Ken Gibb's 'Brick by Brick'

Housing, academia, the economy, culture and public policy

Month: September, 2015

Analysis and Housing Benefit

Last night there was an impressive episode of Analysis on Radio 4 with Paul Johnson of the Institute of Fiscal Studies asking ‘What’s Housing Benefit for’? It was hard to disagree with the basic tenets of the argument, be it the diagnosis of why HB is so large (now £25b per annum), the mixed impacts of welfare reform or the programme’s conclusions about what is to be done. While I suspect a little more could have been said explicitly about the design of HB, the key point – that HB is in part the consequence of wider housing policy failure over generations (especially in the owner-occupied sector) – needs to be stressed and reiterated as widely and as often as is possible.

The programme reminded us that Beveridge would rather have established a fixed rate housing subsidy but that the ‘problem of rent’ – its massive variation even within regions let alone across the country, made this (and it remains) completely impractical. For this reason HB has been based on actual costs rather than a fixed allowance (though this has been lessened by the design of the local housing allowance in the private rented sector).

The second pivotal design feature is that the broader social security system is premised on a minimum level of income (varied by household type and need) after housing costs. This in turn allowed the unusual circumstances that UK social security could pay all of someone’s housing costs and moreover, HB would rise one for one with housing costs (and fall back too). Again, this principle was attenuated by the introduction of a local housing allowance setting a ceiling on support based originally on the median of local market rents.

There was an interesting digression in the programme when David Willets, then in Mrs Thatcher’s policy unit, was involved in the decision to explicitly shift subsidy from things (i.e. new homes) to (poor) people. Implicitly, this was an assertion of consumerist welfare economics ideas that promoted cash transfer over in-kind subsidy as welfare improving for the individual. But note that HB was never a cash transfer in the pure sense.

Inevitably, and rightly, the programme also focused on the welfare reform programme that was significantly aimed at HB (the second largest working age benefit). However, rather than the usual debate over the bedroom tax, the stress was on the deep cuts to private renting HB (the local housing allowance). Moreover, it was recognised that in some places such as coastal towns, the majority of private renting tenants rely on benefits and in that sense HB literally leads the market.

There was also an interesting side debate regarding whether these cuts to the local housing allowance would reduce mixing of communities and reduce social cohesion. Proponents of welfare reform argued on the one hand that housing costs and income differentials had already created this spatial segregation and that implicitly HB reform would be a relatively marginal impact on this process. On the other hand, there was no cross referral to the recent proposals to fund replacement social housing for housing associations under the RTB proposals (i.e. funded from high value council housing sales) which will only reinforce these problems.

Finally, there was much talk of the ‘surprising’ 2015 Budget decision to cut social rents by 1% in each if the next four years. Those interviewed agreed that this looked like a non strategic cost-cutting wheeze and showed little awareness of the impacts on social providers, not just in terms of reduced development but on wider operational budgets as well.

What’s to be done? There was unanimity around building more homes in both the social and private sectors but more than that there was recognition that the root causes of the increasing HB bill is that rents rise in part because underlying housing and land costs have been inflating for so long. It is the wider failure of housing policy, of falling to join up the dots, that is what really matters. The large scale of home ownership premised on rising asset values and under-taxing capital growth indirectly also means higher rents and HB costs. Part of the price we pay for our unaffordable and exclusionary home ownership model is higher rents, more scarcity and yes higher HB.

The solution (or part if it) stares us in the face. We can reduce HB if we are willing to countenance lower housing costs systematically and lower land values across the board and stop chasing the illusion of rising housing and land asset values. The other thing that no-one is talking about is that regardless of the changes made to HB since 2010 – its design was flawed and remains so. There is still a second longer term agenda item to try to design a more feasible, efficient and cost-effective low income housing allowance system. A topic for another day.

Left Hand-Right Hand

Yesterday it was reported that George Osborne used a House of Lords Economic Affairs Committee to attack the housebuilding record of housing associations and also to threaten a ‘more confrontational relationship’ if they do not do more to cooperate with government over the English RTB extension.

Housing has become that old cliché of party politics, one of many footballs that from time to time the Chancellor thumps up the park in order to secure short run political advantage. Yet the emerging policy just does not add up in terms of meeting wider espoused objectives.

Recent housing interventions from the Treasury include proposals to cut higher rates of  tax relief to buy to let investors (politically popular but likely to reduce investment and indeed holdings in the rental market); the aforementioned extension of the Right to Buy, supposedly offset by councils selling off high value homes to help fund replacement homes (perhaps this is better viewed as a CLG policy); and, of course, there is the small matter of the coming four year rent reduction as a further way to reduce the Housing Benefit bill. Now there is exhortation for more associations to build and to do so in increasing numbers of units.

The rebuttal that followed from the sector stressed that the decision to build or not is essentially a function of size and financial capacity. The many hundreds of very small players generally do not feature as developers in the current or indeed most plausible financial environmental scenarios.  Before the 2008 crisis, the old model relied on sufficient grant and often other support via S106 planning agreements and other pro-cyclical cross subsidy, long term (affordable) borrowing, confidence about Housing Benefit (and confidence regarding business planning around future long term income streams). That world is gone so it us hardly surprising that social building has become more concentrated. The reduction in the number of active developers was probably reinforced by the affordable rent programme.

But can the Chancellor really expect more building when extending the RTB to associations is such a disincentive to build (the lesson learned by the Scottish Government when it chose to abolish the RTB on newer homes specifically to encourage council building). It makes little if any practical sense to tie sales to sitting association tenants to new build via forced sales by councils with high value homes. Why make policy so complex, other than the misguided belief that it will save the exchequer money? We risk net fewer social homes, fewer mixed income communities and higher long term social costs from policy-induced housing system failure. How can the Government know or be confident that there will be enough council homes in the right place available to sell to support this programme and that it makes sense in risk and viability terms for the affected associations to then replace the lost stock?

And that is before we get into the legal questions about the status of the housing association sector. And it is interesting that one of the Chancellor’s Committee quotes belies the sense government has that the sector is their policy creature: ‘is the housing association sector doing what it was originally designed to do when it was created in its current form in the 1990s? Then it was seen as a vehicle for building homes’. Is it an appendage of the public sector or an independent third sector?  Kind of important when we think about the ONS/EU question about whether that balance sheet debt ought to be on the public sector balance sheet or not?

And that takes us on to the rent reduction policy – imposing rent cuts might sound like good politics and be popular with hard-pressed tenants but it hardly helps with house building or investment in the existing stock. The housing movement abounds with stories about associations responding by withdrawing from social housing development, planning job cuts and retrenchment. A friend of mine often uses the contraction ‘left hand, right hand’ to summarise where policy on the one hand runs counter to other contradictory policies at one and the same time i.e. the left hand does not know what the right hand is doing. So it is with the treatment of English housing associations.  And it raises further questions about the reclassification of the sector.

Maybe the Treasury will take reclassification on the chin and then use some form of the ‘Post Office’ public expenditure definitional gambit to try to massage the figures?

Thinking about local housing market volatility

A recent paper in Bank Underground (the Bank of England’s new blog site) by Arzu Uluc uses an interesting local-level data set (325 local authorities in England covering 1997-2009) with which to examine local housing booms and busts. The underlying model draws on data including real house prices, real gross disposable household income per capita, dwelling stock per capita and various mortgage market variables like loan to income, loan to value and the share of interest-only mortgages.

The author concludes that the local research allows us to infer (and reasonably so) that volatile housing markets can ‘threaten financial and macroeconomic stability’. Credit conditions in terms of the key ratios and types of mortgage products play an important role through the ‘1997-2009 housing cycle’.

Uluc presents his empirical work by generating six stylized facts. These are:

  1. Real house prices rose on average by 150% between 1997 and 2007 and then fell 12% by the end of 2009.
  2. Changes to the proportion of high loan to income mortgages were positively correlated with local housing booms and busts.
  3. There is a negative relationship between the changes to the proportion of high loan to value mortgages and the size of local booms and busts.
  4. Changes in the share of interest only mortgages were pro-cyclical (similar to 1. above).
  5. Housing booms and busts were also associated with real drivers like real income and dwelling stock growth.
  6. The bigger the local boom, the larger the subsequent bust.

A few caveats are in order – it is not clear why local authority data is particularly appropriate rather than broader more functional geographies; nor does it appear from the blog that there is spatial dependency accounted for in the analysis. I also wondered if the London effect needed to be explicitly modelled (or indeed some sense of North and South)? On the other hand, the author is clearly concerned about attribution and possible reverse causality or confounding factors in the models deployed. These are all things that can no doubt be explored in a longer paper.

What about the bigger messages?  The model is best summarised by a quote from the post: ‘the econometric analysis…suggests that booms and busts ere associated with both real factors and credit loosening. Higher real income growth [was] associated with larger booms in [the] 1997-2004 period, and in 2007-09 areas with higher growth in the dwelling stock per capita tended to see larger price falls”.

Thus, and despite the fall in endowment mortgage volume shares after 1997, changes in the share of interest only mortgages were associated with local house price booms. Similarly, higher loan to income ratio shares of new mortgages were associated with local booms. The interesting negative relationship between high loan to value mortgages as a share of the total and local house price growth – may be explained by the growth of the share of home movers as opposed to first time buyers among total transactions and the increased financial support utilised by remaining successful first time buyers from family and other savings (which also drove down LTV ratios).

As Uluc stresses, there are reverse causality explanations and possibly confounding omitted variables that may instead better explain what is going on – but the associations found are striking. It is a reminder of how difficult it can be to disentangle the relationship between the real housing market and monetary transmission through credit variables – something well known in the wider housing and economy literature but just as striking here.

Stylised facts are useful, but as the author points out, they are the starting point that we then develop models and theories from and look at fresh data to test the ideas that originally flow from these facts. It would therefore be interesting to extend this data forward beyond 2009 and also to aggregate a sub-sample of the local authorities into clusters that approximate for sub-regional housing market areas. If we did so, would we also be able to detect the influence of the changing regulation and practice of mortgage lenders in more recent years?

Local Taxes and the Housing Market: Learning from the Past

My first research study was about the extent to which shifting from the system of domestic rates to the community charge (or poll tax) would lead to housing market effects, namely rising house prices. In the late 1980s and for a little while after, several econometric studies confirmed significant non-zero price effects.

I was in a meeting of Scottish Property Tax Reform the other day where we realised that it was important to rehearse these arguments again in the light of the Commission on Local Tax Reform’s examination of alternative local taxes and the possibility of moving Scotland away from local taxes on property to a local income tax, supported in the recent past by both the SNP and the Lib Dems.

The conceptual argument is about property tax capitalization and runs as follows. Introducing a recurring annual tax on property values will reduce house prices because people bidding to buy a house will know that there will be annual cost in the form of property taxes and reduce their bids accordingly. The recurring tax is literally capitalised into lower house prices. This is widely recognised in the literature [1]. Economists have also looked at how differentials in both taxes and the perceived value of local services lead to constant quality house price variations across council boundaries because these net differences are capitalized into property values [2].

Now imagine that a recurring property tax like domestic rates or indeed the council tax is abolished and replaced with a tax on people or on incomes. The argument is that removing a tax on a specific commodity (i.e. housing) and replacing it with a general tax will reduce the relative cost of housing compared to everything else, and increase the demand for housing. Because housing supply is very unresponsive or inelastic, this will of itself generate higher house prices.

Normally, such studies assume that the tax change is revenue neutral i.e. the aggregate effect on incomes in unchanged as a result of the tax change. As a result, one can focus on the substitution effect as housing costs fall. In reality of course, when we disaggregate there will be winners and losers from the tax change by tenure, income, demography and location. The aggregate (even council-wide) analysis of house prices tend to gloss over this disaggregated effects.

If we accept the fundamental idea, it then becomes an empirical question as to how much prices rise. We can look at four studies of these house price effects following on from rates abolition in the late 1980s. What do they say?

  • The Department of the Environment provided an annex on house prices in the Green Paper that introduced the world to the poll tax in 1986. The DoE accepted the capitalization argument and concluded that in national (UK) terms house prices would rise by 15% in the short run and 5% in the long run.
  • Gordon Hughes at the University of Edinburgh estimated (1987) the medium term price effects at standard regional spatial scales. He argued that house prices would rise by between 11.6% (South East excluding Greater London) to 23.1% in Scotland (the high figure presumably in part the result of the 1985 Scottish rates revaluation) with a national average of 14.4%.
  • In 1988, Peter Spencer wrote a report for Credit Suisse First Boston Bank arguing that we should distinguish between cash-constrained and unconstrained households and estimated that in the short run house prices would rise by 13% and in the long term by 7% for those who were cash-constrained (and presumably would have limited access to mortgages), whereas the unconstrained households would see house prices rise by 85% in the short run and by 30% in the long run.
  • Finally, a later study by Leslie Rosenthal in Fiscal Studies in 1999 found that house prices would rise by between 10% and 17% as a result of rates abolition.

Now, there are quite a few technical questions to consider. One is how house prices and the so-called user cost of capital or something similar, are calculated in each case. Another is the thorny question of just how unresponsive or inelastic housing supply is and whether or not it is formally modeled in each of these studies and across different spatial levels. At the time I certainly found Spencer’s work particularly convincing but clearly all four studies predicted non-trivial long run price effects as a result of rates abolition.

Why is this important in the context of the council tax or local property taxes more generally in 2015 in Scotland? First, there is the tax base argument i.e. diversifying the tax base away from income to a less productive tax base – property – is better as a way of reducing revenue risk and lowering incentives problems associated with higher tax rates on income. However, the main housing market points, second,  are surely about affordability and wealth inequality.

Higher house prices clearly make it yet harder for people to access home ownership or move upmarket when they need to. It makes properties more expensive to build and invest in. Higher house prices translate into higher rents as well. This may all sound good to NIMBY home-owners and buy to let landlords but acts to merely reinforce the gap between property insiders and outsiders. This cannot seriously be considered to be a sensible direction of travel when government espouses widely shared policy goals to reduce inequality and make housing work better.

I am not saying that abolishing the council tax in favour of a non-property solution would lead to the same house price effects as suggested in the late 1980s scenario, only that the logic of the capitalization process remains and we should expect higher house prices to an extent as a result. And that should be factored into future discussions about the future of local taxes in Scotland.

  1. Topham, N (1983) Local Government Economics, in Milward, R (ed) Public Sector Economics. Longmans: London.
  2. WE Oates (1972) Fiscal Federalism. Harcourt Brace Jovanovich: New York.

Scottish Private Renting and its Regulation

The Scottish Government today published its 2015-16 Programme for Government – a statement of its plans for legislation and policy development in the run up to the Scottish election in the Spring. The headline stories are about education and the engagement of the Scottish Government with the new powers it will gain from both the Scotland 2012 Act and the post-Smith Scotland 2015 Bill.

But once you get beyond the leading stories, there are always other things of interest to pursue. For me, what is striking is the relatively brief but definitive discussion of the Private Tenancies Bill that has emerged from two rounds of extensive consultation and a long-standing private renting strategy group.

To put this in context, the Government has not yet published its analysis of the 7,500 responses to the 2nd consultation launched in March (which was due at the end of August but I have not so far found it on the Government Website). So until now what we had to go on was the steer given in the March consultation document. However, this appears to have been firmed up in the Government Programme released today. Much of this is  widely supported (such as the new tenancy proposals – see below) but it does also make it clear that the Scottish Government will give ministers the power to limit rent increases in high rent pressure areas.

Today’s Programme document states (p.71) that the aim of the bill is produce a more professionally managed and better regulated sector that provides good quality homes and is an attractive place to ‘live, work and invest’. To do this the Bill will:

  • Introduce a Scottish private rented tenancy to replace the current assured system.
  • Remove the ‘no-fault’ grounds for repossession so that a landlord cannot repossess just because the fixed terms of the tenancy has come to an end. While tenant and landlord could not quit in the initial 6 months, thereafter the tenancy would continue indefinitely and notice of quitting could thereafter apply (subject to tenancy agreements being maintained and other agreed reasons for repossession not applying).
  • There will be 11 specific grounds for repossession that allow the landlord to regain the property and the tenant will have right to go to a first tier tribunal to challenge unjust repossession.
  • Provide more predictable rents and protect tenants against ‘excessive rent increases’, including the ‘ability to introduce local rent controls for rent pressured areas’.
  • Create a more streamlined clearer to understand tenancy system that is fit for the modern private rented sector.

To unpack the thinking behind the local rent controls idea, we need to go back to the March consultation paper. The paper compiled evidence about market rents by broad rental market area for the period 2010-14. It found that while overall prices (CPI) rose by 11.7%, market rents for 2 bed properties across Scotland rose by only 11.2%. Moreover, private rents over this period fell in real terms n places like Greater Glasgow and Fife but nominal rents fell on West Dunbartonshire, Argyll and Bute and in Ayrshire. It was only in Lothian (17.2%) and in Aberdeen City and Shire (39.8%) that there were real increases (and a large rent increase in the North East specifically).

The consultation recognises some of the problems associated with poorly designed controls and sees no case for a general ceiling on rents but instead argues for powers to make rent increases more predictable and limiting increases where rent levels and increases in local market warrant it:

  • The forthcoming Bill should include specific provisions that give tenants safeguards against unjustified and excessive increases – which could be used as a means to evict them – and greater predictability regarding when rents will increase.
  • Initial rents should continue to be set by tenants and landlords in the open market.
  • Rent reviews should take place no more than once in any 12-month period. Landlords should have to give tenants 12 weeks’’ notice of a change in the rent. This would help tenants to plan when managing their finances to cover the rent
  • The aim is also to protect tenants against the possibility of unscrupulous landlords using large and unjustified rent increases to force them from their home when otherwise they are complying with their tenancy agreement.

Further details of what is proposed follow on p.34 of the March consultation document:

The approach we have in mind would enable Ministers to limit the levels of rent increases for sitting tenants in hot-spot areas. As this is intended to be a means of responding to a problem affecting tenants in a local area, we propose that this power would be triggered by a local authority applying to Ministers for an affected area to be designated a ‘rent pressure area’. Local authorities would have to present evidence to show that rents for sitting tenants in the area were increasing excessively. This evidence may include: statistics on average rent rises, income growth and general price inflation; an increase in the number of rent increases being referred to the First-tier Tribunal; and an increase in the number of PRS tenants approaching the council with concerns over their ability to afford excessive and unjustified increases.”

This sounds highly similar to the pressured market area status used in the 2001 Housing (Scotland) Act to suspend the Right to Buy.

So, subject to the 2nd consultation outcomes not changing the thrust of the March document (which seems to be a reasonable conclusion) and thereby forming the basis for the legislative proposals, it looks like we are moving to limited rent regulation on an area basis only.

How effective will this be? How well designed will the details be and what analysis will be done supporting the proposals in terms of their market impacts? Will it be the thin end of the wedge or can we expect market rental supply to continue to grow despite the reported weak growth in rents? It will be fascinating to see how investors and landlords respond?