Housing Policy in Scotland: Away From the Numbers?

I spoke at a housing conference in Edinburgh on Wednesday. ‘Lifting the lid on the affordable housing supply programme’ was organised by the Chartered Institute of Housing. My brief was the challenges facing the sector in delivering the Government’s output targets over the current Parliament. The meeting on reflection raised important dilemmas but before I get to them a short recap.

 The SNP Government has an annual target to deliver 6000 social and affordable homes for each year of the five year Parliament. Two-thirds of the programme is to be social housing, at least 1000 units per annum from council house building (although the predominant player is assumed to remain developing housing associations). In the current three-year spending review period (final year 2014-15), the overall cut in public capital spending on affordable housing was of the approximate order of 45% (compared with an average cut in capital spending of a third). However, since then a combination of Barnett consequentials and in-year reallocations have boosted housing spending bringing it closer to the average reduction.

 In the first year of the programme (2011-12), the target was comfortably exceeded (but did reflect earlier years’ approvals) and the Scottish Government expects the target also to be reached for 2012-13. Some 80% of housing programmes are organised around three year strategic programmes led by each council – the key issue at the moment is the ability of each local programme to deliver the requisite new supply overall for the next two years. The big worry for councils and their partners is the cliff face that follows in the form of the, as yet unknown, June 2013 Whitehall spending review and the future budget implications for the following three years. To reduce uncertainty the Scottish Government has already offered (albeit reduced) planning assumptions for these three years to provide some degree of continuity (even though these cannot yet be guaranteed completely).

 The Scottish Government view expressed in the conference was one of confidence that the numbers would be delivered for the remaining years of the programme. So much so that it was suggested that the focus should shift now to the period thereafter and a further examination considered of alternative ways to deliver more social and affordable housing within plausible financial, public spending and housing need scenarios (continuing the innovation process started by the Scottish Government in 2010).

 I am a bit more cautious for a number of reasons:

1. There is quite a long gap from initial local plans, to approvals, starts and final measured completions. While we all welcomed the multi year planning model after decades of annuality – we clearly need to recognise that local providers circumstances may change over this period and it may not always be possible to generate shovel-ready alternatives if specific developers either withdraw or do not come forward in the first place.
2. Two speakers representing the local council experience of running these programmes (Glasgow and Highland) painted a picture of declining output and in both cases big reductions in the number of developing housing associations. This is the view commonly expressed by parts of the sector and the question is how general is this trend across wider Scotland?
3. Financial capacity remains a key issue. I stressed in my own paper that there are really two questions here. One is about the ‘true’ level of financial capacity, particularly in the housing association sector. This has been controversial since the 2010 study that set financial parameters thereafter. Regardless of the accuracy of the study in 2010, financial capacity, however, may have weakened thereafter. Second, however, is the ‘gap’ between financial capacity  – it is after all, only potential or latent financing ability – as opposed to actual demand for finance. The point is that even if financial capacity has fallen, the real level of demand for finance may be considerably lower, and all the more so in troubled times. One reason for the apparent decline in willing developing associations is that their assessment of risk, costs, quality, etc. is increasingly to manage stock, perhaps diversify a bit, but not build to the same extent, if at all. We need a better understanding of both of these dimensions.
4. And then there is the numbers game.  Completions are the key metric, and while there are careful well-established standards and regulations, we lack comprehensive evaluation of the outcomes of the main social models in play – size, location, mix, greenfield or brownfield, efficiency dimensions. It is remarkable in this day and age that there seems to be so little interest in this – certainly until the end of the programme (when the value of such a study is considerably less).

 The Government and the sector face need levels that exceed completions by around a third (if the need estimates of 2006 remain accurate). In many respects the Government has done an impressive job to sustain output levels and to widen the mix of affordable rented housing in creative ways. But looking forward, the business risks arising from welfare reforms, continuing credit market problems, the 2013 spending review and this gap between provider financial capacity and demand – all raise questions, if not red flags. While supply policy should not be simply output focused, it will nonetheless be difficult to get away from the numbers.

The Passing of Ray

When I was growing up, for me, the Doors towered over all other bands. While the youthful commitment has understandably faded, they remain special. In that context, it was very sad to hear of the passing of founder member and purveyor of their distinctive keyboard sound, Ray Manzarek. He was a lot older than the rest of the group and remained the de facto ‘spokesman’ for the Doors long after Jim Morrison’s death in 1971 – even if falling out with John Densmore (the band’s drummer) over subsequent projects and commercial ventures.

The Doors were remarkably productive, producing six albums in four years, five of which were timeless classics. Personally, I was more a fan of the guitarist, Robbie Krieger, who did some great playing (for instance: Peace Frog, Spanish Caravan, Roadhouse Blues, LA Woman). Ray Manzarek was particularly prominent on the first album and my own favourite record, Strange Days (also a great album sleeve). As the band developed a lot of what he did became more elaborate and involved (such as Riders on the Storm and the later use of Albanoni’s Adagio). He was also key to probably my favourite Doors song – Waiting for the Sun.

Ray Manzarek contributed some fantastic music in a career largely focused in the amazing period from 1967 to 1971. However, he also managed to harness Jim Morrison (at times a very challenging and unpredictable person, to put it I mildly) and together produced something unique and special, which lives on. Rest in peace.

Indicating Housing

The Economist had a snappy and eye-catching piece on international housing markets today on Twitter. Essentially, the story is based around looking at national housing market performance and linking these to two key indicators: the deviation (and direction of deviation) from long run equilibrium price to income and price to rent ratios. In other words, does country X have a house price to income ratio above or below its long run position and by how much; similarly, is the house price to rent ratio above or below its long run position and to what extent? It then becomes possible to build an economic narrative about market strength, overheating, or, continuing weakness, etc.  The Economist highlighted the notion of the contrast between a common surge in housing markets before 2008-09 but an uneven recovery now. It also singled out Canada as having likely future problems (as well as Eurozone members: Spain, Italy and France).

I found this analysis  certainly interesting, but one that raises more questions than it answers. First of all, the use of price to income ratios is a commonplace in housing economics but there has undoubtedly being growing reluctance to talk about a standard or long run relationship, both because of volatile and disequilibrium features of recent housing market experience, but also because of a much greater interest in the distributional nature of the housing market. In mass home ownership societies, it is how these ratios operate at different points on the income scale, how housing wealth relates to income and life cycle, that are of increasing interest and importance. It also cannot be sensibly detached from mortgage lending and that linked or joint market.

A second issue is that the price to income ratio and in particular the concept of the equilibrium ratio is perhaps an elusive one. Economists may be right to attach importance to the fundamentals and the way market forces embodied in the elements of ratios such as price to income drag values back to a stable long run position – but the more complex the market and the sector, the less recognizable may be the transmission, the path and the end point. It is all the more likely that at intermediate stages other forces will drive us off course needing other corrections in any case. One such force is the mortgage market – there is a strong case for indicators around credit tightness, mortgage lending and market transactions. If, as is surely right, we think the housing market makes large monetary and real economic contributions, these value/volume indicators of scale are critical to our macro understanding.

A third point is of course that looking at countries’ ratios (i.e. aggregate analysis) is not perhaps as meaningful as looking at better defined housing market systems, often at regional or metropolitan levels. Contrasting Greater London with Paris or Manhattan or Tokyo, or indeed with other regions in the UK would be more useful and comparable.

Fourth, the price to rent ratio is a relatively recent innovation that reflects a broader financialization of housing. The indicator is supposed to create a variable similar to a stock market price to earnings ratio on the basis that house prices should have a long-term multiplicative relationship with market or imputed rents: too big and it is over-priced and heading for a correction. I can see that this plays to the Economist’s readership and indeed there are contemporary housing economics papers using this sort of concept. It may well be a useful indicator but it rest on key assumptions. These include that we have securely identified the long-term equilibrium price: rents number (or has it been calculated from trend data only?). We also must assume that there is a well-defined equilibrium relationship between owner housing markets and renter housing markets that holds in the same way over time across different countries. I have my doubts that this is true. The UK has a growing but immature rental market, which has a counter-cyclical relationship with home ownership and a different, competitive relationship with social housing. That is quiet different from the inter-tenure relationships that exist in Germany, the Netherlands, the USA and Australia, each of which arguably have different, distinctive relationships between owning and renting. The indicator used may show the deviation from a trend or long run ratio but the base may mean quite different things.

We clearly cannot expect a universal battery of well worked through and updated local housing models that can be calibrated, contrasted and policies consequently based on robust findings. Indicators are not models but  have a place and I agree they should be combined to provide economic narratives but they have to be at the right scale and require sufficient indicators (though still only a parsimonious number in total) to capture the essence of the market. I had a small role in the 1990s World Bank housing indicators programme which was a fascinating attempt to do just this – working at a city/region scale to try to first conceptualise and then apply a small set of clustered indicators that complemented each other and for which the sum told a useful story. Later on (2008-11) working with colleagues at the Universities of Manchester and Ulster, we developed a housing and neighbourhood monitor and a user-friendly GIS interface that allowed analysis of local housing markets for the Joseph Rowntree Foundation, very much in the same spirit  as the earlier World Bank approach (http://www.jrf.org.uk/publications/housing-neighbourhoods-monitor).

I would suggest, finally, that there are other indicators that need to be included in this small bundle of essential measures of the housing market. These would include those in the Economist article, suitably caveated, the aforementioned indicators of mortgage credit tightness (and this would be a macro variable), as well as a standardized measure of transactions volumes. In addition, countries like the UK must have a measure of regional long run supply elasticity, since this is at the heart of our housing market volatility problems. Steve Malpezzi at Madison, Wisconsin has also suggested constructing an index of regulatory tightness for land release and planning for housing – a difficult and contentious task but something worth thinking about further for the UK?

Public Funding and the Tipping Point

Alex Marsh tweeted a link to a word press blog this morning raising concerns about the future of public services. The excellent post on http://flipchartfairytales.wordpress.com (‘Sleepwalking into tomorrow’s state’) drew incisively on the prognostications of Paul Johnson from the IFS regarding the June spending review by HM Treasury.

The points being made are essentially twofold: the budget deficit reduction strategy was designed to be predominantly spending cuts rather than tax increases. Government chose to initially increase taxes, cut capital spending (e.g. at DCLG) but leave the more painful current spending cuts on services till later on when it was presumed that growth in the private sector would lessen some of the pain at least on the jobs front. As we now know, economic growth did not play by these rules and George Osborne will now cut deep into public services in the run up to the election and beyond.

The second point of interest made in this morning’s post is that we are now approaching a tipping point where state spending has been transformed from being primarily about the delivery of our public services to one of welfare spending on pensions, social security and other (less predictable) annual managed expenditure. Partly this is a transitory effect of the whopping debt interest we have to pay but underlying the story is a relatively unheralded shift way from our public services like libraries, museums, roads, local amenities and the like, towards welfare (bearing in mind the funding protection of welfare giants like health, and education by the UK Government), which makes it harder on all of the other services.

So, while we understandably worry about the cuts and benefit restructuring underway – there is something much larger, significant and insidious underway. Meanwhile we see English Conservatives obsessing over Europe in quite incredible ways and all of it adding fuel to the Scottish referendum debate. But shouldn’t more media and commentariat focus be on the economy and services?

I was on a visit five years ago to Cleveland, Ohio, six months before Obama’s first election victory. It was my first experience of this part of the United States and it was a highly resonant one. Cleveland is a hollowed out city with affluent suburbs two significant universities, and a few neighbourhoods wiped out after the sub-prime crisis (we were still only on the cusp of the GFC when I was there). A post-industrial city, Cleveland’s core had a low resident population, marked spatial segregation and notable city investment only in sports stadia and the rock n roll hall of fame and museum. But what I really noticed was the parlous public finances. The roads were in terrible condition and my host told me of the then on-going political struggle to raise a special tax to fund basic education in the city.

Some urbanists have argued that the rise and decline of Cleveland is a similar trajectory to that of Glasgow and one can see commonalities. However, this all came flooding back to me last week driving in Glasgow’s grid based city centre when I saw decaying roads (worn away down to the cobbles alongside deep holes in the ground) on a par with what I saw 5 years ago. As the author at flipchart fairytales says – it is only when we see our libraries shut and when we start paying for previously free local public goods (or, as in my council area in Lanarkshire, voters are consulted on what is being cut out altogether) that public service users will recognise the depth of the cuts in the same way that local public sector workers clearly already do.

The Return of James Williamson

I am unreconstructed when it comes to music. I have band obsessions (Teenage fan club; Black keys; Queens of the stone age; Tame impala – but also Van Morrison, Mark Lanegan, Richard Hawley, Barry Adamson and, ahem, Rumer). You don’t need to be consistent with music you like – I certainly am not. Because we are hard-wired to music emotionally, we can respond strongly and irrationally to new music by old favourites. I was really undone by Bowie’s unexpected return and the wonderful ballad revisiting Berlin (Where are we now?).

Perhaps my most unreconstructed irrational tie is to Iggy Pop, a product of listening to John Peel in the late 1970s. My first Iggy experience was, decades before Trainspotting, hearing those drums at the beginning of ‘lust for life’ and I was pretty much hooked thereafter. Iggy has always to me been consistently inconsistent – brilliant, barbarous, capable of incredible quiet genius but also some truly terrible moments of turgidity. He is famous for the early Stooges albums and of course his controlled moments with Bowie in the 1970s and 1980s (although I always liked the crazy live album ‘TV Eye Live’ the most from that time). Recently he has made two partly French language concept albums which echo the earlier mellow Avenue B – they are actually really good (honestly). Against this intellectual Iggy there is also the monster – one or two grungy tuneless albums and the Stooges reunion album (the Weirdness). Sadly Ron Ashton of the original band died recently and that seemed to put paid to touring and recording by the Stooges. And then James Williamson returned.

In my humble opinion, the very finest moments of the Ig’s oeuvre concern Raw Power, Kill City and New Values – the three albums made with guitarist, writer, arranger and producer James Williamson. He has a quite distinct guitar technique and an ear for melody that I don’t think is always so apparent in his musical partner. They fell out spectacularly around 1980 and Williamson sunk into a kind of cult obscurity (though I note that with media like Spotify you can readily trace down his post-Pop work). And then he returned and Iggy and the Stooges have a new album (‘Ready to Die’). It is an iron rule that All Iggy Pop albums are patchy and this is no exception. But there are some truly great retro moments, excellent tunes like ‘Gun’ and ‘Dirty Deal’ and, of course, guitar of a form you just don’t hear any more (not since Kill City anyway). It is instantly recognizable as a Williamson/Pop collaboration and the world is a better place for it. Welcome back.

What a great start to the weekend. And I almost got away with not mentioning the car insurance adverts.

Pensions and Rented Housing

The Scottish Government released a press release yesterday supporting an initiative led by Homes for Scotland that aims to examine how to encourage investment in rented housing by pension funds and the main insurance companies too (and identify barriers to investment). It is not clear whether this is primarily about market rented housing or affordable/social housing. As far back as Alex Neil’s days as housing minister, there has been much interest in Edinburgh about finding ways to tap into these large institutional funds. This echoes the UK Government’s long-term aspirations to encourage institutional investment into private renting. If the funds are content to invest a non-negligible share of their portfolios in commercial property, then why not in residential investment, too?

As far as private renting investment goes, there are well-trodden arguments about transactions costs, management costs, tax transparency and specific risks that are identified by housing and financial analysts alike. There is investment but it is limited and nowhere near the levels initially suggested. Real estate investment trusts (REITs) are, it is suggested from international evidence, a slow burn that can take decades to really take hold. In the UK they have largely been used to convert existing property businesses rather than as additional residential investment. Social REITs did not prosper as a policy option even though one or two landlord-investor partnerships felt they could make it work as affordable rented housing.

Turning to affordable and social housing, it is important to point out that the funds do invest in non-market housing. They are the main purchasers of housing association bonds, they have been known to act as banks lending to the sector, they have been involved in sale and leaseback schemes with social landlords, and, municipal pension funds have taken on large-scale investment roles in both Manchester and Glasgow.  What they have not done as yet is show any large appetite for the pension funds to provide equity investment  in joint venture partnerships with social landlords to provide affordable housing to a reasonable scale.

This may not be too surprising. Social providers have to tackle governance issues about setting up these sorts of ventures. There are greater risks for the funds attached to rented housing because of benefit changes, even if the client group for affordable housing is not so benefit-dependent as would be the case with social housing. More generally, however, there is a demand problem – the funds do not think these options fit with either portfolio mix or provide the required expected risk-adjusted returns (they may in some cases be satiated by their housing bond holdings).  The exceptions to this are these large municipal pension funds. But one questions whether there is a lot of untapped appetite for risk from these quarters either.

While one wishes any initiative well that might provide additional funds for housing this will not be an easy assignment (especially to provide durable investment models that bring scale). Two other thoughts occur. My recent Joseph Rowntree work suggested that new housing finance policies take time to bear fruit, especially if new to the sector. Such policies really do need to be carefully designed, piloted and road tested, lessons learned and then given the chance for the market to develop interest and enthusiasm. It takes years to do this sort of thing right. In other words, it is hard to imagine that such policies will rapidly roll out and certainly not in the present political attention span. That is no reason to resist such policies if they are good ideas. Second, the JRF research also stressed that if an increasing share of new non-market housing is to be affordable renting it will not directly address acute housing need and will only filter down to it, if at all, very, very slowly. The funds will find it hard to generate the required returns with anything less than affordable rents.  More rented housing will help the labour market, stimulate house building and to an extent re-balance the economy but if it is, increasingly, not social housing it will not alleviate those most exposed to market forces and austerity. So, a bigger role for pensions as investors may be helpful but it can only be part of the answer if we are interested in the housing system as a whole.

De-biasing and the ‘Nudge’ Unit

The media reported today that the Government’s Behavioural Insights Team will be partially privatized (Government is to hold a competition to find a commercial partner). The doyens of libertarian paternalism, the ‘nudge’ unit employs ideas from behavioural economics and finance (as well as other sympathetic ideas) in order to influence behavioural change and de-bias behaviour in such a way as to increase social welfare and of course improve public service efficiency and generate savings. The initiative started in the backwash of the Coalition’s election. It has had quite a controversial time despite the outwardly attractive rejection of rational behavior for a recognition of a series of biases and heuristics. Despite some large claimed savings or benefits associated with policies working with a range of public sector agencies, the unit has been criticized widely in the UK by commentators and opposition politicians. Only today the Guardian ran a story criticizing the use of psychometric testing as part of job seeker requirements, apparently part of a Nudge unit exercise. The BIT website is a good place to see what they have been up to [1]. It charts the work of the unit, its links to key US academics, a number of news stories and its own reports and newsletters. I would recommend one specific paper on random controlled trials, co-authored by Ben Goldacre – not quite the same thing as behavioural nudging but a nice (if strongly pro) summary of social policy applications of RCTs.

It strikes me that aside from the whole question of the acceptability of libertarian paternalism, there are empirical questions about the size of the benefits associated with different policy changes that need to be assessed on a case by case basis. Many experimental projects demonstrate useful and important policy findings on issue like self-control, auto-enrolment and the like, but, more fundamentally, the policy objectives reflect the government’s wider agenda. So they may be deploying such ideas in areas that one does not think policy should be directed in the first place. For instance, policies on issues like extending the right to buy, or the bedroom tax can be argued to be problematic per se regardless of whether nudging is involved or not.

In my own work, Alex Marsh and I have long been pursuing the role of heuristics, loss aversion, mental accounting and other features of the behavioural economics body of work, as ways of thinking about how housing choices are made, about housing finance innovation and with regard to housing equity withdrawal. We actually submitted a paper in the late 1990s involving these ideas – though a modernised version of it only finally saw the light of day in 2011! Apart from the long road to publishing acceptability, we have always taken the view that the behavioural turn has to be augmented with a recognition of institutional features of the housing market and the reality of pervasive uncertainty about the consequences of decisions in the future and those made now for the future. Despite its attack on standard assumptions in neo-classical economics, it is far more likely that behavioural economics will be subsumed in a broader mainstream economics; rather than the other way around. This, to our way of thinking, cannot capture the reality of housing processes and choices and market activity. But that is not to say that there are not many useful ideas and insights gleaned by the work of Kahneman, Camerer, Thaler and others.

In the airport the other day I picked up a new book by Rolf Dobelli – The art of thinking clearly (Sceptre). This turns out to be a highly readable (and it is translated) pithy account of all of the heuristic and cognitive biases, plus a few other decision-making problems. Apart from being quite funny in places it does a great job of defining quite technical things in crystal clear layman’s terms (the short chapter on hyperbolic discounting is a great example). However, the interesting thing is that in each chapter he makes an attempt to suggest what one needs to do to overcome such biases and to make better decisions. Bearing in mind that the author identifies more than 95 of theses biases and problems we are actually confronted with a massive set of rules, considerations, algorithms, criteria and other ways of overcoming the biases. It is actually much more challenging to live making decisions like this (and the responses are not always consistent) than arguably would be the requirements to be a substantive rational utility maximiser. There is a real danger that decision-making becomes impossible or significantly delayed if we are to take responding to recognizable biases (having worked through how we do identify them when they arise) as seriously and do so comprehensively as the logic of this analysis implies.

Simple one-off nudges may turn out to be the informationally efficient alternative to trying to de-bias decision-making complexity consistently.

[1] https://www.gov.uk/government/organisations/behavioural-insights-team.