buyers aged under 30 now depend on help from family or friends to get them started on the housing ladder." For those on low income or without aid from parents willing to borrow on homes with completed mortgages, there is no solution. The receipt of Housing Benefit becomes a trap, which is difficult to escape.
The property-less poor observe, as people once their peers, exploit cheap foreign markets with undreamed of adventures offered by transferring their equity abroad. We are a wealthier nation than ever before, but we are divided more starkly on the basis of property ownership.

The policy of tenure introduced in 1971, has failed, but it remains at the heart of our current financial structures. It provides huge subsidies for individual housing need, which in effect is a subsidy for the provision of a rented consumer market. In partnership with the policy of the right to buy, it has destroyed the historic investments of earlier governments, defeated the housing market's balance between supply and (true) demand and by creating a high-risk condition for social disadvantage, it has produced an inflated and unstable housing market.

Risk - The Dilemma of the Single Option

Increased risk is a significant factor in the housing market, which is not clearly revealed by simple economic models of the price/income ratio. The critical sensitivity to risk occurs at the threshold of accessibility. TV adverts now offer loans at 5 times income and Channel 4 has revealed that some mortgage agents encourage misrepresentation to obtain loans at 10 times income. There is no logical alternative to house purchase; a low cost rented sector no longer exists. If households cannot afford to buy, then they cannot afford to rent and they are forced into dependency on the subsidy of housing benefit. This is not a choice; it is the consequence of financial structures, which underpin current housing policy. For historic reasons, this is a uniquely British phenomenon.

It is a uniquely British problem because local government control of the rented sector made it uniquely vulnerable to immediate structural change. High rents have moved house prices to a higher plane and high risk is at the heart of UK house price instability. Young couples consider loans at five and ten times their income because they consider it is worth the risk of avoiding the failure to buy. They face this risk, "The Dilemma of the Single Option", because opportunities are determined by their successful escape from the divisions of the property-less poor.

Economic Analysis - We Have Not Asked the Right Questions

The homeownership and rented housing sectors are fundamentally interdependent and complementary, but uniquely in the UK, they are divided by their financial structures. House prices and the instability of the market are crucially affected by the complementary relationship with the rented sector. UK house price inflation is unique, for 35 years it has cycled in the 50% inflation band. Clearly we need a new approach, the phenomenon is peculiarly British, and so we should seek an answer in areas of the economy that are uniquely British.

Yet no economic study has been done to compare the periods before and after the 1971 watershed change in the financial structures of housing policy. The effects of rented housing policy on the house price market have been largely ignored. Two of the most traumatic events in housing history, the largest ever raise in house prices (1972) and negative equity (1991) followed equally dramatic changes in rented housing policy. These studies must be done, if we are to recognise and correct the present problems of the housing market in the UK.

Viable Policy of Affordability

Viable policy cannot escape the realities of the capital housing market, nor can it ignore the criteria of affordability. Affordable rented housing is the key to a viable housing strategy, both for government and the individual. The green paper does not provide a clear definition of affordable housing. Affordable housing should mean that decent housing is affordable for all working families and individuals.

The provision of social housing lies at the base of our struggle to solve the current housing problem. The significance of the 1971 watershed is that welfare housing was restructured to become a consumer service supported by subsidies, which has driven the market to higher costs. In addition, the discounted transfer of houses to the ownership market under the right to buy policy has diminished the supply of rented accommodation. The result is that the need for social housing has increased, to the extent that it now defines the growing underclass of property-less poor.

Shared equity schemes and fixed mortgages are useful initiatives, but they are not adequate to the task of providing affordable housing because they have little effect on the dilemma of the single option, which drives risk at the threshold of affordability. By definition, fixed mortgages are more expensive than variable mortgages; by reducing risk they are good, but only for those who are significantly above the threshold of affordability. Shared equity schemes are good, but without subsidy, they are not so financially efficient as outright purchase. They may even succeed in shifting the threshold of affordability but they do not remove it and they do not address the problems of those who remain the property-less poor. There is a danger that government becomes obsessed with the solution of property ownership, when it should stand back and look for more complete solutions, without such damaging side effects. Under the current structures of housing finance, there is good reason to fear the trap of permanent tenancy. Government should fear these structures too, because both their financial and social costs have escalated.

Open Access Low-cost Rented Housing

A policy of affordable housing cannot genuinely be achieved without including an investment based rented system, which ultimately can achieve cost-balanced rents. This reality is dictated by the workings of the capital market and the current profile of national incomes. Social residualisation for a significant proportion of the population is not an acceptable result of housing policy. Residualisation and the excessive importance of property are the products of our expensive rented consumer market and its welfare necessity for a policy of restricted access social housing. Homeownership is popular because in the long-term it is cheap. Government policy must extend this natural advantage of market investment to the poor
. (http://www.ukhousingpolicy.com/Structures.htm)

But not only that, we must link the policy of investment to serve the more widespread needs of the majority population. At some point in our lives, we all need access to the refuge of rented accommodation and the capital investment market can provide low-costs by the use of investment-based structures. With the feasible objective of cost-balanced rents, there is no reason to restrict access to this viable market option. Open access will address the problems of residualisation and social separation and it will gain the protective support of the majority population.

A bricks and mortar subsidy in rented stock is accumulative, which brings affordability not only to individuals, but also to government policy. It is clearly true, that this alternative choice for low cost accommodation would have a powerful stabilising effect on prices in the housing market.

With these relationships in mind, the test of any new housing policy must be its effectiveness in harnessing the market advantages of investment and for the most part, subsidies should be required to have a cumulative effect. For instance, special aid for part ownership to 'key workers' may be necessary for crisis management, but it has no cumulative benefit and there is the danger that it compounds the stress for those not deemed to be 'key'. The flow of subsidies to existing Housing Association, to the proposed new Local Housing Companies and to ALMOs should be made dependent on the adoption of strategies to progress towards cost-balanced rents and open access; the 1992 Act fine tuned grants for the contrary case of raising rents to the level of the private market.

With Housing Benefit costs of £12 billion per year, the proposed investment of £2 billion per year in affordable housing seems low, especially for investment in low cost rented housing, which would reduce the requirements for benefit.

We posses the knowledge of a history of investment in housing, we should take care to compare its achievements with current policy and also to recognise its mistakes. The need for social housing cannot be solved overnight, because investment takes time. A complementary policy of investment in a new and open rented sector is a solution that we might have glimpsed but failed to recognise in the 1960s. It is a solution this wealthy nation must employ the investment market to achieve.