Ken Gibb's 'Brick by Brick'

Housing, academia, the economy, culture and public policy

Community-led Approaches to Reducing Poverty

 

What Works Scotland held an event in Clydebank Town Hall this afternoon – a workshop of about 40 people from the public and voluntary sectors, plus a few academics and councillors. The focus was on reviewing the evidence and practice concerning specifically community-led approaches to reducing poverty.

Ostensibly, this was an opportunity to showcase Richard Crisp (Sheffield Hallam University) who led a team of researchers who carried out a formal evidence review for the Joseph Rowntree Foundation. Organised and convened by my colleague, Claire Bynner, this was also a chance to share the work with our What Works Scotland  case study colleagues in West Dunbartonshire and also hear from other speakers including Bruce White from Glasgow Centre for Population Health. I was the rapporteur at the end of the event.

The first speaker was the deputy leader of West Dunbartonshire who set the tone for the day. He emphasised the priority of effective anti-poverty measures and championed the evidence of effective grassroots ‘voice’ and the importance of real life stories found in the JRF research we were discussing. He also, however, stressed that poverty is also (and always) political. For me, that latter point reminds us that even in such straitened times, governments still make choices over what they prioritise and could come to different conclusions about progressive taxes, about the mix of redistributive and more untargeted policies.

Bruce White (GCPH) presented important demographic and other trends relating to different dimensions of poverty comparing Glasgow and West Dunbartonshire. Bruce highlighted the utility of powerful infographics using aggregate and especially disaggregate data. One could not fail to be struck by the significant gradients across neighbourhoods often displaying massive differences from the most to the least affluent areas when looking at child poverty, fuel poverty, proximity to vacant and derelict land, to life expectancy and healthy years’ expectancy. He also illustrated the value of the bespoke community profile created for West Dunbartonshire.

This was followed by Richard Crisp’s evidence review. There were a number of things about this work worth noting:

  • He was clear that community-led approaches do impact on poverty and do so in different helpful ways – but they are modest in comparison to the scale of the problem.
  • He presented a useful typology of community led approaches: voluntary action (e.g. food banks); community organisations (e.g. neighbourhood clean-ups); social action (e.g. living wage campaign); community economic development (e.g. social enterprise); and, community involvement in service delivery (e.g. participatory budgeting).
  • He distinguished between material and non-material forms of poverty. The former concern reducing the costs of housing or energy, providing access to affordable credit or creating employment opportunities. The latter encompasses health and well-being, the quality of housing and the physical environment and wider social participation. The framework used also distinguished three types of positive impact: pockets (immediate respite or support ‘felt in the pocket’), prospects (approaches that help people exit poverty) and prevention (approaches that mean people do not enter poverty). I thought this was a good way of carving up and analysing the evidence. They then moved on to see whether attractive approaches had potential scalability or reach.
  • The research team used this framework and found considerable variety in impacts, their depth and scalability. Little evidence was found of approaches that might be called prevention-based.
  • I was a little concerned initially about the use of the terms scale and spread but Richard, to my mind, correctly, pointed out that specific approaches have to be situated and contextualised and then assessed as to whether they are adaptable to different settings. It is also the case that local or community-level policies have to be set in the wider sub-regional or regional economic context.
  • Finally, there was a powerful point made in the conclusion. Despite the good things evidenced in the report and seen in different parts of the UK every day in local communities, if national politicians thought that the community, the third sector and the big society would step in to fill the gaps created by austerity and deliberate policy change – they were wrong. The scale of the shortfall and its consequences for increased and deepened poverty need a sustained large scale response.

It was not all speakers speaking – there was plenty of active and varied interaction and participation from the delegates. This was a genuinely stimulating event and it was great to see that the JRF’s UK research spoke so clearly to west central Scotland. Tomorrow the caravan heads to Dundee and I am sure it will be similarly relevant there.

Scottish Council Tax Banding Reforms

I was back giving evidence this morning at Holyrood. The Scottish Government has drafted a statutory instrument that seeks to increase the weight and consequent charge applied to properties in Band E, F, G and H. They have also proposed an amendment to the means-tested Council Tax Reduction Scheme (CTRS) such that those households on below median incomes who do not currently receive CTRS will be eligible for all of the increase being met by the CTRS if they are in the higher bands. The extra £100m that this will generate will be hypothecated to support the national priority of closing the educational attainment gap. Finally, it is proposed that the long standing council tax freeze will be replaced by a cap allowing up to 3% increases in annual average council tax bills.

There are wider related issues as well concerning ongoing consultation over localising a share of income tax receipts so as to promote local economic growth.  Second, the Government is also consulting over taxes that encourage the reuse of vacant and derelict land and tax development. Finally, councils will be given the power to charge the full council tax on second homes.

The whole process around the Statutory Instruments and related immediate changes is highly truncated with the rapidly approaching new financial year, changes to CTRS, the new cap – and of course local elections thereafter in 2017.

The proposals are the outcome of the process begun by the Commission on local tax reform. The proposals need to command a majority in Parliament. Not everyone in Holyrood agrees with this current band-tinkering direction of travel (e.g. the Scottish Greens).

There is interesting written evidence on the site, not least from David Bell and form the former minister and co-convenor of the Commission, Marco Biagi.  In the section below, I paraphrase the main reflections in my written evidence.

Reflections on Reform and Beyond

Is the proposal package more progressive (i.e. ‘fairer’)? It makes a regressive tax less regressive and offers significant exemption and hence compensation (albeit through a means-tested route) to all of those on below median incomes. The changes proposed do not appear on reflection to be massively difficult for councils to implement though there will inevitably be opportunity and transaction costs. However, I think there are wider questions and concerns.

While there was not complete consensus on the Commission for the action recommended there was agreement on the need to end the council tax and the freeze. What is being proposed, especially given the absence of a general revaluation, is clearly what the Scottish Government, in carrying through manifesto pledges, feels it can do. But what is maximal for them is less than the minimum in the context of the reasonable expectations generated by the Commission. My worry is that without further commitment to substantive reform we will back in five years saying here is a property-based tax which sets values on market levels from 30 years in the past. The weighting may be more fair but the values that place properties in bands will be in most cases wrong and increasingly illegitimate. It is hard not to see this as a political fudge which does not resolve the underlying problems indicated above.

A second point is that fairness with property taxation is complex. It is not just about tax in relation to current income (important as that is) but it is also about the importance of inequality transmitted and reflected in the housing market and the relative failure to tax housing as an owner-occupier investment. While we repeatedly hear of the importance of social justice and tackling inequality, one of the key sources of that inequality (as well as damage through market volatility to economic productivity) is apparently sacrosanct. Moreover, as John Muellbauer at the University of Oxford pointed out, there are other ways to support low income households pay their local taxes, such as through allowances (like the Greens proposed), deferred payments as well as well-designed benefit systems.

Third, while the CTRS reform is in many ways a neat solution to compensating those in low incomes in higher value properties, it does add a further layer of means-tested complexity, and it is not clear at this point what will be done to ensure the highest levels of take-up. This is all the more germane given that the exemption would go much further up the income scale to immediately below median net incomes. There is a tension here with government policy elsewhere which will likely lead to councils setting full council tax on second properties on the basis to bring properties into more efficient use, yet at the same time CTRS is being used to help households stay in properties that are often only marginally affordable, if that.

Fourth, I was surprised that it was deemed unnecessary to carry out an equality impact assessment for the CTRS and that no wider assessments were required for either the tax change or the CTRS. The £7m figure for the additional cost of the CTRS must have assumptions about take up rates – it would be interesting to know more about these – as I think there would be grounds to think that rates might be relatively low. Additionally, aren’t the lessons from the land building transactions tax introduction that these sorts of tax changes do have market effects at the upper end of the housing market and that this is likely to have some degree of impact on when people decide to move how and could conceivably affect the labour market decisions of higher net worth households. I would have thought that was something working looking into.

Fifth, while ending the freeze and giving councils back the power to charge full council tax on second homes provides more discretion locally, this is offset by the implementation of hypothecation the extra £100 million to a national government priority.

Following the evidence session this morning, a few final thoughts struck me.

First, the truncated nature of the process has left a few uncertainties. There was a lengthy discussion this morning about the mechanism by which the £100 million for education will be managed and allocated locally. Second, we are unclear about the timeline and practical proposals for the localising of income tax receipts. Third, there is clearly no appetite for revaluation within the Scottish Government but the underlying problem and entropy of increasingly non-credible valuations will not go away. Fourth, there may be other unintended consequences and transaction costs if many high band property households seek to have their homes revalued down to lower bands – though I do not know the scope in practice for people to do this.

All in all, to paraphrase Marco Biagi, concerning the council tax, few people would have started from where we are now but equally on reflection how many will be happy with where we have ended up?

The Future of the US Mortgage Market

“The trigger for the most recent crisis remains the part of the global financial system that has been least reformed”. The Economist, August 20, 2016.

There is a thorough and thought-provoking diagnosis of contemporary US mortgage markets in the USA in the new edition of the Economist. You may ask why this is a significant issue worth attention. First, the proximity of US mortgage securitisation to the global financial crisis and the extent to which earlier structural and other challenges have been repaired is important for the world financial system not least because the rest of the world owns trillions of dollars of US mortgage debt. Second, the US market has had a lengthy and difficult period which has had all manner of knock-on effects for housing, communities and the economy. Third, there is the key question of the future – how stable, resilient and sustainable is the current system and also proposals for reform. Finally, how relevant is any of this to the UK’s mortgage market?

The article argues that despite the rebalancing of Wall Street banks since 2008, alongside the banks sits the mortgage sector, which creates almost as much credit as the banks but unlike them the housing credit sector is much less capitalised and only just in profit. US mortgage debt is of the order of $11 trillion. The Economist argues that the taxpayer subsidies the system to the tune of $150 billion a year (tax breaks but also the indirect effect on interest rates of the Fed purchasing mortgage bonds). This is in part because of the conservatorship of Fannie Mae and Freddie Mac, or de facto nationalisation of the great majority of the US mortgage sector (at least 2/3 of new mortgages originate from agencies of government). The economist concludes that it is not the market but ‘administrative fiat’ which determines mortgage volumes, the structure of loans and attitudes to risk.

The collapse after 2008 led to major changes in the regulation, ownership and practice operating in the mortgage lending sector. The Economist stresses the withdrawal of traditional lenders from mainstream new home loans to be replaced by specialist orginators. Second, the Government’s rescue of the system between 2008-2012 left them in control of large parts of that system and in particular of securitization of mortgages. Third, although the old derivatives market has been largely removed, it is still the case that the ownership of mortgage assets is still widely distributed across the banks and internationally.

This is where the Economist’s argument gets a bit schizophrenic – they argue that on the one hand there is too little regulation of the new originators of mortgage loans is too loose but at the same time the rest of the mortgage market is far too regulated – with 10,000 pages of law and rules that tighten up who gets loan, what kinds of property and loan types are eligible. Yet loan to value ratios are weakly controlled and 95% LTV loans are increasing (25% of new loans in 2012) and down payment regulations have been loosened.

The upshot for the authors is that the US mortgage system seems to be playing two roles – providing liquidity in the mortgage bond market but also using implicit and explicit subsidy to boost home ownership. What is to be done –the Economist is not keen on just leaving it alone (which itself is a common response after the shocks of 2008 and thereafter). Instead, they want a market solution but also note that with the status quo remaining because of the dominant role of the state, a future default crisis in the mortgage market will need to be bailed out by the taxpayer and this might be huge.

What is the market alternative? Force mortgage lenders to recapitalise like the banks on Wall Street and at the same time raise fees to create profit signals and incentives to take risks (and bear their costs). Administrative control and subsidy would be reduced and mortgage rates would probably go up a bit too. The Economist reckons this would require about $400 billion of new capital.

There are however difficult political economy barriers to such reform: the Government currently receives income from its conservatorships (but does not have their debts on its books) and of course the twin reduction of subsidy and higher interest rates (plus potentially sounder market criteria and regulation for lending) does not win support from the middle classes.

This all sounds like the policy reform problems we have discussed many times before – important coalitions and stakeholders who thwart reform even when it is in society’s long term interests. Figuring out ways to build consensus or use opportunities to act while sorting out the design and implementation of system wide reform, and indeed to compensate or mitigate the impacts on losers from reform – is a challenging mix. Default to inaction is made all the more likely by the need to get new enacting legislation through a partisan Congress.

While one may not necessarily agree with the precise policy thrust in the article, the problems are real enough. While not accepting the prognosis we still have to confront how to make policy well in a complex and uncertain setting. For those thinking about wishing to tilt the UK mortgage market to or from further regulation, it is worth considering the experience of the different and distinctive US setting.

Freedom

Today was a milestone day in our household. We finally paid off our mortgage. Our journey is probably not too different to many of our vintage and trajectory but certainly it now looks like a housing career much less likely to be possible or typical for many folk starting out now wanting to buy a home.

As many did in the high water mark of mortgage deregulation, we started in the late 1980s with a 100% endowment mortgage. This was for a two bedroom interwar four in a block or cottage flat purchased a couple of months after I started my first full time job as a research fellow. Mortgage rates were 15%. It needed a lot of work, much of which family and friends assisted with and we stayed there, in hindsight, too long. There was a dodgy roof and a comparatively large garden, which were both in their different ways time-consuming and stressful.

I really wanted out of that house by the time we moved- I still occasionally have a recurring dream that we have to move back there (and to be clear I wake thinking I have had a nightmare). We moved about half a mile into a new home and watched it being built, which was an exciting time. This was a semi-detached three bedroom house, our larger mortgage was in two parts (a legacy of that earlier endowment). The new house was an incredible contrast to its predecessor and we had a little more than five years there. We would probably have stayed longer but an attractive, detached house around the corner came on the market and we managed to get it (the vendors also moved to another house in the immediate vicinity).

We have been in the present house more than 11 years now and we were able to use the redemption of the endowment (at nothing like its original supposed value) to pay off one bit of the mortgage and then overpay the other part till we could clear it today. A combination of very low interest rates and two jobs made this possible.

We know we have been fortunate working in comparatively secure jobs while escaping the vicissitudes of economic turmoil both in the early 1990s and late 2000s. We were able to secure a 100% loan in 1989 and make incremental progress thereafter. This is now a much more challenging problem for would-be buyers because of the binds of higher entry level house prices, weaker earnings growth, greater job insecurity and the much more significant down payment constraint.

If people cannot access funds, build savings or inter-vivo transfers or other financial support from family or friends, and do so when it is required or opportune, the average age of first time buyers will remain high except for the lucky few. As an aside I think there would be much merit in detailed and extensive independent research in the binding nature of these down-payment constraints and the effectiveness of policies that try to relax them. While there is much to be said for not returning to 100% mortgage loans the industry may have gone too far in the other direction but it is a complex multidimensional problem and simple pat answers about how to safely increase mortgage lending should be viewed with suspicion.

So, it is no more ‘I owe, I owe, so it is off to work I go’. However, to be honest I never really felt like that about work. Still, it is a rite of passage to close the mortgage account, and, as so many aspects of life increasingly do these days, it does make one feel old. The future will be about maintenance rather than a mortgage. We will just have to plan it ourselves.

 

What do we know about the demand for private renting?

Regular readers will know that I have previously argued that we know surprisingly little about the UK rental market, despite the magnitude of growth in the sector in recent years. Evidence is hard to come by because of the disparate diffuse nature of the sector, which is really a series of well-defined demand segments. But this does not stop many people writing about the sector as if it was homogenous, simple to understand, monitor, evidence and, consequently, intervene in to moderate excesses.

Unfortunately, this over-generalisation has extended to the former Chancellor of the Exchequer who introduced tax changes that will reduce returns and increase borrowing and transactions costs (but without any proper analysis of the impact of these changes). But the sector is not simply an investor question – it is also about who lives in the sector and their aspirations and experiences; and it is all the more important because at the margin it is the sector where the action is because of credit constraints on entering owner occupation and, for others, because of the insufficient level of affordable housing supply of social housing.

It is against this backdrop that a couple of weeks ago the Bank of England’s blog site Bank Underground issued an interesting paper on the drivers of the demand for private renting by Mariana Gimpeliewicz and Tom Stratton. In what follows I will summarise their paper and its findings and then reflect a little on what they say.

Noting the observed growth in the share of total dwellings privately rented since 2002 and the growth since 2008 of buy to let mortgages (BTL) rising at more than 6% per annum (a subset of all private renting), the authors argued that it made sense to try to understand the growth in PRS demand, what its main components are and then divide the analysis between pre-crisis and post-crisis and also make some projections about future demand levels in the sector. The authors note that BTL loans explained about 70% of PRS expansion before the crisis but that tighter underwriting may explain why BTL only supported about a third of the growth after the crisis (most of which came from ‘cash purchasers’).

The main drivers of demand for the PRS are (1) demographic sub-groups i.e. students, in-migrants and younger people, who all have a higher propensity to rent privately; (2) where the provision of social housing falls, households will be funneled to the rental market; and, (3) potential first time buyers who are credit-constrained or face affordability shortcomings will be obliged to either rent or live with parents. In this study, the lack of affordability data means the focus instead under (3) is on credit conditions.

The authors found that pre-crisis, net inward migration was the largest contributor of PRS demand ie about a quarter of all sector growth (2002-07). Additional students helped explain another 12.5% of growth, with slightly less growth due to the reduction in social housing available. Their analysis explained about half of the growth in the sector n this period. Between 2008-13 (the credit crunch period), migration remained an important factor, with a declining role for social housing and student growth. Much more important was tighter credit conditions for first time buyers ie the withdrawal of high LTV loans – they found that this accounted for two thirds of the growth in the private rented sector in this period. Overall, their drivers account for 82% of the growth in the sector and all of the BTL segment’s growth. The authors recognise that affordability may be driving the unexplained growth – in other words that by driving up house prices new BTL supply may be making owning less affordable and hence more are directed towards the rental market (but this is supposition).

Looking ahead, the authors expect demand to grow to 2019 but much less slowly than in recent years. This amounts to as much as a million additional properties in the PRS in this period. The key to how this turns out will turn on the extent to which frustrated home-owners actually manage to purchase their first home. Buy to let growth is forecast to slow.

This paper is on the one hand an interesting thought experiment that allows us to see how the different segments are growing at varying rates and have done in the recent past. It shows also that buy to let is far from all of the story. One just has to look around our University cities, for instance, to see the growth in bespoke purpose-built student accommodation. The split between pre and post crisis is also intrinsically sensible and a useful exercise.

However, despite the value of the disaggregation of the sector, the use of different data and its creative manipulation, it is worth noting that there is not much underlying economics in the construction of these different numbers. So, relative rents and housing costs and income play no direct role in coming up with these numbers. Instead, a series of generally reasonable assumptions, extrapolations and extraneous propensities are adopted. This is reasonable in the absence of the economic data of the right kind but we should be cautious.

We need more work more on these sub-sectors – what are the economic drivers in different segments; how is individual tenure choice governed by things like relative prices, credit availability, income, down-payment constraints and household variables? These models may well fluctuate over the credit and wider business cycle but do they also vary across space in different regional labour markets? What about the industrial economics or theory of the firm of different kinds of landlords – what are their motivations and how responsive are decision makers to changes in financial and economic variables (this latter question is vital to understanding the impact of policy interventions?

 

Brexit: Balancing Scotland, the UK and the EU

 

Yesterday morning I went along to the IPPR-hosted Brexit event featuring a keynote speech from the First Minister. More on that later. First, and to set the scene, it is worth thinking a bit about the options to be negotiated.

The Institute of Government last week published a helpful briefing paper called Negotiating Brexit, by Robyn Munro. The paper, from a wholly UK perspective, does three useful things: it sets out what will be negotiated, considers the options for the ‘terms of the divorce’ and, third, discusses the negotiation over the longer term UK-EU relationship thereafter.

Munro (p.3) identifies three sets of critical longer-term questions post withdrawal that will need to be resolved:

  • What would be the UK’s degree of access to the single market in terms of goods, services and free movement of labour?
  • What, if any, financial requirements would remain in terms of funds going to the EU (in return for different degrees of access), and what would be the extent of adherence to EU laws, and what if any influence would the UK have over EU rules and regulations?
  • To what extent will the UK continue to participate in other beneficial programmes e.g. Horizon 2020, European structural Funding and the European Arrest Warrant?

While it is recognised and indeed perhaps likely (because there is no precedent) that the UK will end up with a bespoke negotiated deal, there are four widely discussed models commonly raised when discussing the UK exit from the EU. These are summarised by Munro (p.4). To paraphrase:

  1. Placing the UK within the European Economic Area (or the Norway model) – this would mean almost complete access to the single market [with restrictions on agriculture and fisheries] but in return free movement of people, budget contributions and acceptance of EU rules and regulations with minimal ability to influence those rules.
  2. The UK as a member of the European Free Trade Area, plus bilateral arrangements relating to specific services (the Swiss model) – this would entail access to single market for all non-agricultural goods, plus bilateral agreements for trade in specific services. The Swiss have also accepted free movement of people, an annual EU budget contribution and adaptation of relevant national legislation to those of the EU (but no influence).
  3. The UK could operate a bilateral free trade agreement with the EU (similar to that proposed for the EU with Canada and Singapore) – when these are ratified they will not involve free movement of people but will offer access to the single market in goods, less so in terms of services. They must follow EU rules and regulations but again cannot influence them.
  4. The UK operating through the World Trade Organisation (the least EU-based solution). This would involve the right to negotiated free trade agreements with other WTO members including the EU but prior to ratification the UK would need to offer favourable conditions to all those it sought to trade with. UK exports would also face the EU external tariff. Completely outside the single market, there would be no free movement of people.

These are all tricky options, even if we consider the UK as a coherent single voice in negotiations. The EU has its own interests and a range of internal voices chipping in to help form their negotiating position e.g. the opposing pressures that on the one hand seek to resolve the main issues quickly to end uncertainty versus specific domestic pressures to take a tough line pour encourager les autres. Second, there is the fundamental difficulty of the multi-dimensional nature of what is at stake – the single market, freedom of movement, the rights of non-members with access to the single market the non-trade aspects, and the procedures for dismantling existing laws, rules and regulations.

The third degree of difficulty is that the UK does not have a single voice, neither within the UK government, or, more to the point, across the UK. Scotland is in the vanguard in this respect, which was why it was so interesting to be at the meeting in Edinburgh and hear the FM’s current thinking.

There is of course actually a fifth model available to discuss once we consider Scotland – the so-called Reverse Greenland. Denmark is a member of the EU but it does not apply membership to its territory of Greenland. Could this principle be reversed with the UK outside of the EU but places like Scotland, Northern Ireland and Gibraltar either wholly within or partially remaining? At first sight, this seems difficult and not symmetric at all in terms of consequences and requirements to make it work.

The First Minister focused on the interests of Scotland – economic (including the demographic necessity of freedom of movement), democratic interests (reflecting the clear position of Scotland on the EU), social protection interests (defending workers’ rights), solidarity interests (global challenges and the necessity of international collaboration) and influencing interests (e.g something we lose if we only have associate access to the single market and the infrastructure of rules and regulations supporting it). These are the tests or areas she hopes to protect in the negotiations, recognising that ‘all options’ including a second independence referendum remain as possible outcomes to the negotiation.  But can we reach a UK-wide agreement on the negotiating position before Article 50 is activated?

I found one of the most interesting things she had to say was the focus on the opportunities created by uncertainty. Apart from a few terse sentences that make up article 50 of the Lisbon treaty – there is really very little known about what might and can potentially happen next. This is why many people are coming up with new ideas and plans – some of which may not pan out or may be undesirable. But this surely is a time to be creative and innovative (and inclusive).

The other interesting thing was the stress on the need to understand why 17 million across the UK and more than one million Scots voted to leave – to understand the lack of trust and confidence in government. While this may be argued to be less of an issue in Scotland where trust seems to be higher than for Westminster government, it is the case that the FM sits at the top of an insurgency movement herself that reflects, in part, far wider forces at play (and not just in Scotland/UK and the EU). Political (and societal) norms appear to be in unprecedented flux.

Opponents argue that this is all about another independence referendum. True or not, a second independence referendum is far from straightforward. A referendum will only be proposed in the best expected circumstances and there is much work to do to overcome weaknesses in the 2014 platform, especially on economic issues; and this will be done in an increasingly hostile, uncertain economic environment. The medium term future looks much less promising if the Scottish Government’s record of economic competency is to be maintained (without at least risking more unpalatable political choices over scarce public resources). Even if new Chancellor Phillip Hammond relaxes the austerity straitjacket, any short run economic slow down or recession matters much more acutely to Scotland’s public finances than was the case before the 2016 Act. Seeking to simply govern well without mishap  through this momentous period may be the best strategy. But who is to say what further bear traps await our politicians in the weeks and months ahead?

 

 

Brexit and Public Policy Capacity

The post was written with Des McNulty and is also avaialble on the Policy Scotland website.

In the shock and uncertainty following Thursday’s vote, the focus has primarily been on the constitutional, social and economic questions that flow from disengaging with the EU and on the political fallout. Important as these questions undoubtedly are, there is an underlying problem with policy capacity, not just because of immediate political vacuums in Westminster or the lack of a plan amongst those calling for Brexit about what that might mean beyond a few slogans. 

The challenge for both the UK and devolved governments is to carry on their normal work (and do so competently across their range of responsibilities), while urgently building up capacity so they can understand EU disengagement and thereby negotiate effectively. And at the same time they are having to manage and ride out downside economic risks (which will inevitably impact on their ability to balance these tasks). 

The scale of the challenge ahead is unprecedented. Following the 2016 Scotland Act, the Scottish Government is presently faced with implementing tax powers and the delivery of elements of social security. These are the biggest technical, policy infrastructure, scrutiny and personnel challenges since devolution was enacted in 1999. But they are as nothing compared to the requirements for expert analysis, negotiation and co-ordination across the thousands of often inter-related substantive areas affected by EU withdrawal. This is not just a challenge for Whitehall – there are huge implications for the devolved governments also. 

At this point, no-one really knows how big or complex a job this will be – we don’t know what objectives of any of the negotiating parties are likely to be, what the processes are or who will be at the table. This may be one reason why the UK Government wish to slow down the Article 50 decision (even if at the expense of the negative consequences of short run economic uncertainty). We do know that a co-ordinating body is being hurriedly established across all Whitehall departments to start this work. But one consequence of deficit reduction policies since 2010 has been the winnowing out of analytical expertise in Government departments (in Scotland and Wales as well as at UK level). 

The Scottish Government faces complex and in some respects contradictory pressures. First, they need to deliver competent government across their portfolios, at a time when local government and many public agencies are dealing with severe real terms reductions in their running costs budgets, which are likely to continue for years to come. Second, they have difficult choices to make about how to use their new fiscal and welfare powers, given expectations and the resources required to build the infrastructure needed to implement e.g. new social security arrangements. Third, they need to shift personnel and undoubtedly bring in people from outside to advise and assist on options in future EU/UK/Scotland negotiations. Fourth, alongside all of that, if the SNP administration wishes to put forward a new independence referendum proposal, they will want to provide a credible blue print that addresses the issues on which the Yes campaign was weakest, most notably the currency question.

Perhaps one of the lessons of the last few days is the danger of assuming that ‘other things do remain equal’. The leadership of the ‘leave’ side were wrongfooted by the prime minister’s resignation. They didn’t expect to win or to have to lead the implementing of Brexit, at least not the immediate stages hence the lack of a plan. In advance of the vote, economists identified turbulence caused by short run uncertainty, including inflationary devaluation and stock market reversals as risks. They also pointed to the longer term insidious effects of investment postponed or displaced, jobs moved abroad and longer lasting uncertainty associated with the trade deals that we may eventually secure (e.g. what kind of market relations including labour movement can be secured with the EU). In the EU referendum there was a wholesale rejection of expertise and evidence per se (when it does not suit) with decisions ultimately resting on attachment and perception (arguably something similar happened in the Scottish Independence referendum). But governments can’t work in that way – there is surely now a belated realisation of the need to strengthen government capability by reversing the hollowing out of analytical capacity.

The probability of a Brexit-induced recession or economic reversal is a significant constraint on capacity building for negotiation and analysis of EU disengagement, something that we see as vital if government, the civil service and other sources of expertise such as the universities are to rise to the complex multi level challenge that UK and devolved governments now face. At present the markets are discounting our ability to reduce the public deficit and at the same time expecting lower economic growth. Other forward indicators like bank and property sector shares are also uniformly negative. 

The fiscal stance of the UK Government in terms of deficit reduction may have to be relaxed in order to mitigate the consequences of economic slow down. But further austerity can also be anticipated, given the impact on government revenues. The pattern over the last few years has been to prune back civil service numbers and analytical capacity has taken a particularly heavy hit. But given the scale of the changes and pressures on government there is an urgent and continuing need for expertise if we are to properly understand the options that new circumstances confront us with and provide the information necessary to make properly informed choices. 

The EU referendum outcome is not one that most of the experts, whether in academia or government, would have preferred. Surely any implementation and other adjustments arising from the referendum must however be informed by available evidence and draw on relevant expertise, some of which is in short supply inside government itself. It is now up to the public policy community to mobilise and engage in a way it has not done before and to government to open out so that the challenges we all face are not met because we fail to provide or apply knowledge which would be helpful and relevant.

‘Five Years, that’s all we’ve got’: the Scottish election and challenges for the new Parliament

 

Earlier this month, the Additional Member System reasserted itself and ended majority government (just). The SNP continue in power but as a minority administration (just). One consequence expected from this turn of events is that there will inevitably now be more focus on the committees and a wider distribution across the parties of committee chairs. Will we see more scrutiny and more effective committee work as a result (e.g. of the coming spending review)? Budget-making and financial bills also take on a new heightened aspect now that their passing through Parliament is less straightforward.

The major substantive change for the new Parliament is of course how they use the new powers. Much of the election debate focused on the new fiscal powers and how progressive or otherwise any changes to income tax should be (and party proposals for local tax reform – see below). Much less was said about the coming welfare reforms which will devolve over many non-working age benefits as well as powers to amend the housing cost elements of universal credit. This is a massive step change for Scotland, perhaps the biggest single administrative challenge since 1999 (and that is even before contemplating policy change like benefit top-ups). It is not a particularly exciting thing to advocate but better done well than quickly.

Two interwoven constitutional matters remain very close to the surface. Next month is the European referendum and of course Scotland remains politically defined by the dualism of the 2014 referendum – what David Torrance and others have called the ‘Ulsterisation’ of Scottish politics between nationalism and unionism. As in Northern Ireland this seems currently to most benefit the two parties most associated with these positions (in Scotland, the SNP and the Conservatives), which again raises questions for the positioning of the diminished Scottish Labour party. While there is a small majority in favour of indepdendence in the Parliament, the appetite for a second vote will of course be driven by political calculation and risk. This could well be altered should the ‘material change’ of a vote to leave the EU occur while Scotland votes to stay.

There are two other substantive issues that will feature in the new Parliament. First, while the SNP came up with a remarkably modest set of proposals to reform local taxes that even failed to promise a general revaluation (not that dissimilar as a set of proposals from those of the Conservatives), the rest of the Parliament offered more radical property-based reforms.  This may be enough to neuter the call for more comprehensive tax reform (which would be disappointing and a lost opportunity) but alongside it, there is clearly interest in local government reform more broadly.

These two things cannot and should not be separated, as is equally true of the need to situate council tax reform in terms of wider amendment of local government finance as a system. Austerity rolls on and will impact hard on local government and its services in years to come. My colleagues Annette Hastings and Nick Bailey have shown clearly in work carried out with Heriot Watt University for the Joseph Rowntree Foundation that earlier spending cuts in England were often ‘pro-rich’ at the expense of the most disadvantaged. The Scottish Government and local authorities must actively minimize this possible outcome in Scotland in the years ahead.

Second, the SNP have pledged a target of 50,000 social and affordable homes over the life of the new parliament. The significant financial commitment is welcome but the attainment of 70% social housing within this total and the willingness and ability of non-profit providers to develop, the limits to borrowing by councils and the necessary step change in new supply required by private house builders to support affordable housing – raise major questions of implementation. The 30,000 target was achieved in the last Parliament but this is much more ambitious and takes place in a context where the enabling conditions to facilitate the levels of new supply are still very challenging. This is all at a time when the generally accepted levels of national housing need is 12,000 not 10,000 per annum and worrying evidence is emerging from our cities of rising street and repeat homelessness.

While I don’t actually feel as apocalyptic as the mood of David Bowie’s 1972 song in the title of this post – there are big challenges ahead and as always, governments, particularly devolved ones, are also at the mercy of larger external shocks, not least at the macroeconomic level. Nonetheless in terms of public policy reform and spending priorities, even in a context of austerity, the new government has considerable choice over how it allocates its funds, an opportunity set undoubtedly widened by the Scotland Act. There are real possibilities as well as constraints.

 

 

Owning Housing in the UK: Snakes and Ladders or just Snakes?

One of my favourite ‘angry’ songs from the first Tom Robinson Band album (Power in the Darkness) was ‘I’m Alright, Jack’. The song always conveyed to me the sense of ‘pulling up the ladder’. I was reminded of this reading the new report by the Resolution Foundation: ‘Living Standards 2016‘. In the report they argue that the UK housing ladder has been ‘withdrawn’.

The Resolution Foundation argues that only now are living standards returning to pre-crisis levels. The study focuses on the experience and position of low to middle income working age households. They stress the cumulative impact of long term wage stagnation only recently recovering though ‘flattered’ by low inflation. FRS household survey data rolled forward to 2015 suggests that mean household incomes remain 1.6% below their 2009 levels though they are rising relative to recent years (median income has been doing a little better). Household type (pensioners have done much better since 2002 than working age households), tenure (though with a mortgage facing very low interest rates have done much better than those renting) and place (London is the second best region in terms of household income growth before housing costs but at the bottom of the pile after housing costs).

For the Resolution Foundation these points indicate strongly the central role of housing in affecting incomes and allied to the intergenerational differences in outcomes, helps explain the ‘drastic changes’ to the levels and rate of home ownership. They point out that 1/3 of home owners are aged over 64 (compared with a quarter in 2000) and 16-34 year olds account for just 10% of owners compared to 19% in 1998. They acknowledge that the trend was downward pre-dating the economic crisis but stress that it is among low to middle income households that the reversal has been greatest. They predict that in comparison to 2000 when around half of such households aged under 35 owned their home, today it is more like a quarter and will be just 10% in 2025 if trends continue and only 5% in London. The authors argue for policies to successfully implement the national living wage, reverse the ‘most punitive’ aspects of welfare reform and pursue a sustained and enlarged housebuilding programme.

These figures are important facts that we should be aware of. I would make a couple of additional comments. First, we stressed in the 1980s and 1990s that some national policies have important regional implications, such as the spatial impacts of mortgage interest tax relief. Today, the same can be said about the tightened regulation of the mortgage market since it is deposits that play such an important role rendering home ownership inaccessible – and that has huge spatial consequences particularly for overheated housing markets. Ability to meet such deposits remains arbitrary and increasingly a function of previous generations’ success in ‘winning’ the housing market game and recycling the proceeds to their children or grandchildren. This it seems to me is where a fundamental constraint on home ownership bites and where policy needs to be more innovative and creative (as we will continue to need a more regulated mortgage market compared to a decade ago).

Second, I return to that question about millennials and their changing attitude to housing and the greater insecurity of job tenure in the labour market, to renting in particular, and issues of location, and life-work balance. We need to understand housing demand, tenure aspirations, choices by households and the limits to changing these through policy interventions much better than we do. Aspirations studies are important in this but we do critically need a better understanding of aspirations modified by constraints and actual or likely economic choices. As I have argued before my sense is that the rental market is highly segmented and differentiated but that for a growing number of younger households who do not know anything else other than the parental home – it is is increasingly normal and often quite satisfactory as a housing outcome. It is clearly less well suited for other groups like families but if anything policy work needs to focus on lengthening tenancies and not by simply seeking to ‘solve’ home ownership without tackling the down payment issue.

Glasgow’s rental market affordability challenges

 

In Scotland we have statutory housing strategies for each local authority. Even though it has no council housing, this is a big deal for Glasgow. The city has control over the distribution of capital grant funding to the housing association sector, remains a key landowner and rightly sees housing as central to the delivery of many of its wider corporate objectives. Glasgow like all Scottish councils manages a number of statutory functions such as homelessness and housing planning. Tuesday past was the first set-piece external consulting event and I was speaking at it on the topic of private housing, need and affordability.

The central evidence base that the housing strategy is informed by is the Glasgow Clyde Valley joint Housing Needs and Demand assessment (HNDA). This is an impressive piece of work and one that conforms to a standardised model of quantifying demographic and economic trends, and the overviews the existing housing system, before then going on to examine sources of housing need and estimate three scenarios (low and high migration and the principal projection). This Scottish Government supported statutory analysis is built on earlier eras of housing planning (such as the Local Housing Systems Analysis framework that I was earlier involved with). It is a solid and internally consistent approach that makes best use of data but, as is widely recognised, it is replete with conventions, judgments and assumptions. There are undoubtedly weaker areas in all HNDAs and one of the main challenges is the private rented sector.

Private renting has grown rapidly in the city (and is now over 60,000 units or 20% of the stock) and while we can put together a narrative about the emerging market based on different sources of quantitative and qualitative evidence, it remains impressionistic and I would argue that, generally, we know little about market behaviour on either the supply or demand side. Consequently, we risk undesirable outcomes if our policies for the sector are not based on firm evidence and convincing models of how the sector works and interacts with the rest of the city. Below is my impressionistic version.

Citylets data for the 4th quarter of 2015 suggested an average monthly rent in Glasgow of £701 (compared to £741 for Scotland). While the level is lower, Glasgow how has higher rental inflation (4.2% compared to 2%) and a reducing time to let period – 21 days compared to 30 for Scotland as a whole. So, the market has rising real rents and a tightening around vacant units being filled more quickly Wider evidence suggest that Glasgow (and in some cases Greater Glasgow has been experiencing rising real rents since 2010 and again this is outpacing the Scottish average. Scottish Government evidence also suggests that rents are diverging with upper quartile rents growing quicker than lower quartile rents.

I sat in a breakout session at the conference yesterday where it was suggested by someone in the industry that Glasgow’s 60,000 or so private rented units and no fewer than 35,000 landlords – that is quite a stylised fact if broadly true. It makes policy intervention, regulation and analysis of the sector highly challenging. Landlords may be largely single property landlords alongside a smaller number of multiple unit portfolio landlords. The former may be more ‘amateur’ and short run in perspective – but some actually may see the property as a pension substitute and hence be in for the longer haul unless external drivers like tax changes force then out.

Two things struck me about the landlord suppliers – the recent tax changes to mortgage interest tax relief, LBTT and capital gains tax will have highly differential effects on landlords. Those with stock and not planning to invest will be less affected by LBTT increases but those investing will. And as was pointed out in the meeting, constraining the tax relief to the basic rate could turn for some a profitable business into a loss-making one. Another colleague, second, differentiated between the amateur landlords being likely to be more likely to exist as the market recovers and in the face of these negative fiscal pressures but also as a result of concerns about the new Scottish legislation and how this all affects capital gains. On the other hand corporate investors with several properties will be more concerned about cash flow and income returns.

I remember my former colleague Peter Kemp used to talk about a highly segmented private rented sector with landlords composed of volunteers and conscripts. I think that both notions apply all the more so now – we have a highly differentiated market which caters for discrete groups: students, generation rent working households, those with short run easy access housing demands, and those at the bottom end of the housing ladder unable to access social housing.  I am not convinced we have the research evidence or monitoring capacity to really understand what is going on in each of these segments. Policy is overwhelmingly concerned with the latter problematic group but actually there is much more going on which has an important impact on the rest of the urban housing system.

I think the other really interesting idea raised by Peter’s characterisation is that we cannot assume all tenants are conscripts but indeed some of them are clearly volunteers. Not all Generation rent working tenants, usually younger households. are potential home owners. Some are clearly happy with their rental experience, do not expect to have the sort of job security associated with a traditional mortgage and certainly do not have the savings required for a deposit). But many are content with that reality and would rather trade off a good location (and a relatively high rent) to be able to access the amenity important to their preferences. But we simply do not know enough about the profile of these two forms of tenant who essentially substitute for the presently less accessible home ownership sector. But we need to know more and Glasgow needs to prioritise this in its evidence gathering and ongoing monitoring of its housing system.

Finally, it is interesting that, in a small way, housing associations in Glasgow are dipping their toe into mid market rent and indeed ‘normal’ private renting. Do they have the skills to manage properties commercially and which segment should they operate in? How do you manage estates or neighbourhoods where you have tenants with quite different rights and conditions? This may be anathema to some housing people but to others it is a diversification that makes sense and offers opportunities to improve local housing quality and widen the range of housing on offer.

Changing times.