On Monday, David Cameron gave a speech to the CBI which touched on housing issues. The government’s housing policy has long been incoherent, and Cameron’s speech served to throw much of the incoherence into high relief. My main focus in this post is going to be policy in relation to the social housing sector, but I’m going to start where much of the coverage has been focussed – the proposal to underwrite mortgages for first-time buyers, thus ensuring that loans of 95% of value will be available for the first time since the credit crunch.
The first thing to say is that this policy is a blatant attempt to distort the housing market (and in a way that, as we’ll see, isn’t actually in the best interests of the people it’s supposedly intended to help). If buyers can’t afford a suitable property with the mortgage deals that are commercially available then this is a sign such properties are overpriced, and the market, left to its own devices, would therefore correct the price downwards. By intervening to underwrite mortgages, the government is helping to maintain house prices at an unsustainable level, and is doing so in a way that encourages individuals to get into debt they may not be able to afford when mortgage rates rise. (Given that the Bank of England base rate is currently 0.5%, mortgage interest rates are at some point going to rise in a big way.) The coup de grace is that the government is achieving these undesirable ends by volunteering taxpayers’ cash to bail out super-rich city institutions in the event of a housing crash.
If there was one lesson that we all learned from the credit crunch and ensuing recession, I would have hoped that it might have been that you can’t build a secure economy on a housing bubble propped up by unsustainable levels of debt. And there are moments in his speech when it seems that Mr Cameron has grasped this point:
the previous model of growth in Britain – a debt driven consumer boom stimulating a narrow economic boom – is broken.
Unfortunately, this faint glimmering is quickly extinguished by his announcement of government support for a new round of risky lending:
this morning the Deputy Prime Minister and I launched a radical new strategy to support new mortgages for up to 100,000 people who would otherwise be locked out of home ownership.
‘Locked out of home ownership’ is, of course, a euphemism for ‘unable to persuade a mortgage lender that their proposal to buy a house is a good credit risk’. It’s these people – people who mortgage lenders, in their newly-rediscovered caution, regard as poor credit risks – that the government is proposing to ‘help’. Unfortunately, helping them doesn’t mean using public money to build new social housing that they can afford to live in, but using the same public money to make it easier for them to take on a debt that, when it goes bad, will rob them not just of their home, but also of their savings (that 5% deposit they’ll still have to find).
Now you may think that, if public money is available to solve the housing crisis, it could be best spent building new houses (thus directly benefiting those people who move into the new houses, and indirectly benefiting those people who see the price/ rent of existing properties fall as supply comes closer to matching demand). The government don’t see it like that. They are instead proposing to use this supply of public money to subsidise the profits of mortgage lenders, and to do so in a way that will maintain (or even increase) the already unsustainable cost of housing, thus actually making the problem they’re trying to solve worse. To recap, their ‘solution’ to the problem of people being unable to afford the price of housing is to distort the normal operation of the market in a way that will increase the price of housing, making it more unaffordable than it was before they started.
So far, so incoherent: but this is simply the par-for-the-course incoherence that results from the Con-Dems’ ideologically-driven mania for using public money to support private-sector profits, rather than to support the public good. (A mania shared by the Labour party, as those people who remember Public-Private Partnerships and the Private Finance Initiative will understand.) I also want to point out a different area of incoherence that seems very largely to have slipped under the radar.
Ever since coming into power, the coalition have been arguing that there is an acute shortage of social housing. A consultation document published this time last year by the Department for Communities and Local Government endorsed a finding made by a major homelessness charity:
An analysis of housing need and demand in England published by Shelter in 2008 indicated that there was a backlog of over half a million households requiring social rented homes who were homeless or living in overcrowded, temporary or other unsuitable accommodation. Many more households will have been prevented from forming, have been forced into shared accommodation, or are struggling to meet their rent.
You might think that the solution to this crisis is to build more social housing, preferably quite quickly. Alternatively, you might agree with the view set out in the consultation document by the Housing Minister, and feel that the solution is to be found in forcing homeless families into expensive and unstable private tenancies, stripping those tenants who are lucky enough to find a place in social housing of their long-term secure tenancy agreements, and putting in place policies that will allow social housing providers to increase some rents up to 80% of market value while still receiving public subsidies. (Even though private providers can rent profitably at this level without subsidy, and even though housing benefit only covers rent up to 30% of market value and most people in need of social housing rely on housing benefit to pay all or part of their rent). Either way, there is agreement on the underlying point – that there is a shortage of social housing, and that measures need to be taken to address this problem.
Now let’s look at what’s almost a throwaway remark in Mr Cameron’s speech to the CBI on Monday:
We’re also selling council houses house again and using the money to build more houses.
This is a reference to proposals that are outlined in (slightly) more detail in a new housing strategy document that was published to coincide with the Prime Minister’s speech. It turns out that the government are not proposing to re-start the Right to Buy (it never stopped, at least in England), but rather revitalising it by making council properties available to buy at even greater discounts:
We will consult shortly on the appropriate levels, but our firm intention is […that] the average discount received by buyers in England would be up to half the value of their homes – which would be roughly double the current average discount.
Now it doesn’t take a genius to recognise that, if you encourage more people to buy their council houses, this will necessarily reduce the stock of social housing. This flies directly in the face of the government’s assertion – repeated, in passing, in today’s strategy document – that there is an acute shortage of social housing. The strategy document does attempt to get round this difficulty by insisting that the money raised by Right to Buy sales will be used to build replacement properties:
We are committed to ensuring that every additional home sold under Right to Buy is replaced by a new home, and receipts from sales will be recycled towards the cost of replacement.
Unfortunately, there are problems with this ‘commitment’.
For example, as far as I can tell (the report is a masterpiece of politician-speak and so not at all easy to follow), these replacements will come in the form of so-called ‘affordable properties’. Since such ‘affordable properties’ are the new category of social housing for which landlords will be allowed to charge up to 80% of market rents, they will be considerably less affordable than the social properties they will replace (which have rents set much lower). But even setting aside the fact that the government is proposing to replace actually affordable social housing with ‘affordable housing’ that isn’t, in fact, affordable, there are two things that need to be said about this.
First, if discounting Right to Buy properties by 50% will still produce enough revenue to build a replacement property, it follows that charging the full market price would produce enough revenue to build two new properties for each property sold. It’s difficult to understand why the government wouldn’t pursue this strategy, since everyone would benefit from it. The ex-tenant buying their property would still get the opportunity to profit (significantly) from future increases in its value; the people on the waiting list for social housing would benefit from an increased supply; the taxpayer, who funded the building of the original property, would see a healthy return on their investment, since the value of both new properties would be added to public assets; and the government would achieve all this good at no cost to the public purse. This wouldn’t just be a win-win scenario, it would be a win-win-win-win scenario.
Second, it turns out that selling council houses at 50% of their market value may not, in fact, cover the costs of building new properties. (The explanation of this is going to get a little intricate because the situation itself is complex, but I’ll do my best to put things as simply as possible.) To begin with, the council that has borne the costs of building and maintaining the property, and is supposed to build a new one to replace it, isn’t the main beneficiary of the sale:
Once the council’s costs relating to the sale have been covered, the council retains 25 per cent of the remaining receipt from the sale, with the remaining 75% going to the Treasury. […] Right to Buy receipts […] are built into the Government’s deficit reduction plan.
In other words, the proposal to sell off taxpayer assets at bargain-basement prices is driven, not by a desire to give councils a revenue stream to fund the building of new social housing, but by the desire to cut central government’s deficit by any means necessary. Strangely enough, the relatively basic economic principle that selling something you own for considerably less than its market value actually worsens your debt/asset ratio seems to have escaped the finest minds of the Conservative and Liberal Democrat parties. (The debt/asset ratio is a standard indicator of financial health, and a worsening debt/asset ratio will worry lenders. Since the government’s deficit reduction plan is intended – at least if you believe the spin – to reassure lenders, pursuing policies in support of deficit reduction which will worry lenders is counterproductive.)
Unfortunately, this surprising oversight is not the worst of it:
Our proposal is that Right to Buy receipts will first be used to meet debt on additional properties sold, then will meet Treasury and council forecast receipts, and that the balance will be available for investment in replacement properties.
As I’ve mentioned, the whole document is written in politician-speak, which makes it quite difficult to figure out what apparently bland statements like this actually mean, but unless I’m mistaken this includes a fairly major caveat to the earlier assertion that the proceeds of Right to Buy sales would be used to fund the building of new properties.
You see, that reference to using the proceeds of extra council house sales to ‘meet Treasury and council forecast receipts’ (which I think means projected income) makes it sound to me like the money from the sales isn’t to be ring-fenced. In other words, and so far as I can tell, the proposal is that the income from council house sales will be used first to pay off the debts owed on the property, then to bolster government income, then to prop up council income, and only after all these demands on the money have been met will any that’s left over go towards building replacement houses. Since official Treasury forecasts for government income are usually over-optimistic (and in the current climate are pretty much certain to be), and councils are going to spend the next few years more cash-strapped than they’ve ever been before, this bland little statement would seem to virtually guarantee that there will be no ‘balance’ to put towards building replacement properties, and consequently no replacement properties.
In this context, it’s perhaps just worth reminding ourselves of the precise language the government uses in this strategy document when it announces the replacement property policy:
We are committed to ensuring that every additional home sold under Right to Buy is replaced by a new home
The commitment would not seem to extend to these new homes being in the social sector. A situation in which the private sector builds more houses than the social sector sells would fulfil the letter of its terms, if not the spirit in which an unsuspecting reader might take it. The promise to recycle the proceeds from sales into replacements is more reassuring – but it’s to this promise that the caveat about replacement schemes having lowest priority in the distribution of the money seems to apply. In other words, it seems like the guarantee that the number of properties in the social sector will remain constant may not be worth much, and that a policy ostensibly intended to stimulate the building of new social housing may result instead in a reduction of the amount of social housing. You will have already realised that this is yet another example of incoherence in the government’s housing policy.
Moving on from this rather worrying vagueness, there’s another inconsistency between this announcement and earlier announcements, too. The government have previously proposed that people who have a high income should be charged an enhanced rent if they choose to live in social housing. The motivation for this policy seems to be the belief that it’s unfair that people who can afford (or are presumed to be able to afford) commercial rents should occupy social housing that could be offered to people who can’t. Yet, strangely, when it comes to the Right to Buy, there’s no mention of this issue. The government apparently believe its unfair for high earners to occupy a particular property if it remains in the social rented sector, but it would appear they don’t see it as a problem if high earners want to buy the property instead. In fact, they see it as so little of a problem that they’re setting about creating discount schemes that will make buying it more attractive.
This would seem to be a little inconsistent since the net effect – that a particular property is not available for a low-income household – is the same in both circumstances. In fact, by boosting the discount for Right to Buy it strikes me the government are actually creating an incentive for high earners to stay in social housing – what’s a few extra months’ rent, even charged at top whack, if it qualifies you to buy the property at a huge discount? In other words, what we have here is yet another example of incoherence in government housing policy, with two aspects of the same policy pursuing incompatible goals.
This last thing I want to draw your attention to is perhaps the most blatant example of incoherence I’ve found in this document:
The receipt needed [from Right to Buy] to fund replacement will only be a fraction of the cost of a new home. This is because most of the funding for new affordable rented homes comes from borrowing by the rental provider against the future rental income stream
The incoherence here comes from the fact that, although some of these ‘rental providers’ will be for-profit organisations,* many will be public-sector bodies like housing associations. In other words, the government are proposing in the same document using the proceeds from the sale of council houses to reduce the public deficit and simultaneously adding to the public deficit by funding the provision of replacement housing through new debt. At best, taking out more debt will undermine the effectiveness of the policy as a deficit reduction strategy, but at worst it will actually prove counter-productive. Since the sales are to be so heavily discounted, and the proceeds are to be split in so many different directions, it seems quite likely that the amount of new debt taken on will actually be greater than the amount of old debt paid off – thus making this a ‘deficit-reduction policy’ that actually adds to the deficit.
What’s most worrying is the cumulative effect of all this incoherence. Council houses are to be sold at significantly below their market value in order to generate a short-term boost to government income. Because of the depth of the discount, and the way the proceeds from the sale are to be distributed, the money from the sales will not be sufficient to build replacement properties, meaning public sector bodies will have to go into debt in order to fund their construction. This debt is to be financed by charging up to 80% of market rates to live in the new properties – thus making them hard for people on low incomes to afford. Since the acute shortage of social housing is at heart a crisis caused by a shortage of properties that people can afford to live in, this means the government’s ‘solution’ to the crisis not only will do nothing to improve it, but will actually make it worse. Under the policies outlined in this strategy document, the number of cheap properties to rent will actually decrease.
You take my point, I hope, about incoherence, but allow me to summarise the jaw-dropping pitch of incoherence the government have now reached in their housing policy:
- In response to an acute shortage of social housing they are selling more social housing to the private sector.
- In response to an acute shortage of houses people can afford to rent they are replacing social rents that are actually affordable with ‘affordable rents’ more expensive than four-fifths of unsubsidised rents.
- In order to improve the public balance sheet they are selling public assets at a loss.
- In order to cut the public deficit they are increasing public borrowing.
- In order to help first-time buyers who are priced out of the housing market they are intervening to maintain house prices at unaffordable levels, thus pricing more first-time buyers out of the market.
- In the midst of a recession resulting from a property bubble founded on dodgy debt they are encouraging mortgage lenders to make riskier loans.
I’ve concentrated on housing policy, but whenever I’ve looked into it I’ve found similar levels of incoherence across the full range of government policy. (For example, the student loans policy intended to limit the cost to the Treasury of funding university education which has actually led to a significant increase in projected costs). And that’s perhaps the scariest thing about all of this: that the government don’t understand the consequences of their actions.
Whatever you thought of Margaret Thatcher’s policies, at least she knew what she was doing. She may have wiped out the country’s manufacturing base (instead of refocusing it, as she should have done), but at least she didn’t do it by accident; she did it quite deliberately, in order to destroy the political power of the organised working class. You might feel that was an unwise decision and that, by placing the electoral interests of the Conservative party ahead of the national interest, it caused catastrophic long-term damage to the country that we’ll be regretting for many years to come, but at least it was intentional. That’s not true of the current crop of Conservatives, and their Liberal Democrat enablers – something that’s made very obvious by the fact their policies lack even basic coherence.
These people are destroying the present and future of the country without even realising they’re doing it, and that makes opposing them on the level of policy almost impossible. If there was a coherent plan we could mount a coherent opposition to it, but trying to oppose a government like this is like trying to punch fog. There’s no substance behind any policy position – it’s all smoke and mirrors for media consumption – so no hope of landing a telling blow.
(And for the record, writing a coherent blog post about such multi-faceted, ever-shifting incoherence is a struggle, too. Apologies for the points in this where I’ve failed to make things clear. I gave it my best shot – I’ve revised this thing more times than you’d believe – but I have no illusions about my overall level of success.)
* – You may have missed it, but for-profit companies are allowed to compete with housing associations for public housing subsidies. This – using public money to fund private profits – is almost the only coherent trend I can discern across the broad sweep of government policy. It’s happening in health, education, housing (those are just the ones I’ve stumbled across; there may be more examples), and the Con-Dems are only extending the previous Labour government’s policy. It seems pretty scandalous to me, but it never gets much coverage – including here, where I’ve reduced it to a footnote. Perhaps I should make this the topic for a standalone post?