A new approach to housing policy?

[Originally posted at Dale&Co, 22/11/11, It is an earlier version of material discussed in Laying the foundations?]

The much anticipated, and heavily trailed, housing strategy for England – Laying the foundations – arrived on Monday. The Government’s claim is that the strategy will “get the housing market moving again”, while at the same time “laying the foundations for a more responsive, effective and stable housing market in the future”. How do those claims stack up?

The document presents a plausible portrait of the situation we find ourselves in, in terms of the housing shortages and affordability problems. And some of the diagnosis of the problem is equally sensible. The problems of the housing market are not of recent origin. They are the product of some longstanding failures. To take one example, as the Prime Minister and Deputy Prime Minister observe in the foreword: “for decades in Britain we have under-built”. The Government is promising that it is taking “a new approach”, which “marks a decisive break with the failed policies of the previous Government”. I wouldn’t seek to defend Labour’s housing track record, but this seems a cheap shot, given the nature of the problems. It is also the case that some of the deep presumptions that have caused these problems – such as housing being the most appropriate vehicle through which households can and should accumulate wealth – are reinforced rather than questioned in today’s statement.

Much of the housing strategy document is, in fact, simply bringing together in one place a number of policies and initiatives that have already been announced. It is hard to argue that placing them between two covers transforms them into a coherent strategy.

The document contains many initiatives and issues that could be examined at length. Much of it is about incentives. It is about curbing perverse incentives and creating incentives to act in ways that furtherdesired political and social objectives. There are some sensible, credible and welcome policies such as promoting the community and self-build sector, developing a register of public land that is potentially available for development, acting to bring empty homes back in to use and tackling unlawful subletting. But it has several more problematic aspects. Some of those – like the impact of the reforms of the local housing allowance – have already been debated.

I wanted just to pick up on a few points.

The most high profile proposal is for the Government to participate in an indemnity scheme to allow first time buyers to access new build properties with 95% mortgages. It is part of the Government’s short term plan to “get the housing market moving”. What is this trying to achieve? The superficial answer is that it will allow first time buyers without a large deposit to access the home ownership sector. So it helps with affordability problems.

However, this answer doesn’t really stand up to scrutiny. House prices are still substantially out of line with median earnings. So we could argue that what first time buyers need is price reductions not assistance with accessing prices that continue to be over-inflated. Particularly if there is a risk that interest rates will rise. However, allowing prices to fall further will impinge upon Bank balance sheets, reduce the wealth of older home owners, and put more existing homeowners into negative equity. So it wouldn’t play well with the Government’s key constituencies. Allowing prices to fall would therefore be politically unacceptable, even though it would be a better route forward from a housing market perspective.

So what we get is a proposal that will reduce the incentives for banks to improve their risk management practices because the government is ultimately underwriting the debt. Admittedly, the outline of the scheme suggests that the banks and the builders will have to take a hit first, but this policy establishes the principle that the government is the ultimate backstop for poor commercial decisions. Where have we heard that before? Not only in the UK banking crisis more broadly, but in the US debate about subprime lending and the process that brought Fannie Mae and Freddie Mac to their knees.

I think this is a bad move. It is a short term intervention that makes the longer term goal of an effective and stable housing market harder to achieve. But might we be taking it too seriously? A couple of things strike me. First, given the broader economic outlook,house prices continue to look fragile. This initiative is not, on its own, on a scale that will prop up the market. Second, if the Government’s reforms of the planning system lead to the substantial increase in development it is promising then that will reduce upward pressure on prices further.So it may be that some FTBs might think twice about taking up this offer, if it means negative equity in the very near future.

The proposed changes to the planning system will no doubt boost profits for the speculative builders who were demanding them. I am sceptical that they will necessarily increase the supply of good quality and sustainable homes greatly, although it would be good if they did. Supply is a function of the broader economic context and confidence. Builders are sitting on plenty of development land at the moment. It isn’t only a shortage of land that is stopping them building.

But if you could sit on your hands in order to force valuable concessions from the Government that would ultimately increase profitability? Well you might be tempted.

The Government’s actions to promote small and medium sized builders and more community-led building are very welcome. If the Government can remove some of the barriers – in terms of land and finance in particular – facing this sector then that would go a long way to making the construction industry in Britain more responsive, more competitive, and, potentially, higher quality.

The Government could have been really radical and proposed taxing developers’ land holdings to incentivise them to sell it on or bring it into use sooner rather than later. But that wasn’t likely to happen now was it?

Most of the proposals for the rental sectors we have seen before. The strategy statement gives a little more detail on proposals such as the “reinvigorated” Right to Buy. But, equally, those details raise further questions. It is clear that earlier promises that RTB sales would be matched one for one with the construction of new affordable housing are not quite what they first appeared. The distribution of the receipts from sales stays as it currently is, with the bulk going back to the Treasury to redeem debt. So the replacement affordable housing will primarily be financed by private sector borrowing.

In fact, the proposals for expanding the social rented sector are premised on the absence of public capital spending and the need to borrow privately. The expectation is that the private sector will lend against the higher future income stream from “affordable”, rather than conventional social, rents. Similar motivations lie behind the Government’s enthusiasm for Tax Increment Financing. Much of the thinking here puts me in mind of the Private Finance Initiative. The Government doesn’t want to incur capital spending now but would rather get the private sector to put the money upfront. The Government then covers the cost of the rent for tenants who cannot afford to pay out of their own pocket. So we’re exchanging a known capital expenditure for an unknown but long term revenue subsidy. Analysts have shown that the total cost to the taxpayer of using revenue subsidy in this way typically becomes greater after a very few years. But, of course, in any one year the cost may not look so great.

From the Government’s perspective, the only ways to try to manage thefuture revenue subsidy bill is to cut the level of housing benefit at some point in the future or to let social housing to tenants who can pay from their own pocket. The former approach is ruled out in the strategy document, as it has to be if the Government doesn’t want to frighten off the lenders. The latter approach is, to some extent, already happening. Where those households who do need assistance find themselves living is a separate question.

Reaction to the housing strategy statement is emerging throughout today, and debate over its merits will no doubt continue for some time. That is absolutely as it should be.  Housing is one of the most urgent issues facing us today – it’s good to see it high up the political agenda.

[Amendment 23/11/11: The proposed mortgage indemnity guarantee is likely to be available to all buyers of new build properties, not only first time buyers.]

Image: © Joe Gough – Fotolia.com

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