Scottish House Building: New Numbers, Old Challenges

The Scottish Government published their 2013 housing statistics key trends (http://www.scotland.gov.uk/Publications/2013/08/2641) earlier this week. While the data covers lots of standard issues it is the house building statistics that are striking. Three main sets of findings are highlighted:
• Overall new supply (including conversions and refurbishments) fell between 2011-12 and 2012-13 by 14%, such that in 2012-13 in total new supply amounted to 14,629 units. Completions fell for both private housing and for housing associations. This is, apart from the immediate aftermath of war, the lowest figure since 1945.
• New house building (all tenures) fell by 13% in terms of completions and by 9% in terms of starts.
• However, the affordable housing supply programme with its 6,000 units target did achieve it, with 6,009 completions. Nonetheless, this total is the third consecutive decline in this total and is 13% less than in 2011-12.

Despite the achievement of the annual 6,000 units affordable/social building target (for the 2nd of a proposed 5 year programme), there are a number of challenges and further reflections that can be made. First, there is the remarkable and precipitous fall in private new housing supply – shocking in its own right but also important in its geographical spread and its wider effects e.g. undermining planning gain support of social or affordable supply (through Section 75 agreements).

Every year between 2003-04 and 2007-08 led to private completions of between 20,000 and 22,500 units. Since then the numbers have fallen every year – now at less than 10,000 in 2012-13. These are the lowest levels since the 1960s. Private new supply was strong in the buoyant North East but paradoxically weak in the biggest building local authority – Glasgow.

Second, meeting the affordable supply target for a second year has to be put in context:
• Housing association completions fell by 32% in a year to 3,244 units in 2012-13.
• The council building programme (965 units in 2012-13) was 13% lower than the previous year.
• While the principle of achieving 2/3 of the total as social housing is still being met there is evidently more reliance on affordable programmes of one kind or another.
• Looking at the data over a longer period of time and with the exception of 2009-10 and the year after (when completions were high and supported by accelerated funding, etc.), the level of 6,000 or so completions is not untypical.
• Finally, and against the trends, affordable housing starts have risen sharply – 4,279 in 2011-12 rising to 6,484 in 2012-13. Will this be borne out in completions and support the attainment of the target in the third year of the five year programme? We all know that starts can take a long time to come through, if at all. More worryingly, however, affordable programme approvals fell 24% to just under 5,000. While accepting the complex overlapping relationships between approvals, starts and completions – we cannot stand easy with regard to the target being met.

In the end the private sector is critical to both the state of the housing system as a whole and to the affordable supply programme. There is a major shared equity programme underway in Scotland (our version of Help to Buy 1) and mixed evidence more broadly of market recovery in prices. Will this support a wider, stable organic market recovery in house building? The market building figures reported above are truly terrible and getting worse. We need a prolonged sustainable recovery in new supply and it remains to be seen whether Scottish borrowers (with flat or falling real earnings) will be able to accommodate this on the demand side (and to what extent lenders will soften on new mortgage lending in part underwritten by Help to Buy 2).

The jury remains out on the affordable supply target. It will depend on future terms and availability of finance necessary to give housing associations confidence that approvals can go forward, as well as the arithmetic of now higher grant rates and the overall size of the programme. Lurking behind the scenes also is the worry for all social landlords about the business impacts of higher levels of arrears associated with welfare reform.

The British Obsession with Home Ownership

I was on the radio yesterday morning talking about home ownership and renting. Amidst my pauses, verbal tics and mangled grammar, it was quite an interesting discussion. The BBC had recorded a German commentator based in London who was both a little mystified by the British devotion to owning and also keen to express the indifference of his people to housing tenure (and much lower rate of home ownership).

I think the German position was a little overstated. According to McCrone and Stephens (1) there are at least four reasons for lower rates of home ownership and the incredible flat real house price trajectory in the country over the period since 1970 (see the recent excellent graphic coverage in the Economist – (2)).

First, most of the stock is in flats or apartments and this is more likely to be rental. Second, larger down payments historically have led to older first time buyers. Third, owners often bought larger detached homes, which were high cost, further shrinking opportunities. Fourth, older buyers seem to stay put for much longer periods hence the smaller resale market (in part because they are also more likely to build these detached properties themselves). While things have moved on a bit since they wrote their comparative housing book in the mid-1990s, much of the argument continues to hold. Indeed, while there is a path dependency that helps sustain the UK’s craving to own, similarly, long term rooted factors also can also be found in the desire to normalize housing as a much more balanced and stable system in Germany, backed by long established tax and regulatory policies.

However, it is of course not all sunshine and roses. Urban eastern Germany has faced chronic problems of de-population, over-supply and the policy failure consequences of ill-designed public housing privatization after re-unification. And just because Germany has had this remarkable period of stable prices does not mean that it will continue to do so. Indeed the comparative strength of the economy and urban/regional investment may already be inflating house prices in major German cities.

Nonetheless, it remains a radically different picture from the UK. The German speaker also argued that a strong system of state pensions in his country (and is that right?) meant that there was none of the same impetus for asset-based welfare founded on long-term capital growth of property values. This was an opportunity for me to challenge the premise i.e. that asset-based welfare of this form is somehow a sustainable and/or a comprehensive way to pay for old age, for care or for supporting the higher education or house purchase of children. It is arbitrary and down to the luck of local market historical performance and it is also capricious in terms of when one’s need for funds falls. And don’t forget those who miss out systematically: those who are non-owners, live in the wrong regional housing markets, or who have no housing wealth or indeed are now less likely to be able to afford entry to the sector in the first place.

In the debate of the last few days about the merits or otherwise of rising house prices (note though that they are perhaps still falling in Scotland and in Northern Ireland), the underlying policy goal of increasing home ownership remains for many politicians and for wide swathes of the media untouchable. This is despite the fact that many are persuaded about the logic of a balanced housing system, which is more tenure-blind, that lowers the cost of housing and where speculation, asset price expectations and land markets do not encourage regular periods of volatility. But the political willingness to move in that direction remains absent.

Policies to levy deep cuts on local government and to reduce the welfare benefits of the poorest in society are politically popular and play to core constituencies. Wasteful and counter-productive policies like Help to Buy are promoted, presumably, because the short term electoral gain is more important than the long term damage of further market volatility. Doing the right thing for the housing system as a whole seems to be beyond the planning horizons of our politicians. Perhaps the real challenge for the housing commentariat is to provide arguments and evidence that speak to the need to take a long term truly strategic approach to housing?

Imagine a world with stable long term house prices, where expectations of future house price inflation remained equally static and where government policy ad that of the Bank of England prioritised the maintenance of this housing market goal? The independence and consumption motivations remain for home ownership but not the wasteful, displacing and self-defeating aspects of asset growth speculation. Rental housing would, with sensible regulatory parameters, be seen to be less of a second-class activity but actually also similarly about housing consumption and choice. Neither should this damage the continuing need for new housing supply to meet demand, need and to replace redundant stock (allied to the supply-side reforms required to make housing supply more elastic and which would benefit from the certainty of operating in a less volatile environment). Most important normalizing a more stable housing system would make housing a little bit boring and less liable to interact so dangerously with mortgage markets, the macro-economy and less able to be a conduit that reduces the supply of funds available for productive investment and genuinely systematic opportunities for pension investment and care insurance products.

Before we get too dewy-eyed considering this sunlit imaginary prospect, it is also worth pointing out that making significant shifts in this direction to at least over time reduce the oscillations in real house prices and at the same time creatively and positively reform rental markets would be a considerable improvement on the current parlous situation. We may not end up with Germany’s desirable balanced market but a commitment to wider market stability would be a purposeful and even game-changing step.

It is a different post to this one that will look in more detail at the sorts of policy clusters that might contribute to this goal. The point here is simply to consider the aims of that overarching approach to the housing market and the prize that could be attained.

Ultimately, obsessing about home ownership is irrelevant for many people’s housing situation trapped outside the sector. Sustaining a home and a mortgage is also hugely burdensome for many others. And it is, arguably, both a drag on the economy and the source of some truly misconceived social policy ideas about asset-based welfare. It is never too late to start down the right policy road.

(1) McCrone, G and Stephens, M (1995) Housing Policy in Britain and Europe. UCL Press: London.

(2) see: http://www.economist.com/blogs/dailychart/2011/11/global-house-prices

Guaranteed?

There is much controversy about the use of explicit or implicit state loan guarantees in the contemporary housing system. My rather undramatic theme is that we should not disregard guarantees entirely and that they can play a useful role as a policy instrument in specific circumstances.

First of all, we should note that there are several variants of guarantees out there, chiefly:

• State-backed guarantees associated with lending on new build private housing in order to support new supply, often targeted at first time buyers.
• ‘Help to buy’ general guarantees to support any sales often with a limit on the mortgage involved but effectively encouraging lenders to offer loans at much higher loan to value ratios. In both this and the previous case, the lender risk is reduced because an element of any future negative equity would be protected by the guarantee.
• Affordable housing guarantee schemes offer to reduce the cost of borrowing for social and private rented new supply projects. The Government will guarantee payment obligations on new debt provided there is offsetting lower grant per unit. This will apply in Scotland as well as in England.
• Scottish National Housing Trust joint ventures guarantee void loss (i.e. loan repayments) and capital losses on the public sector investment part of the affordable housing joint venture with the private sector.

Since its announcement there has been a pretty consistent line of criticism that the second of these will induce some element of a housing bubble and there is much more skepticism about the worth therefore of such a policy or whether it can help to bring the market and supply up to pre 2007 levels on any sustained basis. There has been more muted criticism of the affordable housing guarantee scheme though in this case this has been as much to do with concerns over the private rented element, the fact that borrowing is already cheap for larger social providers (i.e. via bond finance) and delays before THFC were in a position to market the new product.

On the other hand, there is more support for policies aimed at promoting new supply and for first time buyers. The choice in this case of a guarantee instrument seems less controversial. Equally, the NHT model in Scotland, after a hesitant start, has gained some momentum, has the flexibility to work to different variations, and appears to offer good subsidy value for money (albeit for primarily affordable rather than social housing and for much shorter holding periods).

Guarantees are of course widely used elsewhere – Sweden and the Netherlands being important European examples, indicating different models are in use and that they can reduce borrowing costs. They are also used in other parts of the UK economy – e.g. the loan guarantee scheme for small and medium sized businesses run out of DBIS (now called the Enterprise Finance Guarantee). This is an explicit response to a market failure – and that is really the key. It is one thing to identify the market failure at hand; quite another to design and implement the appropriate policy instrument in response. In short, the key point is that good policies including such guarantees or indeed subsidies more broadly must be carefully designed.

What sort of criteria might be considered?

• Targeting effectiveness. Who benefits and it is acceptably directed towards certain key groups and does so in a comprehensive fashion?
• Consistency with wider policy goals. Does the policy complement other programmes and overarching goals; or, does it substitute for them and otherwise counter wider pre-announced higher-level objectives?
• Value for money for scarce public resources – are the subsidy per unit costs sufficiently low comparatively and in absolute terms?
• Minimizing unintended consequences. Does the subsidy become capitalized in prices, does it distort choices (e.g. through poverty traps) or otherwise lead to substantive impacts other than those planned (e.g. an artificial bubble)?

Price subsidies can, in principle, lead to too much housing being consumed. Tax breaks can easily be regressive and distort investment decisions between housing and other classes of asset, and, guarantees can also cause problems by lowering the cost of borrowing relative to lending costs for those activities that do not attract guarantees. So, we can easily have market and other distortions if subsidy/tax/guarantee design is not thought through both in terms of the problem at hand and its wider, general equilibrium, effects.

Guarantees therefore may or may not help. It depends on the specific context and how well they tackle the problem at hand and meet the kind of criteria outlined above. As part of a wider set of interventions and targeted towards reuse of partially completed or otherwise unused sites, it has potential through the National Housing Trust. It may also be a cost effective way at the margin of promoting new supply for entrants to home ownership (though 5% down payments may yet be too low as a stable, prudent ratio for potential first time buyers]. The design of help to buy is of course highly problematic. It is also the case that the constraints around the affordable housing guarantee scheme may make it less effective than Government hopes (e.g. the offsetting grant levels and the directing of the scheme to additional programmes which are likely to be more marginal – may reduce take-up].

A range of well-designed housing models and subsidy instruments can operate in different contexts to achieve a variety of valuable policy ends.  The key is the careful thinking through of its design and subsequent implementation, learning from experimentation and perhaps examples from elsewhere before committing fully. Cross these hurdles and there is no reason why one of the models should not be a form of state-backed loan guarantee.

What I think about when I am running (with apologies to Haruki Murakami)

Apart from work, our family and friends, we are, I suppose defined by our interests. Outside of spectating at sports activities (at Fir Park), I probably spend too much time reading and listening to music. The other major space in my life for about 20 years has been running.

I started running as an alternative to swimming, which was, to be fair, doing my head in. Apart from a little enforced cross-country at school and a bit of school games sprinting, I had stuck to playing football. But around 1992 and having finally successfully stopped smoking I needed to compensate, gain fitness, get good at something I could stick at and that would absolutely not involve swimming 20-40 laps of the pool.

I began running for 5-10 minutes continuously and over a period of time this expanded to 30 minutes. I had the good fortune to live on the doorstep of Strathclyde country park (and still do), which opened new possibilities for routes and different types of runs. From there I eventually braved running at work – the Kelvin walkway, Garscube and the Clyde-Forth canal were ideal green lungs in the city. I found a couple of pals to run with as alternatives to five a side or aerobic  ‘tune-up’ 30 minutes group exercise sessions. The University’s gym also had treadmills and these also became familiar parts of the routine.

I read about running, nutrition and training. I introduced intervals, hills, easy days, tempo and longer runs. I got myself an early sat-nav watch with which to pace and set distances for routes. Compared with later, I did scarily quick times on the treadmill for 4 miles and longer (those were the days) and finally I started doing some organised races in Glasgow, Edinburgh and Dunbartonshire – a mix of 10Ks and half marathons. The first 10 k was a hot night in Helensburgh. An amazing experience, as was a 10k that went up Arthur’s seat and then the Royal Mile in Edinburgh. The Glasgow half was my first experience of a big race of upwards of 5-10,000 people and was just fantastic.

While I had quite a few injuries, none of them were fatal and I regularly went through the cycle of accelerating fitness, injury, denial, recovery and starting again to build up fitness. However in my early thirties this took considerably less time than more recently.

My running life peaked with two marathons in 2004 (London) and 2005 (Paris), the latter involving a time of 3 hours 47 when I was running long distances per week, at a light weight, and stuck to a really effective training regime for 4 or more months. The London marathon was one of the most incredible days one can experience, and as a participant completing the race in front of hundreds of thousands of spectators – unforgettable. A few months later, however, I became head of department and that was the end of that.

Thereafter I kept running but the longer distances of 7 or more miles became rarer and I succumbed to a couple of longer-term injuries. A mixture of these sorts of problems effectively stopped me running for most of 2011 and 2012 and by then I had discovered new problems with my calves. All very depressing.

However, in part through the efforts of my physio Dave Nugent and by taking a much more conservative approach to building distance and miles, I seem to be on the road back. I now run every second day either in Strathclyde park or at work in Glasgow and I am now covering 20-25 miles a week with at least one 8 miler each week.

It is a positive achievement to re-attain each milestone that makes me feel I am back just a little closer to the (age-adjusted) levels that became normal for me prior to 2005. It is also great to retrace the older routes I used to do as I get a little stronger. One thing that is painfully apparent, however, is that 49 year old legs cannot go as fast as 30-35 year old legs. And, there is the non-trivial matter of weight – will it come off as easily or at all, compared to a decade or so ago? Perhaps, most importantly, can I stay healthy and avoid injury?

What do I think about when I run? In the first place I find it very hard to think about work in any organised or sustained way so I usually do not try. I like to look for landmarks and see what is going on around me. In my time I have seen peri-urban deers in Glasgow, shared routes with ‘celebrity’ runners (mainly footballers), flattened a drunk man coming round a blind corner, and battled the runners’ curse of commercial dog walkers. I don’t like listening to music when running but spoken voice radio is great – I bought a new personal sports radio yesterday and tried it out this morning. I used to run with one or two specific people – they have now both left the University but I am now really quite content running alone, lost in my own thoughts and worrying a little about the next hill.

It is quite hard to distil what goes on in your head when doing this sort of exercise. A lot of it is about monitoring your body and the environment around you. I have dodgy ankles (post-football) and I find psychologically that wearing glasses helps (I would never have done that even 3 or 4 years ago). But most of the rest of the time, assuming that one is content with the pace, I am just there enjoying the moment.

Running is, I am sure, linked to one’s personality. It suits me well, it clears my head, and I am probably addicted to post-run serotonin. It organises my week, impacts positively on what I eat and I miss it terribly when I am injured. It is also great to (gradually) work harder and feel your strength and stamina improving. I am comparatively slow now but within those more limited age-related parameters discussed earlier, and in trying to avoid injury, I am slowly improving. Long may it continue.