The Policy of Tenure

The Housing Finance Act 1972

Mr. Heath's "Fair Rent" Act 1972 radically changed the direction of public housing policy. It's provisions for the homeless were well intentioned; indeed, it announced the intention to eradication family homelessness. Rather than continue the interest rate subsidy, which gave council house building parity with owner occupiers, it switched emphasis to Housing Associations. More significantly, it switched emphasis to supporting the individual's ability to pay market rates for rented services.

Most non-city Local Authorities had proved by then their capacity to maintain and expand the stock with less subsidy then was afforded to homebuyers. Most non-city councils were able to cope with this total removal of building subsidies. But the subsidies to individuals, introduced to support market rents, were due to spiral. From now on, subsidy would support a new Policy of Tenure, rather than a Policy of Housing Provision.

The subsidy of tenure was expected to cause a revival of the private rented sector. An appeal procedure for the private rented sector defined "fair rents" at a level of profit on a private landlords investment that was reasonable and not excessive. This procedure would now apply to all council houses. Local Authorities were no longer allowed to charge rents at the level of a balanced budget, which meant rental income balanced against loan charges and the costs of new building. They were now required to raise them to the levels of the private sector. This was called an "economic fair rent" and it was the basis on which Mr. Heath declared his intention to double council rents.

One of the ideas behind the Act must have been to raise more funds from this huge resource, not only to solve the immediate problems of the homeless, but also to fund the building programs of the new housing associations that were to be launched by the Act. Even if council tenants were earning the average wage, such large increases in rent would have pushed them into dependence on Housing Benefit, but residualisation meant that most council tenants were earning less than the average wage.

The Act placed a duty upon Local Councils to house the homeless, in particular to give priority to housing homeless families with children. Local councils were stunned by the apparent immediacy of the new directive. It demanded the resources for an immediate result and it appeared to sweep away the idea that homeless families, new to a council’s area, could simply be ignored. In the long run, it would have been more manageable to enforce a directive for open access to council houses. That would have stimulated the building of a larger stock, better able to respond to urgent need. However, on this issue, the Act was not interested in the long term and councils were required to examine in detail, the meaning of a duty to house the homeless immediately. It was not easy to find the resources so quickly without enraging their own electorate by increases in the waiting lists. With legal advice they adopted a number of strategies to meet the new directive.

Flaws in the good intentions

The Failure of the 1972 Act

The costs of the Act were high. Added to growing housing benefits, were the subsidies to enable the creation of Housing Associations under the Act. Like a new mortgage, the start of a new stock is very expensive. There was also the cost of the increased bureaucracy to set "fair rents".

The good intentions of the 1972 Act to finally eliminate all homelessness were shallowly based. They intended to fund the exercise, not from taxation, but by tapping the huge resource of the council housing stock. The opportunity to double five million council rents must have seemed like taking a licence to print money. It was clearly the expectation, that profit-rents from average tenants would fund the subsidies to the poor and not add to the general levels of taxation. In the event, the Act destabilised the housing market and homelessness soared. The gradual decline of public housing into welfare housing soon reduced the expected numbers of profit rents.

The architects of the Bill failed to understand the likely workings of the market. Their intention to manipulate council rents was defeated, not by political resistance or militant rent strikes, but by the response of market forces. The final irony of this Housing Act is that the mechanism it provided to double council rents proved too weak to achieve it. The phasing-in of higher rents did nothing more than keep pace with the subsequent "unexpected" rise in general inflation. Only later in the 1980 and 1988 Acts, council rents were forced more firmly towards the level of market rents.

The intention to double council rents was announced in 1971, before the introduction of the Bill in 1972. Although there was evidence of immediate excitement in house building journals, there has never been wide recognition of the connection between that policy announcement and the subsequent extraordinary national inflation in house prices. House prices had risen and fallen many times, the stop-go economy had long been the subject of political discussion, but house prices had not previously peaked above 10%. In the year of this announcement prices rose by 12%, by 36% the following year and by 51% the year after that.

The announcement that 5.5 million rents would double was the only factor of sufficient magnitude to encourage such feverish entrepreneurial speculation on the price of access to the 9 million sized private sector. Nor is it widely acknowledged that this huge inflation in house prices preceded the general inflation of that time. It can certainly be argued that general inflation was swept in on the tide of housing inflation.

This period of our economic history was a very clear indication of the intimate and complementary relationship between the home ownership and rented sectors.

The Housing Finance Act 1980

The Housing Finance Act 1980 did not appear to have such virtuous intentions, but it was designed to correct the political failures of the 1972 Act, to demote the council sector, to raise rents to actual market levels and to reverse the continued decline of the private rented sector. While the populist slogan of “Fair Rents” had brought little success, the “Right to Buy” would include a real motivate for electoral gain by distributing the inducement of large discounts on council house sales. Indeed, Mrs. Thatcher made such a claim in Commons debate (1979)

“the Right-to-Buy policy alone is sufficient to persuade thousands of people to vote Conservative for the first time”

The ineffectiveness of Mr. Heaths Act was transformed by the boldness of the new proposals to sell stock to tenants at 30% of market price. The rejection of such largess was to be the part of Labour politicians in the face of their most loyal supporters. Not for the first time, Mrs. Thatcher created confusion amongst her opponents. The Act was designed to strip the massive accumulated assets of publicly held housing stocks and to force the transfer of low-income families into a revival of privately rented accommodation.

Enforcing the Policy of Tenure

"The Right to Buy" is a clever sound byte, which has little to do with actual policy. In fact, it means the disposal of council stock at a third of the market price, which has created many problems while solving none. Cost balanced rents are low, because they draw on historic investment in the stock and they accrue no right to a discount, however long a tenancy. Successive generations of tenants share in the creation of the stock and each benefit from the pooled resource of well maintained housing. No doubt, Mr. Macmillan, the most prodigious of all house building prime ministers (Conservative), was very conscious of this when he complained that Mrs. Thatcher was "stealing the family silver". The right to buy policy destroys the investment value of stock and prevents the possibility of low rents.

The 1980 and 1988 Housing Acts established the Policy of Tenure more firmly and accelerated the process of residualisation. 73% of households moving in to council houses in 1993 were unemployed. With the operation of the Right-to-Buy, the best council properties have been disproportionately sold. The Acts brought in controls on Local Authorities and Housing Associations to ensure that rents rose more rapidly. Between 1988-1991 average rents rose at three times the rate of average income and at four times the average income for new developments.

More than half of the growth in owner occupation is attributed to the transfer of public sector stock. This not only exacerbates the shortage in available rented stock, it represents a false percentage of home ownership, which masks the need for rented properties in the rising generation of households with no privilege to the 70% discounts of the Right-to-Buy.

The Depression of Housing Supply

In effect, these houses represent a total loss to the supply of housing need. By artificially boosting the stock of ownership, the market eventually compensates and adjusts the production of building for ownership downwards. Accommodation requirements are not transmitted between generations, because the parent’s occupation normally extends well beyond the start of their children’s families. The capital of inherited ownership thus boosts the comfort of middle-aged children and cannot help with their earlier problems of ownership access. We can therefore expect that the costs of this policy of tenure increase as ownership falls to its natural relationship with average income.

In the last twenty-five years, house building has been depressed. The fact that house-building supply has consistently fallen below demand is a peculiarity of the UK housing market. It is also a peculiarity of the housing market in the last 25 years, that two million council houses have been transferred to the private ownership sector and that council building has been halted by the prospect of loss from sales by discount. These are problems of supply created by policy. Why is there so much debate and dispute on the importance of land use regulations, when there are more obvious reasons to hand for the lack of supply?

The Policy of Tenure has clearly failed

Compared with the progress in housing standards during the first twenty-five years that followed the war, the last thirty years have produced increased residualisation in spite of massively increased expenditure on subsidies. Housing provision has continuously fallen below the levels required and is beginning to reach crisis proportions. The main aim of encouraging the private rented sector has also failed. Private rented accommodation has by far the worst state of repair and it has fallen as a percentage of overall stock to half the level of 1971. Home ownership has increased significantly, but more than half of this has come from the change of tenure by council sales while the rest could have been expected from increased affluence and the pressure to surmount the Dilemma of the Single Option. Because council sales are almost entirely to older households, it does nothing to solve the aspirations of the rising generation.