Understanding Housing Policy Failures

Introduction

“There is real concern that the current social housing system is failing the very people it was designed to help. Social housing was meant to help lift people out of the slums. Instead many social housing estates have become the very ghettos of multiple social deprivations that they were supposed to replace”. - Principles for Social Housing Reform - Stephen Greenhalgh Conservative Leader of Hammersmith & Fulham Council. (Localis Think Tank 2009).

So we can begin on a current point of agreement between Conservative and Labour analysts. In his introduction to the Localis paper, Greenhalgh also identifies the principle evils of a welfare housing policy. “Today social housing has become welfare housing where both a dependency culture and a culture of entitlement predominate.” As one might expect, the cause and effect cycles of housing policies are very slow, to the extent that many forget or are just not aware of those hard fought past battles.

Rents used to be low, the investment stock of council housing was expanding quickly and was accessible to everyone. They were high quality houses that were genuinely affordable, even for most low-income households; the large post-war building programmes of all housing began to exceed the number of households by 1969 and by that time the investment value of the rented stock meant that subsidies were already falling towards zero. But by then, those hopeful trends were already deeply damaged by residulisation and since then, the investment stock has been dismantled and we have accepted the enforced state of an unsustainably expensive rented consumerism.

We can easily expand on Stephen Greenhalgh’s complaints. In spite of vigorous and widely praised efforts to relieve child poverty, the trap of the housing benefit supported consumer service has placed the UK near the bottom of the European social mobility league. We can show that our social housing policy is unlike the policies of our peers in Europe because of financial structures that actively prevent the accumulation of investment in any form of social housing; namely, the discounted sales of social housing. We can also show that the high costs of the private rented consumer service present a threat, which drove the majority of first time buyers into positions of high risk; the risk of taking loans at five to ten times income, rather than the prudent maximum standard of two and a half and the same risk ramped up the price and the hyper-sensitivity of the housing market. These conditions were established by financial structures designed to revive the private rented sector and as a part of that policy, to eliminate the competition of low-cost housing stock.

Labour Post-war Housing Policy

While the NHS was a crucial element of Labour’s victory in 1945 and has remained high in the affections of the electorate ever since, the issue of housing was just as important. It was the main concern for 41% of people in a 1946 opinion poll and the post-war policy of massive investment in good quality rented council housing was very popular. Yet eventually, this part of Labours design to create a welfare state failed. While the impact of the NHS was recognised and valued by the electorate, the impact of housing policy was more varied. Slums were cleared, housing standards raised and there was a widespread surge in social mobility, but the practical developments of housing policy such as overspill estates, tower blocks and inferior construction implemented by top-down planning, had huge and unforeseen consequences, which caused dissatisfaction. Unlike the services of the NHS, the errors and consequences of bad housing developments were inexorably slow to correct. However, the dominance of conservative policy effected a gradual return to welfare housing, creating an isolation of low-income families and disaffected conflicts between the growing divisions of a two nation state.

The Original Vision Of Council Housing

In the first six years following World War II, Bevan created a universally accessible rented council house sector. Crucially in the 1949 Act, he removed the pre-war statutory restriction that limited public housing to the ‘working classes’. At such an early stage in the development of a huge national resource, this was the act of a remarkable visionary. It was a vision that he described as ‘the living tapestry of a mixed community' and his policy was based on two important concepts:

Conservative Post-war Housing Policy

Between 1951 and 1997 Conservatives were in government for 35 out of 46 years and in this period they made three major attempts to ‘restore the dominance of the private market’ in order to reverse the rapid decline in the private rented sector and to increase home ownership. In each of these efforts they failed because of the negative reactions of the market. Far from a realistic view of the market, this myopic vision of housing as a consumer market fails to recognise the far greater cost-effectiveness of the investment market, which is more natural to the provision of any high valued resource such as housing.

While claiming allegiance to home ownership, all three of these attempts to revive the private rented sector, drove those attempting to enter the housing market to new depths of despair. Oddly enough, Macmillan, first responsible for discarding the 'living tapestry of a mixed community' was the most prolific council house builder and in his later years, he denounced Thatcher for selling the family silver.

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The Current State Of Housing Policy

The Cost Of Subsidies

Without help, low-income households in the UK have never been able to acquire the modern equivalent of good quality housing. In my own lifetime, most working class households once lived in appalling slums. Typically, they were two up two down, single-clad brick damp houses, which had gas lights, no electricity, one cold tap and an outside toilet with a tin bath hanging on the wall. Council houses transformed that situation in less than a generation (20-25 years). Subsidies, by government borrowing, were needed. But the high initial subsidies, required to establish the stock, fell quite rapidly and most stocks throughout the country proved to be self-supporting when the 1972 Act abolished council subsidies.

But by then, the effects of residualisation had polarised homeowners and council tenants to the extent that they were widely portrayed as having opposing interests. This paper and the graphic evidence of House Price Inflation (above) shows that the opposite is true. Council tenants were regarded as a continuous burden on the taxpayer even when, in fact, the reverse had become the reality. Post-war policies to encourage housing provision also subsidised homebuyers and that subsidy continued for 30 years after the end of council subsidies. In 1968 ⁵ , a subsidy of £157 million supported 5 million council houses, while £300 million in tax subsidies was provided to the owner-occupied sector of 7 million households (i.e. £28.50 per council house and £33.30 per private house).

While capital grants still supported new building in the tiny and very slow growing Housing Associations, Mr. Heath switched subsidies from bricks and mortar to housing benefit for individual households. In effect, he both switched and increased subsidies to support the high rents of a rented consumer service. However, these changes remained insufficient to reverse the decline of the private rented sector. In a final effort to bring rents into line with the private sector, Mrs Thatcher used the dependence of housing associations on building grants and finally, she set out to eliminate the competition of the low-cost alternative. She legislated against all present and future investment value in the stock by a law to enforce discounted house sales to tenants; the disingenuously named 'Right to Buy'. At last, the decline of the private rented sector was halted, but now the rented sector as a whole began to decline rapidly, since the rate of sales proceeded at twice the rate of new rented buildings. The cost of Housing Benefit escalated to £21 billion and rising, is rightly considered to be untenable. But it is dishonest to blame the extreme anomalies of bad policy on tenants (feckless tenants live in luxury). The cuts will fall on tenants and since they cannot afford them, they will pay in the pain of overcrowding and homelessness and eventually these costs too, will come home to the taxpayer.

The Unreasonable Pursuit Of Dogma

Graph 2 shows the declining cost of buying a house, which provides both accommodation and the growing equity of a valuable asset. When accommodation is sold as a consumer service, it is expensive. In the business terms applied to other consumer services, rents in the private market are calculated as a percentage of the current value of the goods being provided. For instance, a modest 7% on a £130,000 house is a rent of £175/week, which brings this “modest rent” close to the first year ‘barrier’ cost of taking a loan and rents continuously rises with inflation. Now this explains a lot:

• It means that those who cannot afford to buy, cannot afford to rent but they rent because of the Housing Benefit subsidy. This not only sustains an inefficient provision of housing, it also traps tenants within it.
• A tenant, who works harder to earn more income, has benefit withdrawn at the rate of 69p in the pound. In effect this cuts a minimum wage, from £5.93 an hour to £1.84 an hour. It is a poverty trap from which it is very difficult to escape. It gives cause to the lack of social mobility in the UK.
• The poverty trap is a threat to all emerging new households. It explains the fear that drove them from loans at the prudent level of 2.5 times income to a norm of 5 and as high as 10 times income. Clearly they must do it, because they think it is worth it!
• This high risk is the defining condition of the rented consumer service and it is caused by the abolition of low-cost rented housing in 1971. It is the Dilemma of the Single Option, the risk inherent to the formation of each new household; because there is only one brave answer to the question “Buy or Rent?”



• The association of the private rented consumer service with high risk is confirmed by the response of the housing market. In 1971 the stable UK housing market was transformed into a persistent condition of extreme instability. House prices in the UK became hypersensitive to small changes in the market (cf Germany and France who retained large low-cost rented sectors).
• The aim to restore the dominance of the market in housing has been a narrow Conservative obsession to promote the interests of consumer markets per se, yet it is by far, the least efficient means of rented housing provision. The watershed change in the stability of the UK housing market is evidence that a rented consumer service, supported by a £21 billion subsidy of housing benefit, is deeply incompatible with home ownership.
• Graph 4 compares public subsidies for a rented consumer service (red) and for investing in a rented stock (blue). The cost difference is huge!⁶. Each example is calculated for a ‘moderately low’ rent level and for a ‘really low’ rent level. The (blue) rented stock produces surpluses, which can be used to fund the expansion of the stock.
Cameron announces plan to end lifetime council tenancies Guardian Tuesday 3 August 2010.
• The rented consumer service is not an alternative to ownership since it could not exist without large subsidies. Rented investment stock, on the other hand, is a complementary alternative to ownership; they both benefit from the advantages of investment but they delivered it with different timings. Rather than penalise council tenants we need to use the power of investment to provide affordable housing for tenants and owners alike.

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Complementary Housing

Plugging The Gap In The Free Market

In the first year of buying a house, loan repayment costs are high, but these fall with inflation and are usually completed in 25-30 years. For those able to afford the initial cost, the average costs are many times less than the cost of a private rent, for which they gain both accommodation and the growing value of their property investment. For low-income families the initial cost of repayment 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 i.e. private rented accommodation. As the value of the house increases, the rent increases and the tenant has no share in the investment. It is because the free market makes this fundamental distinction between the cost of a consumer service and an investment that 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. Council housing did that; the investment value of the stock created cost-balanced rents that low-income families could afford. The investment principle works because it achieves the most cost-effective provision of both rented and home ownership housing.

The Spectrum of Investment Housing

We should understand how the power of the The Capital Market works and how we can best use the efficiencies of its investment and consumer services. For instance, we should understand that a spectrum of investment housing exists, which ranges from council housing, through co-operative housing to house purchase for home ownership. The differences lie in the extent to which the equity of the stock is used to deliver low rents and to extend the size of the stock. Alternatively, the differences can be measured in terms of the timing required to deliver low rents at zero subsidy.

It is these different timings in the delivery of the advantages of investment that allows them to interact as complementary alternative choices of accommodation. For instance, the availability of low-rent accommodation stabilises house prices and is an essential refuge for those saving to buy.

Housing Is Cheap

Fig.1 The principle of using investment to yield low cost-balanced rents
Model parameters based on Year 2004

Unit cost:	£150,000		Loan Rate:	7%		Loan period:	25yrs
Target stock:	20,000		Building rate:	400/yr		RPI:	5%
Manag & maint:	2%		Nat avg wage:	£500

The cost of financial investment in a housing stock is high in the early years (20-30 years), but as loans are paid off on a significant proportion of the stock, it matures into low-cost, self-supporting accommodation with cost balanced rents, which alone can continue to support the expansion of the stock.

Graph 5 shows characteristic development points in the maturing of an investment stock. It also shows two rent levels, one affordable for those on the national average wage and the second affordable for those earning only a half of the national average wage. The spreadsheet models are available for download and the effect of changing the parameters can be examined. For the parameters shown in Graph 5, the costs fall to affordable levels after 40 years and they fall by a factor of six at full maturity. But this is a very conservative model, because the actual history of small towns such as Colchester show that cost-balanced affordability was achieved after only 27 years.

Thatcher’s Pyric Victories

At the third attempt, Conservative policies to sustain the private rented sector halted more than forty years of decline. But these costly policies cannot be sustained in a weakened economy and they could not have been achieved without the elimination of the post-war investment stock, which had been the cause of the decline. The large discounts, thinly disguised by the title of the Right-to-Buy law were the powerful medicine that finally achieved the objectives of Conservative housing policies. They destroyed the low-cost rented stock and by means of a nominal change of tenure, they increased the number of homeowners but better still, the Conservative distribution of largess to Labour voters, fulfilled the boasted ⁷ claim of gaining conversions to the Conservative vote.

This was probably enough to explain the intimidation of the Labour leadership on housing policy, but it may also have been a belief that the policy of investment was now a hostage to fortune, compromised by the intentions of any future government to squander the accumulated value of investments for short term political gain.

While the escalation of Housing Benefit required to support the private rented consumer service cannot be sustained, the spin against the fecklessness of social housing tenants and moves to time limit the period of council tenancies are neither a justification for the capping of housing benefit nor a solution for the collapse of policy. Such measures can only increase the social damage and it’s subsequent costs. The collapse of Thatcher’s pyric victories must be faced and Housing Benefit redirected into re-establishing a rented stock.

Open Access – the living tapestry of mixed communities

For the majority of the period from 1951 to 1989, Conservative housing policy implemented a policy of residualisation in the social housing sector. The problems associated with this policy began to emerge as early as 1956 and they encouraged divisions between the developments of council houses and homeowner sections of town communities.

Yet Bevan’s vision could easily have succeeded. By 1969, the nations slums were virtually eliminated and the number of houses exceeded households for the first time. If this development had been allowed to evolve with unrestricted access, it would have been larger, maybe 40% rather than 30% of housing and therefore more capable of responding to urgent cases of housing need. It would have evolved into a valued service for everyone, providing an economical refuge for first time buyers while saving to buy, to serve the needs of an increasingly mobile workforce and as a cheaper alternative to house purchase it would have stabilised the house price market.

We need to implement a complementary housing policy, which will serve the needs of tenants and owners alike, which recognises and encourages the complementary interactions of all investment types of housing provision, which is the most efficient means of providing rented housing and which can achieve affordable housing without the patronage and indignity of long term subsidies.

With subsidies much less than Housing Benefit we can begin to provide the initial subsidies required to establish the investment stock. We can begin to change the operation of existing housing associations, ALMOs, councils and a variety of not-for-profit housing providers, with building grants conditional on the progress made towards low cost-balanced rents and a policy of open access. The demands of a wider tenant clientele would require more flexible management and building programmes geared to meet both the demand and the expectation of its the variances.

The financial and social structures of Conservative housing policy cannot be repaired, not even by the myriad of patches applied to them by John Prescott. It must be a complete reform, fought for with the truth, sustained by the presentation of its common sense and the courage of a leadership, which is then prepared to trust the electorate.

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The First Step Towards A New Solution

Much went wrong with the management of council housing and the lack of political vision to develop its potential, but its financial structures were unquestionable and it began to deliver zero subsidy targets after only 27 years of investment. By comparison, the switch to a private rented consumer service has produced massively escalating housing benefit subsidies, which have nearly doubled to £21 billion in the last ten years alone.

For an individual with a good income, home purchase is a good deal and maybe with some hardship in the first few years, the average costs are low. But at least 30% of the population, currently nearer 60%, don't have the choice to buy. If we think it is important to avoid massive homelessness, then they need some help. The cost of providing this help under the current system is crippling and it is about to be arbitrarily cut, which means we are about to experience new levels of homelessness on our streets. We must reinvest in a low cost rented system. Graph 4 shows the public cost, if we made the decision today, of remaining with the rented consumer service compared with the costs of beginning to build a new low cost rented system. The comparison is astounding. Without knowing the history, of how we got to here, we would doubt the sanity of the British nation. On purely financial terms, who would chose the provision of housing based on the red curves of Graph 4 when it could be based on the blue curves? Who would choose the socially divisive policies inherent to the red curves, when the socially cohesive policies of the blue curves are available and at lower cost? The answer is that we did.

There is good reason to believe that the level and stability of house prices in Europe and the UK are critically related to the availability of alternative accommodation in low cost rented housing. Central to the complementary strategy of investing in a low cost rented sector is the recognition that Complementary Rented Housing and Home Ownership are both based on investment, but that they serve alternative and complementary housing needs in a way that is mutually supportive. Since the Complementary Rented Sector is designed to become totally non-subsidised. it can also be designed:

• To serve the needs of the total population and not just the needs of the poor.
• To provide a low cost haven for people saving to buy.
• For a temporary base to enhance the mobility of the workforce.
• To provide an alternative choice to house purchase, which brings down and stabilises the price of houses.

Home ownership and an open access low-cost rented sector are complementary choices for the provision of housing need. The recognition of this symbiotic relationship is very important and it must become part of our new vision for housing policy.

An opposite relationship exists between home ownership and the private rented consumer service. They exist in unhelpfull competition only because of the public subsidies that have been injection in to the rented consumer service.

It is time to dismiss the myth that the British are obsessed with home ownership; we have never been given the choice and that is exactly what a Complementary Housing Policy would provide. We should be more determined to live our dreams of homes and castles by establishing the choices for first time buyers and new tenants alike to establish homes for themselves that are both secure and affordable.

The high costs of the Rented Consumer Service have caused:
• high house prices
• high subsidy costs to support low income households
• discourage efforts to earn more, due to subsidy withdrawal
• subsidy dependence creates, isolates and traps the propertyless poor
• avoiding subsidy dependence encourages first time buyers to risk high loans
• mortgage loan levels have risen from 2.5x to 5x or 10x income
• this risk for first trime buyers creates a hypersensitive house price market
• this market risk has caused persistent 50% swings in price inflation

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