Ken Gibb's 'Brick by Brick'

Housing, academia, the economy, culture and public policy

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.

Housing Studies Association Conference, 2016 edition

Every year I endeavour to get a rapid response post out about the annual HSA event. This is my effort for 2016. Good to see old friends, network and just have space to reflect on what is going on in housing studies. The event was, as always, well-organised and the Heslington campus at York University continues to work really well as our venue (Although more on this below). This year the tweeting was pretty much constant and generally good value (#hsa16).

I think it would be fair to say that there were quite a few rather worrying or even bleak papers presented, not that they were not often also interesting and enlightening. It is just that, as we largely agreed, there is a lot to be concerned about. Cases in point: the impact of welfare reform past and prospective (Christine Beatty), the behavioural impacts of benefit cuts to private tenants (Peter Kemp) and the neo-liberalisation of London (Anna Minton), to name but three of the plenary papers. 

More positively, Bob Black discussed the impact in Scotland thus far of the Commission on housing and welfare. Chris Walker of the Policy Exchange courageously entered the lion’s den to challenge the views held by [almost] the entire audience regarding the housing association sector and how the sector might meet Government policy objectives. Omar Khan from the Runnymede Trust did an excellent talk on housing and ethnicity, presenting a rich array of evidence and suggesting that inequalities will not disappear by themselves and should be a standard part of housing policy. Sarah Johnsen rounded things off analysing the ethical and practical issues surrounding the emerging use of social control on the (rough sleeping) homelessness.

Not for the first time, I found myself in the final morning hangover slot, speaking in the first session on the morning after the conference dinner. I was talking about our recent Housing and Work Incentives project for JRF. Alongside me, Suzanne Fitzpatrick and Glen Bramley did a really interesting quantitative paper in that session about the structural and individual factors associated with homelessness. In Auckland, I recently heard something strongly complementary using Australian data from Gavin Wood.

The general theme this year seemed to be that we are in a difficult place (perhaps a tipping point) for housing policy and provision. Apart from the seemingly increasing adversarial nature between government and the social housing sector, much was made of the unevidenced and often incoherent, rapidly evolving, policy response. Of course, this is, primarily, the story of contemporary England but we must not be complacent on the Celtic fringe.

Mark Stephens spoke at the dinner having earlier tweeted to see if anyone could pass on any housing jokes. I think the general agreement was that there were not any. However, Mark told an entertaining story about the long standing location of HSA conferences in Universities drawing on vacant student accommodation to put up delegates. Could it be that there has been a long-running conspiracy from the HSA board to get us all into the sumptuous sleeping surroundings we all know so well? Does the board have a need for thin mattresses and monk cells? I should declare an interest – I was honorary secretary of HSA in an earlier life so maybe implicitly or explicitly I was part of the process that created the HSA  model that has led us in recent years to happily wander around the Heslington campus at this time of year.  

My most striking memory of the social aspects of the conference? After the dinner last night there was a handy time interval allowing for a drink before getting the bus back to the University. Essentially the entire conference landed on a local pub right in the middle of a pub quiz. The locals were not happy by the deafening change in room volume though I suspect the bar was more pleased to have our business.

While I do not have a housing joke to hand, My joke de jour is still I think worth repeating, here goes:

“A man is walking down the high street at lunch time. He sees a bar advertising ‘a pie, a pint and a kind word for £5’. He goes in and orders his beer and is favourite pie. Receiving his change he asks the barman – ‘what about the kind word?’ The barman replies: ‘Don’t eat the pie’.

Glasgow 2018 European Championships – Continuing the Journey

The 2014 Commonwealth Games in Glasgow was a pivotal experience for the city and its people. This is not to say that there was not controversy and criticism of specific aspects of both the delivery and certain dimensions of the legacy. My point in this post though is whether or not lessons are learnt and applied to future undertakings. It is undoubtedly true however that Glasgow has demonstrated that it has the technical capacity, the facilities and the wherewithal to compete as a host for major events. The success of those 11 days in 2014 in these terms and for the city in the sense of jobs, visitor numbers, festival effects, investment in facilities, etc. now means that Glasgow can host other major sporting events: the world gymnastics, cycling, swimming and the Davis cup to name four since 2014.This is a remarkable achievement if we cast our minds back to just a few years ago.

I understand the critics of what are referred to as post-industrial neo-liberal urban policies fixating on heritage, tourism and culture or sports and also concerns about the ability to bend such programmes towards reducing inequality and proactively supporting multiple disadvantaged communities. But does being an event host competitor and winning these events make a broader kind of economic logic? It depends on whether we think the opportunity cost of event delivery is outweighed by the economic, social and more indirect tor implicit benefits of such activities. The raft of legacy research findings on economic returns, jobs, visitor spend and the like do seem to be additional – but they are also an investment if facilities can be reused not just by citizens but for further events, too. Other legacy lessons about volunteering, physical activity, community development and sports clubs, etc. are much less clear cut. Many of these debates will actually need a longer time period to be resolved.

My point in this piece is more that the city is on a journey and is being transformed into a place which can deliver these mega events (and sport-specific international events too), and if properly constructed this can add value to the city-region economy and change the way we think about it. It could enhance rather than displace other investments, job creation and economic activity (though there is no necessity for this – it requires careful design and constant attention).

It is in this context that I should declare an interest – I was a member of the cross University legacy research partnership that the City Council and Glasgow Life established for the 2014 Games. As part of that role I agreed to facilitate a workshop this week. The meeting sought to learn lessons from 2014 both operationally and in legacy terms, and apply them to the development of the delivery and legacy plans associated with Glasgow’s co-hosting of the summer 2018 inaugural European championships. Working with Berlin this will involve bringing together a series of European sporting championships for individual sports into one mega event. Glasgow and satellite venues will host cycling, swimming, triathlon, golf and rowing, among others; Berlin will do the athletics.

My role the other day was really just to hold the coats and keep things to time but it was nonetheless a thought-provoking morning and a fascinating insight into how partners (lead officers in the council, Glasgow Life and other relevant public agencies) are thinking their way through the challenges of the event. A few things struck me in particular.

First, a considerable amount has been learned about what works and what does not work as a result of the 2014 experience. This ranges from the locus of control and the relationship with other non-local partners integral to a mega events programme, but includes issues over community engagement, communication, managing expectations and trade-offs (e.g. seeking to widen inclusivity among volunteers but also selecting those with the right skills). However, people clearly recognised that there are limits to the transferability of these experiences because of the different nature of the two events.

Second, there was a complete absence of complacency and instead a shared desire to work in partnership with neighbouring councils involved in delivery, with Berlin, European broadcasting, the business community, local sports clubs, volunteers and the specific sports organising bodies. People present were both aware of and thinking hard about identifying and managing risks.

Third, it is clear that Glasgow has changed and is changing as a result of the 2014 experience. This is not just branding and the after glow of the festival effect from 2014. There is a palpable capacity to maintain and strengthen Glasgow’s recently won position as an international mega event host and to lever economic and social benefit from it. While they do not happen by themselves and are easily over-estimated, we should equally not dismiss the potentially major long term effects this may have on the city and indeed for Scotland.

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