Does the housing market constitute a wicked problem?

 The RICS Commission produced a housing market/policy reform report yesterday (More Good Homes and a Better United Kingdom[i]).This contained a long list of recommendations premised around a sense of fundamental market failure, a severe evidence deficit at the heart of housing policy, policy fragmentation and a consequent call for a range of actions to boost housing supply, mitigate existing policies such as welfare reform and expand private finance for rented housing. The policy proposals are a combination of some good novel ideas, seeking direction change (e.g. seeking greater standardisation and less local variation in planning) but also proposals that are on the face of it less attractive (e.g. qualified support for Help to Buy).

 The diagnosis by the Commission got me thinking. Is the seeking of a comprehensive reform approach doomed to failure because we have mis-specified the problem? If social, policy, economic and cultural processes over time have evolved our housing system into something complex and indeterminate, perhaps it is now, in the classical sense, a wicked problem that will defy solution[ii]?

 Horst Rittel, working in a context of systems design, distinguishes between tame and wicked problems. Tame problems, as discussed by Conglin (2005)[iii] are often found in an engineering or science context and are determinate, well-defined, we know when they are resolved, we can evaluate them objectively and we may face the same sort of problem repeatedly. Wicked problems are much more difficult to pin down. Rittel describes them as ‘ill-formulated’, where decision-makers (stakeholders) typically hold ‘conflicting values’. Indeterminacy is the characteristic of such problems. He went on to describe 10 features of such problems and these were helpfully reformulated by the Australian Public Service Commission (APSC) into seven public policy dimensions (as might apply to problems of climate change or poverty or, in Glasgow’s case, stubbornly and unexplained high mortality rates). The APSC stressed:

• Wicked problems are difficult to define because of multiple perspectives and interests on the problem
• Multi-causal interdependencies associated with the problem
• The problem is often unstable
• There is usually no clear solution (because there can be a long succession of further causes and solutions as you work back into complex root causes of e.g. poverty)
• The problems are socially complex
• The problems rarely fit with one organisation’s competency or responsibility
• Addressing the problem may include the requirement to change the behaviour of those affected.

 How does this speak to the housing market?

 I think that the modern British housing system is characterised by different conflicting interests – outsiders and insiders. These multiple perspectives are increasingly irreconcilable and, added to that, successive Governments have been unwilling electorally to challenge the key group of established existing home owners. This is at the expense of potential first time buyers and this intergenerational conflict is now an established cause of the volatility we see in the market. Positions are locked-in and it is difficult to make policy progress regarding a goal such as stable house prices (i.e. zero long term real price change) and the instruments (i.e. tax powers) that might be required to effect such a policy.

 The housing market is also wicked in the sense that the problems defy simple causal explanation and that further reasons beget different solutions which in turn beget more explanations. We understand the supply inelasticity problem in its own right but it connects to other housing tenures as people are obliged to rent, this promotes landlordism and meanwhile supply requires confidence, demand and finance before it will advance; yet, too much demand side stimulus may simply inflate a house price bubble stoking volatility (instability) and a further cyclical episode. Other ‘deeper’ stories than market general equilibrium analyses can also explain the same and indeed other aspects of the housing market.

 It is evident that housing interventions do not sit easily or chiefly with one organisation. Not only does the Treasury and the Bank of England matter, so does social security. Moreover, from the perspective of Edinburgh or Belfast – housing is in part devolved but in part is also a function of UK Government decisions (and this evolves e.g. stamp duty is being devolved to Scotland and council tax benefit is for the time being remaining protected in Scotland). Meanwhile, actual housing markets are about functional geography and the interaction of different tenures with each other and local economies. Complexity is a fair summary.

 So, housing does share some of the features of wicked problems, relating to its multi level complexity as a social and economic system, because of the multiple conflicting interests that inhabit it and because of its instability. All of these things increase the likelihood that discrete policies e.g. in the benefit system, or though guaranteeing loans, etc may induce unforeseen and unintended consequences. Add to that, the existence of medium term market failures in credit markets, the wider economy’s stagnation, austerity Britain and technical extreme supply inelasticity.  It’s not good, is it?

 Is this all a counsel of despair? Yes and no. It is a warning to think hard and carefully about new interventions and the need to link them closely and clearly to a consistent set of policy goals (like price stability or new supply linked sensibly to unmet need). But at the same time it is a recognition that we need humility, sensible ambitions and a long term agenda if we are to bend the trend of the housing market’s wicked evolution. In particular, we need to get smarter about influencing the big social policy and electoral debates in order to convince more of the opinion formers and those who input to party/manifesto thinking about gradually and sensibly altering expectations about housing as an asset and de-toxifying housing by seeking to make it a normal commodity and consumption activity rather than continuing on this destructive path.

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[i] http://www.rics.org/uk/knowledge/news-insight/press-releases/rics-publishes-its-housing-commission-report/

[ii] Rittel, H and Webber, M (1973) Dilemmas in a General Theory of Planning’, Policy Sciences Vol. 4 (155-69). Australian  Public Policy Commission (2007) Tackling Wicked Problems: A Public Policy Perspective. Australian Government: ACT.

[iii] Conklin, J (2005) Wicked Problems and Social Complexity – downloaded source reference is ‘This paper is chapter 1 of Dialogue Mapping: Building Shared Understanding of Wicked Problems, by Jeff Conklin, PhD, Wiley, October 2005’ (also see http://www.cognexus.org).

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Banking Misbehaviour: Then and Now

“The opinion expressed by bank managers is that a more reckless course of gambling with other people’s money was never pursued by any body of managers or Directors and that such engagements as these could never have been entered into had there not been either the weakest or most wilful sanction of these four firms, coupled with a negligent system of supervision which is hardly short of criminal”.

This is not a quote from the Banking Commission and is not a judgment on RBS, Lloyds, the FSA, etc. It is actually a quote from the New York Times (October 3, 1878) and refers to the collapse of the City of Glasgow Bank the day before – until Northern Rock, the biggest and most serious banking disaster in the UK¹. However, the parallels are fascinating and since I am writing a paper for a conference about housing in Glasgow in the late 19^th century I thought I might share some of the story².

The urban context of the city around the time when the bank collapsed was a high density, overcrowded city of often dreadful insanitary and unhealthy tenements. Glasgow housed more than a million souls by 1912 and endured regular, endemic economic volatility. The main sectors driving the economy were mineral extraction, textiles, chemicals, engineering and, of course, shipbuilding. The city was a ‘walking’ city prior to the later introduction of the tram so people lived in the shadow of where they worked. Duncan Maclennan and Andy Gibb (in their 1988 paper Glasgow: no mean city to miles better) indicate that population grew every decade of the 19^th century by at least 10%. The economy relied on waves of large- scale rural migration from Ireland and from the Highlands.

Jobs and housing oscillated widely with changes in international (British empire) markets. Writers like Alexander Cairncross suggested large swings in occupancy rates, rents and investment. Indeed, the collapse of the Bank in 1878 pre-empted a decadal long collapse in housing investment. At the same time both an officially sanctioned improvement trust and the municipal corporation were demolishing thousands of the worst units and putting tin badges on properties setting maximum occupancy levels in an unsuccessful attempt to regulate away overcrowding.

The City of Glasgow Bank had 133 branches and was heavily exposed to speculative investment in North America, India and Australasia. When it collapsed it had liabilities of  £12.4 million and assets of only £7.4 million. The Bank’s owners had unlimited liability (1500 were bankrupted including families, businesses and specific ventures associated with lending from the bank). There was no formal statutory external audit of banks in these days and, according to Rosenblum, it later transpired that there had been gross management errors, large loans made on dodgy security and that speculative investments had been made in order to make up for bank losses already incurred (with falsified balance sheets and profit and loss accounts).

The Bank collapse had a series of enduring repercussions. The banking sector moved rapidly to limited liability as the predominant form of corporate governance. It also led to the adopting of the convention for commercial banks to apply prudent capital ratios to underpin the sector’s viability. It also led to law to guarantee external auditing of statutory accounts. And, in an echo of the contemporary post GFC debate, the Directors were tried in the High Court in Edinburgh. They were found guilty: two served full 18 month sentences and five other Directors served 8 month sentences (also without any remission).  The media and the chattering classes in had a field day as several of the Directors were worthies in the ‘wee Free’ Church³.

Was the fraud and base financial criminality associated with the 1878 collapse (and in the cruel setting of unlimited liability) comparable to the moral hazards and behaviour of our generation’s banks? Is excessive risk taking, gambling or rate-rigging as bad, worse or not in the same league? These seem to me to be qualitatively different but price-fixing does and should attract the large fines that do from time to time get levied. A second matter is whether we might see similar extent of fundamental reform as followed 1878. Probably not – and the worry that regulatory reform prepares for the last battle rather than the next war is, I think, a real concern. Periodic large-scale booms and busts in financial systems have regularly recurred over the last 150 years and beyond. Perhaps the best we can hope for is the mitigation of their effects and stronger incentives to reduce investor and banker animal spirits. But people have been saying this since at least 1878.

Notes:

1. Rosenblum, L (1933) ‘The Failure of the City of Glasgow Bank’, The Accounting Review, Vol.8 (4), pp.285-91.
2. Gibb, K (2013) ‘Speculation, sub-division, banking fraud and enlightened self-interest: an alternative account of the making of the contemporary Glasgow housing system’, incomplete paper in progress for ISA RC43 Conference ‘At home in the housing market’, University of Amsterdam, July 2013.
3. Guy McCrone wrote a trilogy of novels (Wax Fruit, published by Pan) about a 19^th century middle class Glasgow family directly affected by the Bank collapse.

Rebuilding the Housing Market

The media reported today a new survey by the Halifax that indicated most young people think they will now never own a home. This kind of story is readily set alongside the housing bubble worries associated with the Treasury’s plan for supporting the mortgage market and continuing concerns about the lack of new housing supply, be it affordable and market provision. Despite a few more positive recent market indicators, the general prognosis remains challenging.

The rigidity that prevents market recovery (a term one needs to carefully define) stems from three broad sets of market issues. Mortgage lending remains entangled in the capital rebuilding exercise post-GFC and while Government supported loans will inflate lending, historically high deposits and tight terms and conditions put purchase beyond many of those potential first time buyers identified in the Halifax survey. Housing supply has been hammered by the down turn and volumes are at historically low levels. That lack of market confidence in turn undermines planning agreements like S106 planning agreements (S75 in Scotland) and also probably the willingness of developers to spread their products to the cheaper end of the market.

Supply, demand and funding interact but do so dysfunctionally. Supply will grow if confidence is enhanced but that may require generally rising prices and that will only freeze out the generation rent still further until the lending market’s circumstances move strongly in their favour. And, as economists like Geoff Meen have repeatedly pointed out, the small scale of supply additions (even in the best years) makes such a small contribution to the overall housing stock, that extra building will not dent house price growth except in the very long run.

This is why the debate is again running about the politics of how to make it generally acceptable to pursue lower house prices. Lower entry costs with or without much easier loan pricing is a sine qua non for restarting entry into home ownership. There is, however, something paradoxical in all this. We need to lower house prices to make them affordable to entrants (the outsiders) but those entrants are driven by the same asset speculative motives (as well of course those other home-owning ideals we know so well) in order to capture subsequent (untaxed) capital gains from rising prices thereafter. Meanwhile, existing homeowners (the insiders) are the loudest supporters of conditions that raise the house price level and their specific housing values. Is anyone really talking about permanently lowering prices relative to incomes?

I think ideally that Government should aim for house prices in the long term to grow at the same rate as general inflation – a neutralizing of the relative price of the asset. House price stability and reducing the amplitude of cyclical volatility should be a macro goal of the first rank.  We need automatic stabilizers to dampen the housing market. Co-ordinated monetary, fiscal, housing and planning policy levers will also be required. Pie in the sky? Perhaps, but the economic costs of the status quo are very high, let alone the social costs. Where are the productivity gains from implicitly or explicitly sustaining housing market volatility and by so doing reducing mobility, hampering the labour market and, contributing to relative local housing shortages? A useful test of new housing policy, a form of rule consistency, would be to question whether any proposed policy innovation contributes to house price stability. It is not too hard to think of recent announcements that palpably do not do so.

Meanwhile, this is all grist to the mill of the private rented sector, the one dynamic part of the housing system in recent years. While most of the policy debate here is understandably focused around regulation, registration and the housing benefit sector – we still remain woefully under-informed about the sector. This is as true if we are looking at Buy To Let lending (below the UK level), how local markets function, about new landlords and their tenants, or the wider market rental sector and its sensitivity to policy change? How robust, for instance, was the basis by which Government expected the HB reform of the private rented sector to lead to behavioural responses in the form of landlords cutting rents? One hopes that this will improve as the economic scale of the growing sector increases the pay-off for more monitoring and empirical evidence building.

What we have is a patchwork quilt of market rental information, less on local rental investment, still less information on tenant household composition and no real sense of how the different tenures push and pull on each other through respective cross-price elasticities (i.e. how the price of one sector affects the demand or indeed supply of another tenure). With a large, growing and often rather invisible market rental sector in our cities and towns, it is imperative for the management of local housing systems and for good housing planning that there is investment in effective monitoring.

Of course, these two issues: ‘normalising’ the owner-occupied market and understanding what is going on inside the rental market – are not unconnected. At the same time, austere times do not help in terms of supporting local housing planning and its research function. But with such scarce resources, the case for better evidenced decision-making is all the stronger. Rebuilding the housing market will require a renewed appreciation of tenure interdependence and the capacity to measure, monitor and understand the local market implications that often lie beneath the visible spectrum.

On Rent Incentives

After a week on holiday and offline I have been trawling back over what has been going on. DCLG have floated the idea of penalizing non-developing housing associations in England by putting a cap on their rents that would not apply to developing associations.

This incentive mechanism (a nudge or a shove?) is a fairly crude attempt to access the borrowing capacity that many associations have but choose presently not to develop. This is of course also an issue in the rest of the UK but is essentially a function of both the current business environment and the ambiguous status of housing associations as either private or public  bodies (supposedly autonomous and risk-bearing but also grant-funded and regulated and therefore ‘legitimate’ instruments of policy intervention more broadly by the State).

Clearly, associations face a context of little public funding, difficult private borrowing conditions, unequal access to capital markets and their own historical debt and reserves profile. Demand also varies regionally as do rents (see below). Prudential risk management will for many providers indicate that not developing is the best, sustainable thing to do in such circumstances, least of all for their current tenants and their stakeholders. Government is not willing or able to sufficiently alter that environment to enable this risk profile to improve; instead, it proposes top-down controls on the rents of non-developing associations.

What about the unintended consequences? When the previous Government’s national rent policy was introduced it was recognised that this would impact on some housing associations business plans because they would not be able to increase rents by as much as they had budgeted for. Exactly the same outcome is being generated by this proposal (for non-developing associations) – and it will affect the improvement programmes and other services that current tenants might expect to receive.

I think this proposal also raises wider questions about rent setting. To repeat the phrase used above, the English (New Labour) national rent policy was a long term ‘top-down’ national policy that linked rent differentials to a national formula and locally, average rents across the non-market sectors. This policy was phased–in with damped adjustments over more than 10 years. Despite the fact that housing by its nature needs long term policy consistency, perhaps this is the great hubris of New Labour – that there would be electoral time, sufficiently robust long term conditions, and good enough long term planning, to warrant such decadal planning consistency. In any case, what we have now is the incremental erosion of that policy and the uneven drift from national consistency to more of a patchwork of confused signals that will in time baffle consumers.

Not only will the proposal to limit rents for non-developing associations affect rent setting but so also has the affordable homes programme with its higher rents and multiple higher rents on re-lets of existing properties. At the same time there is now also a much larger and growing private rented sector sending out its own price signals and one presumes, in many places those market rents are influenced by larger non-market sectors. All in all, this is a bit of a mess (and one that will with entropy only worsen over time).

The problem with rent setting policies and with subsequent tinkering is that there are too many policy objectives and not enough scope for intervention – one objective changes the way rents operate and it creates a problem elsewhere in the set of objectives. Rent setting is about rental affordability, provider viability (including to both develop and manage stock) and fairness in the sense of comparable consistency (i.e. quality differences are reflected in the same way for the rents of different providers). We all know that affordability comes at the expense of rents that will support development currently but also that higher rents have HB impacts. But in the long term how can we expect to build a viable social rented sector if we treat tenants with the contempt of state-induced rent variations that on the ground will make no sense at all?

Throughout this period Scotland has eschewed national rent setting and has historically been able to do this because of lower rents and higher grant. They may not be able to sustain this. At the same time, in Northern Ireland, there is evident government enthusiasm for a national approach to rent setting.

There is a stock-flow problem in all this. The requirement to expand supply in the current environment pushes the State to be more creative with rents including the proposed ‘nudge’ and the higher rents on relets to fund affordable homes. The pricing of the existing social housing stock is de-emphasized but it is where tenants have entered into long run contracts with landlords, where those landlords have long term business plans and it is where tenants should have fulfilled expectations that higher rents for a property should imply higher quality relative to a benchmark. The drift of current policy thinking is against this set of prerequisites for stable social housing. In time, it may only serve to further undermine the sector.