Thinking about the Budget, Housing and Scotland

I have long felt that making sense of the Budget each year requires a few days and the lifting of at least some of the immediate confusion, argument and data fog that descends. There was considerable anticipation that the Budget would mark an important staging point in the apparent prioritisation of housing by the UK Government for England – something that goes back at least to the Fixing the Broken Housing Market white paper and now continues with the preparations for the social housing green paper. Alongside these developments, it was anticipated that more plans to achieve ambitious housebuilding targets would be set out and that this would include a major commitment to more affordable supply.

I will come back to housing and also some specifically Scottish dimensions of the budget below. The Sunday papers this morning, at least those to the right, have columnists suggesting that, politically, the budget went well. But this seems to be about not compounding ongoing political problems for the government and surviving the immediate period so as to be able to fight on.  However, the troika of the IFS, the OBR and indeed the HMT’s Red Book itself sforecast low productivity growth, difficult public finances and continuing stagnant real earnings. This is a grave context and yet of course it is all too often buried by the understandable but overwhelming Brexit steamroller.

There were many housing announcements, though some were better defined, costed and designed than others. Inside Housing summarised the intended housing changes:

• £125 million over two years’ increase in targeted affordability fund for LHA claimants finding it difficult to pay rent
• Changes to universal credit worth £1.5 billion including allowing HB claimants to continue claiming for another 2 weeks after a new claim
• Committing to achieve the 300,000 net additions to housing supply by the middle of the next decade and to support this through £15.3 billion of a mix of capital funding, guarantees and loan funding which would in part support the unlocking of strategic sites and estate regenerations – although the majority of the money appears to be for private development (though the Treasury say that part of the new financial guarantees ‘could’ be used for affordable housing as well – Inside Housing, 24 November 2017, p.2).
• £1 billion of extra borrowing capacity for councils to build affordable homes in areas of high demand.
• Pilots will be carried out in the West Midlands for the new HA right to buy.
• Councils given the ability to charge 100% council tax on empty properties.
• On the planning side pledges were made to invest in five new garden towns and also an ‘urgent review’ of how to close the gap between planning permissions and house building.
• Homelessness initiatives will include three new housing first pilots .
• Fiscally, stamp duty will be ended for all first time buyers in England, Wales and Northern Ireland purchasing homes worth up to £300,000 (and on the first £300,000 if the property is less than £500,000).

While there has been general recognition of the scale of the supply measures (which also include continued help for SME builders) and the direction of travel on homelessness, there has been less enthusiasm for the perceived limited additional support for affordable housing supply and a sense that they signal incremental rather than fundamental change (as suggested by David Orr).  Even the FT commentary after the Budget suggested that it was time to just end the English councils’ ceiling on housing borrowing altogether. Further valuable commentary from the housing sector on the Budget announcements can be found from various sources can be found here (CiH, Jules Birch, Shelter and NHF).

I want to say a little more about the stamp duty change.  Many economists are rightly critical of transactions taxes in terms of inefficiency compared to recurrent property taxes. The changes announced this week are the latest demand-side housing market interventions which, while targeted to first time buyers, will in all likelihood put upward pressure on house prices to the benefit of existing owners of housing assets and reducing the benefits to the formal beneficiaries. Both IFS and OBR have made this point, as have many commentators elsewhere. The evidence will out on the actual effects (insofar as models can actually, credibly, separate out the effects of the fiscal change on house prices and activity) but there is a wider question.

A slightly perverse outcome of greater fiscal devolution to Scotland has been fiscal competition between rUK and Scotland. So far, this has been exemplified by housing taxation: the tax rates competition between the two parliaments over stamp duty (land building transactions tax in Scotland) and the decision of Scotland to follow the 3% tax hike on second properties and buy to let landlords purchases. Now, the Scottish government has to consider how it will respond to a sizeable reduction in stamp duty in the rest of the UK.

There is an interesting reversal of classic oligopoly theory going on here. Traditionally, it is argued that where a small number of suppliers dominate a market, one firm raises prices and no-one follows; but if one cuts prices, they all follow and reduce their prices too. With fiscal competition in this devolved duopoly of the UK there is a different asymmetry.  Tax increases are followed in this case by Scotland because economic revenue benefits trump political costs (e.g. buy to let landlords are the main losers from higher stamp duty/LBTT rates) but where taxes are cut in the present UK budget for political reasons (and they arguably trump economic arguments in this case) how should or can Scotland respond given its public finance constraints (the opportunity cost is larger because of the smaller budget Scotland manages).

Housing is more prominent now as a domestic policy priority and is much higher on the political agenda. It is complex and multi-faceted and that is represented by the breadth of housing-relevant announcements last week. Policy to move us beyond an incremental change, however, will require sustained commitment over at least a decade. To return to the microeconomics of housing, we need a permanent, structural, change in the shape of the supply curve (so that it is more elastic), not a short term shift, welcome though that may be in its own terms.

 

Towards a Housing Solutions Platform

This week I had my first trip to Brussels and participated in a roundtable established by the Friends of Europe to discuss pan-European steps to deliver more affordable housing supply and in particular discuss examples of genuine financing innovative housing solutions found in different member states. This is happening not long after Housing Europe published their 2017 State of Housing in the EU.

This may not sound exactly riveting but it was actually a fascinating day on many levels – how the EU and its different cogs and gears work; how such meetings are organised and conducted; who says what; and, what can one derive from the substance of the discussion. The roundtable was set up as a large square table in classic style with more than 40 folk assembled around it. No break-out sessions or smaller conversations but instead a series of short and some even briefer contributions marshalled by the chair for the best part of 4 hours.

I was one of the first speakers talking about evidence influenced housing policy, what works and the potential value and risks of housing policy transfer or mobility given national institutional differences, contexts and the like. After my bit was over I was able to just sit and listen. There were several very interesting themes running through the day:

• Housing First was a recurring cross-national motif. There was an excellent presentation by Finland’s Y-Foundation and also by Tom Bennett who runs the Housing First Transition Fund in Glasgow. The Finnish contribution, by Juha Kaakinen, included the nice point that rough sleeping was tackled so effectively in Finland for two reasons – Housing First but also additional affordable/social supply.
• From the chair in particular, but also around the table, there was much made of the need and potential utility from rigorous economic evaluation of the wider net benefits of preventative housing interventions regarding homelessness and affordable housing supply – critical to making the social, economic, public finance and infrastructure arguments for the wider benefits attached to more and better housing. I thought this also spoke to evaluability assessments which brings stakeholders together before an intervention begins, work through a shared theory of change and decide collectively an agreed evaluation process.
• Many cities face problems with short term ‘touristic’ letting most notably through Air BnB. There are clearly lessons to learn and share from the experiences of cities like Barcelona and Paris.
• The growing importance of partnership by public and private sectors with foundations, endowments and philanthropy especially with regard to filling gaps, providing patient capital and supporting the gathering of rigorous evidence.
• The difference in size, scale and opportunity is of course very important across EU members but this led to an interesting line of discussion that smaller countries like Finland and Scotland were better placed in some respects to experiment and innovate with new and interesting delivery models. The focus on smallness also raises the question of spread and scale of successful projects – this is a challenge colleagues wrestled with in What Works Scotland.

My own wider reflections on the day were threefold: first, finance and subsidy are part of an irreconcilable, irreducible conundrum for low cost housing (its cost can only be reduced via different more or less novel ways of providing and subsidising – equity, land, construction and finance). My Canadian colleague Derek Ballantyne argues that in reality there are few genuine innovations, merely different ways of assembling and packaging these elements but they all involve different ways of subsidising, taxing and profiting from elements of the delivery of new housing and how it is subsequently operated. Ballantyne also concludes that it all comes down in large to political commitment to resource the subsidy, in whatever form it comes.

Second, and related, there are really two choices – first, the size of the macro resource commitment by governments to housing (made up of capital and other finding subsidy, tax breaks, guarantees and personal housing subsidy). Cut the programme and less is possible:  it may force states to divvy up what is left in different ways – spreading shallower subsidy further or focusing on fewer units but with deeper subsidy. Alongside the macro challenge are, second,  the myriad micro housing delivery models which are more or less efficient, cost-effective and/or prone to perversities, unintended consequences and other problems. There was much talk about using public finance devices to lever in private equity participation, though we must watch out for possible moral hazard.

Finally, I was struck listening to the discussion of public funding and subsidy how much of our housing subsidy is actually lost through home owner tax breaks and also inefficient taxation such as transaction taxes rather than, for instance, more efficient recurring taxes on land. I was reminded of Hernando De Soto’s phrase ‘dead capital’ concept that he applied to unused property-based collateral. I wondered if there might be mileage in a new phrase, ‘dead subsidy’ referring to wasted, and often capitalised, housing tax breaks (and of course ‘dead tax’ might also apply to those transaction taxes and their own micro-allocative inefficiencies)?

A little unexpectedly, I found the platform format and discussion rewarding and thought-provoking. This was in no small part down to the efforts of the chair (Dharmedra Kanani) and also the choice of discussants put before us.  I have only mentioned a few of the big ideas circulating yesterday. I am sure we will hear much more from this group in the months and years to come.

 

Disruptive Ideas for Housing Land & Infrastructure

I chaired a panel session this week at the annual Homes for Scotland conference in Edinburgh. The idea was that our four speakers would consider land and infrastructure challenges around the risks and opportunities created by disruptive changes. These disruptions are novel ways of delivering housing, changing how funding and infrastructure is done in order to deliver more housing that is less expensive and can, arguably, and to different degrees, alter the way our housing system functions.

The populariser of the disruptive innovation concept, Clayton Christiansen, argued that small scale innovators take root and outcompete incumbents. They are, in other words, a silent but growing threat to business as usual. In this context innovations aimed at either using land value uplift capture through planning law reform to fund new infrastructure (rather than from scarce public finances); or, separating out land and infrastructure (into a common good fund underpinned by a state guarantee) and a separate element for the build cost – serves to offer a threat to the status quo business model of land oriented speculative housing developers.

The planning reform proposal, from Thomas Aubrey at the Centre for Progressive Capitalism, and the plan to separate out land & infrastructure from bricks & mortar (Matthew Benson from Rettie and Co) were the central examples provided of disruptive challenge in the panel session.

They entered this lion’s den this morning on the premise that the current housing system is broken – new housing needs to be affordable or at least considerably less costly, there needs to be much more of it and infrastructure critically needs to be funded upfront to facilitate new home development. Typically, in the UK, unlike much of continental Europe, this is funded by central government in different ways and from a range of government departments. It is typically not, and despite initiatives like community infrastructure levy, in the form of capturing (part of) land value uplift on the granting of planning permission.

There is thus a public finance argument in favour of such a shift – a charge or tax could in principle reduce the requirements on public revenues to pay for new infrastructure. Second, lower priced housing costs and the development of the long term funded investment in a common future fund – could reduce the cost of housing over time and again reduce important aspects of the housing budget (ie by reducing unit costs). As my colleague Christine Whitehead has often said, one measure of good housing policy is its capacity to reduce the cost of housing to households and the tax payer.

Our first speaker, Nicola Woodward (Lichfields), went further and argued that new housing and an efficient housing stock, are essential economic infrastructure, vital to growth and productivity. My colleague Duncan Maclennan has been making this argument for some time and indeed goes on to argue that benefit-cost ratio metrics that propose large productivity impacts for things like transport investment are often mis-specified and overstate value relative to housing investments and which in turn are often understated. This is partly about attribution i.e. increased densities attribute to transport rather than housing social returns, but also due to a failure to properly consider the counterfactual i.e. the cost to the economy of not investing in housing. Duncan’s argument, till now at least, seem to have been more positively received in other places like Canada and Australia than here.

What about the critical responses? One interesting response from the panel was that those who might feel that these sorts of new models or reforms to planning would damage the interests of the existing players – were essentially missing the point in that the objective is to improve the working of the housing system. There will be losers and they will typically be loud while winners will probably only whisper at best. So, the political economy of pursuing this credibly is both interesting and challenging. Two possibilities suggested were, one, to set up demonstration pilots; or, second, to attempt forms of innovation in planned new towns.

It might be pointed out second that using funds from value uplift for new infrastructure for roads, schools, water, etc. means those funds cannot be used for S75 affordable housing. On the other hand, as Matthew Benson pointed out, his model could be applied to any tenure mix including social housing and it would all be cheaper than the current new supply status quo. A worry was also expressed that this class of reforms might impact on house prices, though the direction of impact was not completely clear to me. Benson argued in any case that house prices are dominated by the existing stock and the proposals suggested would not in reality be big enough to affect the overall housing market.

Will these or other similar ideas actually disrupt land and planning to support more, less costly, housing supply work? How will they relate to wider community plans, the work of the new Scottish Land Commission and the upcoming planning legislation coming in Scotland? Some of these ideas are not unlike more traditional disruptive ideas like land community truss. Perhaps we therefore need a suite of ideas that can be used at different times across our range of market contexts. I am sure the debate will continue.