Housing Blues

Last week’s Conservative Party conference didn’t offer much hope for our sector. As I predicted in my July blog Johnson on housing, the government’s primary objective is to boost hime ownership, and there was barely a mention of any plans to invest in social housing.

Communities Minister Robert Jenrick and his deputy as Housing Minister Esther McVey (he was once her deputy – how times change!) both said they were “tenure blind” but the tenor of their speeches and comments during the week was very clear. Here’s a précis:

“The property-owning democracy is a perpetual goal for which our party strives to ensure thatevery generation has the opportunity to benefit… I believe in ownership as the bulwark of individual freedom, bringing security, dignity and independence… As Conservatives, weknow that owning a home is not just about the four walls around you, it’s about investingin your family, saving for the future and putting down roots in a community (can’t peoplein social housing also put down roots?)… We are on the side of hard-working people who want the sense of security that comes with homeownership.. We are on the side of hard- working people who want to play their part in our property-owning democracy.”

And so on and so on.

The big announcement was a proposal that all new housing association homes for rent should be eligible for shared ownership, with occupants buying as little as 10% of their homes initially, rising in 1% chunks. This follows on from the recent policy announcement (login required) that aims to revamp and revive shared ownership.

This could be extended to existing homes “on a voluntary basis”, an echo of the Voluntary Right to Buy (VRTB) deal that was struck with the National Housing Federation in 2015. Many commentators felt that this would make it harder for providers to build new homes, especially if it’s made a condition of grant, which could deter lenders.

Take up is predicted to be low: Shelter ran the figures and showed that 75% of social housing tenants couldn’t afford it, rising to 94% in London. Who wants to own 10% of their home and be responsible for 100% of repairs, especially if, given current concerns about fire safety, you’re handed a bill for thousands of pounds to remove cladding?

If this scheme proves unpopular, I can imagine that VRTB will be put back on the table.

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Money for Nothing

Thomas Cook went bust this week with the loss of 9,000 jobs, and misery for thousands of travellers. The government was asked to cough up £250m to keep it afloat but refused. As a general rule, it is Conservative policy not to interfere in the workings of markets. Firms must be allowed to succeed or fail without government intervention, regardless of the consequences.

Yet over the past six years the government has been intervening on a titanic scale in the biggest market of all – the housing market – and the consequences have been all too predictable.

I am referring of course to Help to Buy. When it was launched in 2013 many people argued that it would be a monumental waste of taxpayers’ money. If you pump billions of pounds into the demand side of the housing market without any corresponding increase in supply then prices will rise. Any housing student will know that, in economic terms, housebuilding is inelastic – it can take years from conception to completion – so new homes are slow to appear when demand increases.

Just to rehearse the story to date: the equity loan scheme is the main component of Help to Buy. It gives buyers of new homes (up to £600,000 in value) a 20% loan on their property (40% in London). They cough up a 5% deposit so they then need a 75% mortgage (55% in London). The loan is interest-free for the first five years and has to be paid back within 25 years, or when the property is sold.

The government owns the loan book, administered by Homes England, so they are taking a punt that house prices will continue to rise, otherwise their investment will fall.

Help to Buy was meant to be a short-term fix to the collapse of the housing market. It aimed to restore the confidence of buyers and builders, but it has become semi-permanent. At the end of last year, 211,000 properties had been purchased with loans totalling £11.7bn. The latest estimate is that Help to Buy will consume £29bn of public funds by 2023, eight times more than the original estimate. From April 2021, the scheme will be restricted to first-time buyers and there will be lower regional price caps. Some developers are selling 50% of their homes under Help to Buy.

 

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Staircase to heaven?

As I predicted in my previous blog Johnson on Housing, this government’s primary housing focus will be on home ownership, making life easier for first time buyers in particular.

The government recently issued a discussion paper titled Making home ownership affordable, and one of its primary aims to is to revamp shared ownership.

It proposes a “national model for shared ownership” that will make it easier for shared owners to buy and sell their homes, and to boost “staircasing” – the process by which you buy additional chunks of your property – by allowing owners to buy 1% of the unsold value at a time, instead of the present 10%.

Five years ago I wrote a report for Gateway Housing Association on staircasing. At the launch, then National Housing Federation CEO David Orr described shared ownership as “the tenure that refuses to die”. It’s always been a kind of twilight tenure, attractive to some, understood by few (some people still think it means sharing your home with others!), andthere are still lenders who can’t quite grasp how it works.

The principle of shared ownership is sound – a transitional tenure between renting and buying– but it is beset by complicated rules and has been hit by some bad press in recent years: poor construction, steep service charges, a lack of interest by landlords, and a lack of clarity about who it is for.

The concept of staircasing implies that shared owners can fairly swiftly move up and out of the tenure. In fact, a Cambridge University study in 2012 found that shared owners were less mobile than other owners and the costs and complexity of staircasing were major barriers to mobility. If you can’t buy bigger portions of your home, then it becomes hard to move on to outright ownership.

My report for Gateway found that those who staircased had an average income of £10,000 more than those who had not, and they also had greater access to savings and inheritances. Obviously, income is a key barrier, but the fees involved in buying extra shares were also identified as a significant obstacle.

 

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Crisis, what crisis?

What is the cause of the housing crisis? Most people in our sector would answer: a lack of supply. It seems obvious, doesn’t it?

Our failure to build enough homes for the past four decades is the cause of homelessness, of rough sleeping, of high rents and high house prices, and of a widespread increase in human misery. Build enough new homes and, by the immutable laws of supply and demand, prices and rents will fall, and everyone will have a decent, affordable place to live.

Of course, it’s not as simple as that, and in recent years a growing number of commentators have argued that supply on its own is not the answer: that there is, in fact, no shortage of homes and that the cost of housing has not increased significantly in real terms.

Economist Andrew Lilico, who has written for Policy Exchange and the Institute for Economic Affairs in the past, leads the charge on this, and has even called the housing crisis a “myth”, although I would challenge him to walk around central London and explain that to the hundreds of people sleeping rough!

For these people, interest rates are the key. Historically low rates have led people to consume more housing than they would if rates were higher. “When interest rates return to 4-5%, allthis issue will vanish like April snow,” says Lilico. It’s a little like the argument that building new roads just creates more traffic and is self-defeating. Of course, this is broadly true if motoring costs remain low and governments refuse to invest in decent public transport.

The latest report arguing that supply is not the problem comes from the Tony Blair Institute and its executive director, Iain Mulheirn. He states that interest rates have fallen from an average of 8% in the 1990s to around 2% now and that this is the primary cause of high house prices. Mulheirn also uses “official data” to show that there are more homes than households, and that this surplus has increased from 660,000 homes in 1996 to more than 1.1 million now.

I think someone who’s worked in housing for even a short time would recognise the three key flaws in this argument: the increase in second homes; the number of empty homes, and the fact that households form when housing is available and not the other way around, i.e. there are millions of concealed households across the country waiting for a place of their own. This “no housing crisis” thesis also tends to ignore the fact that there are also huge regional imbalances, with severe under-supply and an affordability crisis in London and the south east, in particular.

 

In terms of absolute supply, Mulheirn argues that the government’s target of 300,000 homes a year will do little to bring down prices and rents.

He writes: “… the available academic evidence suggests that no plausible rate of supply would significantly reverse the price growth of the past two decades…a 1% increase in the stock of houses tends to lead to a decline in rents and prices of between 1.5% and 2%, all else equal. This implies that even building 300,000 houses per year in England would only cut house prices by something in the order of 10% over the course of 20 years.”

I have a lot of time for Blair (oh, for the stability and progressive policies of his administration right now!) and, to be fair to Mulheirn, his report is nuanced and he does argue the case for more social housing. But I think the danger of reports like this is that the nuance disappears beneath the headline, and a report that says “supply is not the problem” will be taken up and used by nimby campaigners and those opposed to housebuilding in general. This example from the Hands off Thaxted campaign quoting Lilico, is a case in point.

In addition, the ‘more bed spaces than people’ argument defies reality. Many people consume more housing than they require. I will wager that almost every senior executive working in our sector has more bedrooms than they need. That is how the free market works, but, short of Soviet-style commissars going around billeting people in empty bedrooms, this is just a fact of life that we have to accept.

However, I do have some sympathy with the argument that just piling more private sector homes into the market will fail to reduce prices and rents significantly. The answer is obvious: let those who want to enjoy the benefits and pitfalls of the market to do so, and to invest in genuine social housing for those who don’t.

The government’s own figures on public attitudes to housebuilding show that 26% of renters do not want to buy – and for many of them a social housing home would be an ideal home. Building 100,000 social rented homes a year would produce a million homes within a decade and this, by removing people from the market who don’t want to be there, would have much more impact upon prices and rents than a zealous emphasis upon private housebuilding.

In the real world, of course, private housebuilding is more or less the only game in town, and our sector will have to live off the crumbs falling from that particular table for some time to come. But as a sector we should be rigorous in challenging reports that say supply is not the problem. It is.

(This blog was first published by the Housing Quality Network on 10th September 2019)