Rebuilding the economy

Everyone knows that we are not building enough homes. This is not just bad for all those people in need of a home, but it is equally bad for the economy. Homebuilding is a significant contributor to employment and growth, and as most of the materials that go into a new home are sourced within the UK, its economic impact is very much focused at home.

Yet despite all the logic, and the political pressure pointing to the need for an expanded homebuilding programme, the reality is deeply depressing. In the last 12 months, only 98,000 new homes were started in England, less than half the number required to meet the needs of newly forming housebuilds, and 9 per cent below the already hopelessly inadequate level recorded in the previous 12 months. So despite the government’s rhetoric about stimulating growth and supporting house building they are presiding over a crisis which is showing no signs of ending.

If the position is bad enough across the whole housing market, it is even worse for social and affordable housing. A sharp change in policy following the general election and a savage cut in public investment has effectively put an end to the supply of new social lettings. The government’s preferred model, called ‘affordable rent’ lettings, involves much higher rent levels. The original suggestion was for them to be fixed at 80 per cent of market rents, but as this would have resulted in demonstrably unaffordable rents in London and the south east – the schemes that are being developed there are generally at around 60 per cent – 65 per cent of market rents. This is still substantially higher than the level of target rents previously applied for social lettings. The government’s justification is the belief that their new affordable rent model will deliver more housing. Indeed for some time they have been claiming that they will build an additional 170,000 new affordable homes in the life of this parliament. But the policy is simply not working. With the output of affordable homes plummeting – just 16,500 housing association and 1,180 council starts in the last 12 months – these aspirations are clearly divorced from reality.

And there is another malign consequence of the government’s pursuit of its affordable rent policy. That is the increased benefit dependency, which is the result of pushing up rent levels to minimise the call for government grant, and making more use of expensive private lettings as an alternative to social housing. There is of course a long history of Tory governments promoting higher rents and private alternatives. Peter Walker’s Housing Finance Act in the 1970s was explicit in its aim to switch funding from ‘bricks and mortar’ subsidy to personal, income-related subsidy. The Thatcher and Major governments in the 1980s and 1990s pursued the same objective with Sir George Young, housing minister at the time, now chief whip, explicitly stating that “housing benefit will take the strain”.

What is so odd about the current government’s position is not its pursuit of the same approach, but its denial of the consequence – an inevitable rise in the cost of housing benefit. As we all know, the government is simultaneously trying to cut housing benefit expenditure. So, over coming months, an ever-growing number of people will find themselves squeezed between the Department for Communities and Local Government’s (DCLG) higher rents policy and the Department for Work and Pensions’ (DWP) benefit cuts agenda. This incoherent policy is unsustainable and will cause great hardship.

So what should be done? The starting point has to be recognition of the inter-relationship of housing expenditure, whether channelled through DCLG or DWP, and the need over time to rebalance spending in favour of investment as against personal subsidy. As the IPPR report Together at Home demonstrated, only £4.5bn is being spent on housing investment in the four year spending review period of 2011/12 to 2014/15, while £93.9bn is expected to be spent on housing benefit. To address this imbalance, IPPR suggested combining both finance streams in a single ‘affordable housing grant’ to each local authority in England and allowing local discretion on how the resource was best allocated.

While the principle of bringing together the investment and benefit funding streams is obviously right, the proposed delegation to local authorities is potentially fraught with difficulty. Not only could some people face homelessness if sudden reductions in benefit threatened to make their tenancy unaffordable, but the viability of new developments could also be undermined by unexpected shifts in funding allocations, and a patchwork of different, and potentially inconsistent policies operated across 326 different areas (that is the number of housing authorities in England) could pose serious obstacles to institutional investment in private, intermediate and social housing. Housing markets are generally much wider than individual local authority areas, and to have the most effect, policies designed to promote better value for money solutions would need to be applied across a wide market area. This would allow resource to be shifted over time from high-rent lettings requiring substantial housing benefit support to more cost effective options.

All of this would suggest that solutions should be sought at regional or sub-regional levels, and given the risks inherent in such a radical change of policy, it would clearly be sensible to model and then trial the proposition locally before extending it nationwide There is also the added complication of the government’s proposal to merge housing benefit into its new universal credit. However given the difficulties that DWP are already facing in trying to bring together the disparate elements into the universal credit, extracting housing benefit from the mix might be a blessing in disguise.

London is the one part of England with a regional structure in place, which makes it an obvious choice as a location to model the integration of housing subsidy and investment.  With a city-wide housing remit, the Mayor of London is well placed to explore the scope for devolution of the housing benefit budget for London, to be combined with the Homes and Communities Agency’s housing investment programme which has already been devolved to the Mayor. The London boroughs and other key players in the capital, including housing associations, would need to be involved in a London-wide forum to help develop a plan for future resource allocations in London, and ensure the optimum use of potential sources of investment finance including their own assets. Additional borrowing would almost certainly be necessary to bring forward new value for money developments that would allow a phased reduction in the use of the most expensive current lettings.

No-one should be under any illusions that a reform along these lines will be easy or problem free. It would pose a huge challenge to all the main housing providers and funders. However as Figure 1 below illustrates, there is a huge potential prize, with almost £7bn to deploy, as against the £900m currently allocated to housing investment in London.  It would also put an end to the curious phenomenon well illustrated in Figure 1, of a very substantial increase in spending on housing coinciding with a decline in the output of new homes.

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Source: Parliamentary answer from Mark Hoban MP (DWP) and Mark Prisk MP (CLG) to Nick Raynsford MP. 17 Jan 2013 and 28 Jan 2013