Laying the foundations?

The Governments housing strategy Alex Marsh School for Policy Studies University of Bristol e: alex.marsh@bristol.ac.uk 22 November 2011 1. Introduction

The much anticipated housing strategy for England Laying the foundations arrived this week. The Government opens the document with the claim that it is launching a radical and unashamedly ambitious strategy. 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. Government policy rarely emerges fully formed and unsullied by external influence, particularly when lobbying by stakeholders and think tanks has become such an integral part of the Westminster policy process. It is possible to identify some of the apparent external influences upon this strategy where the Government appears to have imported ideas from this think tank or that lobby group. But it is not my aim here to do so systematically. Rather the aim is to review the key proposals in the document. 2. Preliminaries

It is good to see the Government recognising from the outset of the document the importance of housing to both economy and society. For too long housing policy has languished as something of a policy backwater. And it is good to see that the Government appears to be willing to increase the amounts of money going into housing, compared to the settlement agreed earlier in its term of office. Wise spending in the housing field undoubtedly offers good value for money. The document offers a plausible portrait of the housing situation we find ourselves in. It captures the key dimensions of housing shortages and affordability problems. And some of the diagnosis offered is equally sensible. The Government recognises that the problems facing the housing market are not of recent origin. Our housing problems are primarily 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 document does not seek to place the blame simply on the recent financial crash or the current economic climate, although it recognises both that these developments have exacerbated Englands housing market problems and made the search for a remedy all the more urgent. The Government is promising to take a new approach, which marks a decisive break with the failed policies of the previous Government. This seems questionable at two levels. First, while I wouldnt seek to defend Labours housing track record, this is a bit of a cheap shot. Labour put quite a bit of effort into, for example, diagnosing the problems of housing supply, through the Barker and Callcutt reviews, for example. The Labour record on net additions to the social housing stock was not great, but that was in part because of the relatively high rate of demolitions of poor quality accommodation. The Coalition is trumpeting gross additions to the social housing stock at affordable rents, but that is before any impact of a reinvigorated Right to Buy, or the impact of the self-inflicted perverse incentives associated with the localisation of the HRA (see below). Labour had a poor record on regulating the mortgage market in a way that attenuated the magnitude of its cycles. But we are yet to see whether the Coalitions will be any better. It is also the case that some of the deep presumptions underpinning housing policy, that have arguably contributed to current problems, are not questioned in this strategy document. Indeed, if anything they are reinforced. One example is the assumption that housing is the most appropriate vehicle through which households can and should accumulate wealth. Another might be that, while it is appropriate for government to take a strongly managerialist stance towards the social housing sector, it is entirely 1

inappropriate to take a significantly more interventionist stance towards private landlordism or, indeed, towards the supply or demand for owner occupied properties. If we think about housing policy through the lens of Peter Halls three levels of policy, the document embodies changes of levels for existing policy instruments (level 1) and it proposes changes to the instruments used (level 2). But it does not propose changes in terms of the underlying goals or aspirations of policy (level 3). And one further preliminary observation is appropriate. While the document is shot through with level 1 policy changes of various types, the direction of change is not always clear. So, for the sake of argument, when the Government states positively that they are going to spend Xmill in a particular area they dont mention that the previous government was spending 4Xmill. So were talking about a 75% cut in spending. That is understandable from a political perspective. It is also understandable in the broader context of fiscal consolidation. We could, after all, be looking at a 100% cut. But when we are seeking to assess whether the sorts of interventions proposed are going to address problems or are, in fact, likely to be a step backwards in terms of support then this becomes significant. 3. Content

The housing strategy comprises six sections covering: increasing supply; social housing reform; the private rented sector; empty homes; the quality of housing experience and support; and quality, sustainability and design. In terms of substance, much of the housing strategy document is, in fact, simply bringing together in one place a range of policies and initiatives that have already been announced. The proportion of its proposals that are genuinely new is relatively small. And it is hard to argue that placing this collection of proposals between two covers transforms them into a coherent strategy. Some might argue that, on the contrary, it makes it easier to see the gaps and the joins. Many of the initiatives and issues included in the document could be examined at length. Much of what it covers can be summarised into a word: incentives. It is about curbing perverse incentives and creating incentives to act in ways that further desired political and social objectives. If there is anything radical and unashamedly ambitious about the document it is the rejection of top-down planning and the belief that localising decision-making will deliver better outcomes. Development needs to be driven by fiscal incentives rather than fiat. But this isnt new, it is a theme of the Coalitions thinking since the beginning. The potential contradictions between the documents claims that it is putting in place long-term strategic changes to the way in which we plan for housing (emphasis added) and the likely realities of localised decision making are not explored. And nor would you expect them to be. The document presents some sensible, credible and welcome policies that are seeking to address issues that are widely recognised as problematic. But it has several more problematic aspects. And some of the problematic aspects are given more prominence. Some of these problematic components of the housing agenda have already been discussed extensively. Indeed, Ive posted quite regularly on my blog about issues such as the affordable housing approach, changes to social housing tenure, the reform of the local housing allowance, and the criminalisation of squatting. In the remainder of this document I want to focus on some of the newer aspects of the agenda, while noting some of the better established issues in passing. 4. Increasing housing supply

The chapter on housing supply dominates the strategy document. It contains much of what could be claimed to be new. And because this topic links most clearly to the broader economy and levels of macroeconomic activity it was always likely to be most newsworthy. The most high profile proposal is the Governments intention to participate in a mortgage indemnity scheme in order to allow first time buyers access to 95% mortgages for the purchase of a new build 2

property. It is part of the Governments short term plan to get the housing market moving. And it comes straight out of the CBIs proposals for the housing market, published a couple of weeks ago. But what exactly is this trying to achieve? The superficial answer is that it will easy credit constraints upon first time buyers, who are struggling to meet the deposit requirements currently being imposed by lenders. Without a large deposit, often via the bank of mum and dad (a phrase I am truly beginning to loathe), they are currently unable to access the home ownership sector. So, in theory, the guarantee scheme helps with access and affordability problems. However, this answer shouldnt really stand up to scrutiny. House prices are still substantially out of line with median earnings all over the country. In the press over the last day or so one of the credit rating agencies has pronounced that it considers housing in Britain still to be 25% overvalued. It wouldnt surprise me if that were an underestimate. So we could argue that what first time buyers really need is price reductions, not assistance to pay 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 and reduce the wealth of older home owners. The current estimate is that there are 800,000 households in negative equity which lowers mobility rates. Allowing prices to drift downward would only make that worse. So the price deflation strategy wouldnt play well with some of the Governments key constituencies. It would therefore be politically unacceptable, even though it would be a better route forward the perspective of housing market efficiency. If the Government wanted to do something about access to mortgages, while not impeding market adjustment, it might have been better looking at helping households in negative equity to move. But that would have required taking on liabilities now rather than later. It would also help households, but be of very limited benefit to the construction industry. What we get instead 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 also in the US debate over subprime lending and the process that brought Fannie Mae and Freddie Mac to their knees. It is a short term intervention that makes the longer term goal of an effective and stable housing market harder to achieve. I think this is a bad move. If you were to take a Minskyian perspective on the credit cycle and considered that we are currently in the phase of collateralised lending following the ending of a euphoric period then you would be even more concerned about this attempt to manipulate credit conditions. But might we be taking the proposal too seriously? A couple of things strike me. First, given the broader economic outlook, house prices continue to look fragile. The indemnity scheme is relatively small scale. It is not, on its own, going to prop up the market. Second, if the Governments 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 think twice about taking up this offer, as there is a significant risk it will mean negative equity in the very near future. This begs the question as to whether the Governments planning reforms will deliver more housing. The proposed changes will no doubt boost profits for the speculative builders who were demanding them. But 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. On the one hand, although the Government keeps referring to the New Homes Bonus as offering powerful incentives, well have to wait and see whether in practice they will be sufficient to convince communities of the wisdom of development. On the other hand, supply is a function of the broader economic context and confidence. Builders are sitting on plenty of development land at the moment. It isnt only a shortage of land that is stopping them building.

We also need to remember that freeing up planning wont necessarily bring greater stability to the housing market. If by freeing up planning policy makers are seeking to attenuate price volatility by increasing the price elasticity of supply, then potentially market adjustment to demand shocks is transferred to quantities rather than prices, with equally problematic secondary effects. The Government proposals to promote small and medium sized builders and more community-led building are very welcome. Britain is out of line with many other developed countries in having such a small proportion of supply provided via these sectors. 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. Moves to develop a register of public land that is potentially available for development are welcome. The proposal for better support for Community Land Trusts could also be valuable in helping to establish new for Britain at least - ways of delivering affordable housing over the long term. The supply of land is not just a question of the flow of planning permissions, it is also about the way in which speculative builders option and bank land to secure their own access to development opportunities. 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 it doesnt look like that is on the agenda: an agenda which, on the face of it, is largely geared towards furthering developer interests. The wisdom of other proposals depends on the details, which we dont have yet. The release of public land on a buy now pay later basis in order to facilitate develop could be a good idea. But equally it could be an unjustified subsidy to developers, depending on how it is structured. Will it be used to build affordable housing or executive homes? We dont know. Similarly, the idea of a fund to allow paused developments that are shovel ready to restart may be a good idea. But it depends on why they were paused. Supporting developments that were only marginally economic at the peak of the market may not be a sensible use of public money. The Government makes equally vague noises about reducing the regulatory burden. It is going to launch another of its red tape challenges. Again, this may be positive. But if instead it turns out to be a capitulation to developers preferences for lower standards that deliver poorer quality and sustainability then that isnt necessarily positive. Given that the Government is proposing to allow developers to demand reviews of s106 agreements made before 2010, in order to make developments more financially viable, the omens are not good. But the biggest barrier to deciding whether the strategy will deliver a more stable and sustainable housing market is, alongside the absence of key detail, the fact that key components of the strategy those relating to mortgages and mortgage regulation are not provided and not necessarily within Government control. We already know that those countries which did not deregulate their housing finance systems as much as Britain, Ireland, Iceland or the US did not experience anything like the same house price volatility. So we already have a good idea what needs to be done if we want greater price stability. But, we also know that the finance industry dont want it done. The question is whether this Government wants to wrestle that particular genie back into the bottle. What the proposed Financial Policy Committee and the FSAs Mortgage Market Review deliver are a key part of the overall equation. 5. The rental sectors

Most of the strategys proposals for the rental sectors we have seen before, although the strategy statement supplies a little more detail. Market fundamentalist preoccupations with creating competition where none is perceived to exist are all present and correct this time in continuing to encourage the supply of affordable rental properties by private investors and developers. Proposals such as the reinvigorated Right to Buy get fleshed out a little. We learn that the Government hasnt yet quite determined where it wants to pitch the new higher discount levels or how it will achieve that. The details were offered 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 housing will primarily be financed by private sector borrowing. So it is an extension of the broader move from social rented housing to Affordable Rental. This policy isnt so much a long-term strategy as a one-off move to sweat the equity of housing associations. The strategy statement talks of thinking about what happens post-2015. That is pretty much essential as the move to AR will have run out of steam, and that is likely to happen sooner rather than later. The expectation is that the private sector will lend against the higher future income stream derived from Affordable, rather than conventional social, rents. Similar motivations lie behind the Governments enthusiasm for Tax Increment Financing. Much of the thinking here puts me in mind of the Private Finance Initiative. The Government doesnt want to incur capital spending now. It would rather get the private sector to put the money upfront. The Government then covers the rent for tenants who cannot afford to pay out of their own pocket. So were exchanging a known capital expenditure now for an unknown but open-ended revenue subsidy. Analysts have shown that the total cost to the taxpayer of using the revenue subsidy approach is typically greater after a very few years. But, of course, in any one year and specifically years when you get started and are building new housing - the cost may not look so great. From the Governments perspective, there are only really two ways to manage the future revenue subsidy bill. The first is to cut the level of housing benefit at some point in the future. The second is to let social housing to tenants who can pay from their own pocket. The former approach is explicitly ruled out in the strategy document, as it has to be if the Government doesnt want to frighten off the lenders. The latter approach is, to some extent, already happening as local authorities reformulate allocations schemes which give greater priority to working households. Where those households who do need assistance find themselves living is a separate question. The strategy reviews the Governments approach to reforming tenancy law the introduction of fixed term tenancies and homelessness duties allowing local authorities to discharge duty into the private rented sector. It also gives a little more information on Mr Shapps pay to stay policy to force higher earning households in the social rented sector to pay near market rents. Proposals for the policy are going to be consulted upon. There is a suggestion that the additional rental income can be used to crosssubsidize new affordable housing. It is likely that the volume of income involved here is going to very modest. Given that the Government is proposing to increase the discounts available, higher income households have a strong incentive to exercise their Right to Buy. Rather alarmingly given that such households are not doing anything wrong under current policy this discussion is linked with illegal subletting in a section entitled Tackling tenancy abuse and ensuring fairness. The discussion of private renting is altogether more modest. Indeed, it doesnt really come up with anything new or concrete. The strategy reviews the changes to Stamp Duty Land Tax introduced in the 2011 budget. It continues the discussion of Real Estate Investment Trusts. The focus remains on financial institutions. The holy grail of policy in the private rented sector for the last thirty years has been securing institutional investment on a large scale. In the past I have taken the view this is a chimera. There have been enumerable attempts to interest institutional investors and none has been successful. Im still not convinced. But it cant be denied that there now appears to be some genuine interest from institutional investors. The other theme the strategy raises in relation to private renting is quality. Here the whole discussion is again rather vague. There is nothing about tenancy terms or security. The government is committed to supporting growth and innovation by avoiding unnecessary regulatory burdens But at the same time it is also looking at measures to deal with rogue landlords and encouraging local authorities to make full use of the robust powers they already have to tackle dangerous and poorly maintained homes. This suggests that the position hasnt shifted greatly from previous statements that the presumption is that the policy tools available are sufficient. Of course, even if you accept that position which is arguably the 5

problem is not so much with the powers but with the resources to implement those powers. Nowhere is that acknowledged by the strategy. 6. Other measures

The final three chapters cover a range of topics that have a lower profile in most mainstream housing debate. Chapter five discusses empty homes. It is good that this Government is giving a profile to the issue. It is good that they are putting modest amounts of earmarked money in the direction of dealing with it. It is not so obvious that the proposal to increase the period before an Empty Dwelling Management Order can be obtained from six months to two years makes the job of dealing with problematic empty homes easier. This chapter also reviews the Governments proposals on squatting. I have written about these before. They have been criticised for being legally inept and obfuscatory. It is such a small scale issue in practice one wonders why the Government has made such a fuss about it. It just allows the Government the opportunity to demonstrate that they are on the side of property interests the investors and absentee landlords who leave the properties vacant (which, strangely, isnt condemned as an antisocial practice) against some of the most vulnerable people in society. Chapter six covers a range of loosely related topics around helping vulnerable households or households in precarious housing positions. The Government does a good job of putting a positive spin on a set of policies that largely represent severe cuts in funding going to those who need support to live independently. But beyond that I didnt feel it said anything hugely new. There is much made of assistance to service personnel and giving them greater priority for assistance, which no doubt makes sense from the perspective of populist politics. There is an extended discussion of welfare reform and the creation of the Universal Credit. The Government has already come in for a lot of criticism in this area, including from me. The creation of the Universal Credit isnt really getting the attention it deserves at the moment. This is a huge endeavour which will have an enormous impact upon the lives of millions of vulnerable people. The risks attached to UC are considerable. The risks are not just practical such as can they get the ICT to work but conceptual. There are reasons why we dont already have such a system. One such reason is that it is difficult to arrive at a national system which can effectively handle the wide variations in housing costs across the country. If the Government dont crack this one then things could go spectacularly awry, either in terms of households not receiving sufficient assistance or the Government losing control of the budget or both. The last chapter on quality, sustainability and design feels like a bit of an oddity to me. It is not the area of housing policy that I feel very able to comment on. As far as I can tell there is a lot of sensible discussion here, although what it adds up to will no doubt depend on issues of definition of key terms (such as zero carbon). What I can say is that it feels like the chapter is written for a slightly different document, or a document for a different time. In its aspirations to improve design, energy efficiency and sustainability it identifies some important components of a comprehensive long term housing strategy, but it does so without recognising that much of the discussion at the moment is about budget-tightening, revisiting and watering down commitments, lifting the burden on business, and the like. It isnt obvious that these two discourses are entirely compatible. Building sustainability seems to me to be about spending a bit more now to save over the long term, which is precisely the opposite of most policy thinking at the moment. 7. Conclusion

The Government opens its strategy with the claim that it represents radical and unashamedly ambitious thinking. Im not entirely convinced on either count. Or, rather, I think some of what it is trying to do is radical. But Im not sure that is going to turn out to deliver entirely positive housing outcomes. 6

There are elements of this housing strategy that are unambiguously positive. On many of its proposals the jury has to remain out because we dont yet have the detail to make a sensible judgement. There are some areas private renting - where it would have been good to see more activity, but where there is little. There are some proposals in particular for a mortgage indemnity guarantee that are, in my view, utterly misjudged. It is admirable that the Government is willing to intervene to assist those in owner occupation or who aspire to it, but that isnt a very wise mechanism for doing so. It is storing up trouble for the future. Overall, I would say that the strategy contains some modest steps in the right direction but some unfortunate lurches in the wrong direction. Finally, the very existence of a housing strategy is to be welcomed. The fact that it has achieved considerable prominence in the news is excellent for those of us who have spent a half a lifetime thinking and writing about housing, convinced that it is a vital issue. Reaction to the housing strategy statement emerged throughout the day yesterday, 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 its good to see it high up the political agenda.