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.

 

 

 

Sydney, Incidentally

I am working in Australia for a week. It is mid-winter (allegedly) and people are wearing coats (as are many pets). Yet it is the same temperature here as it is in Scotland and really quite nice, all in all. I am at the University of Sydney working with colleagues on research about mechanisms to boost affordable housing supply in Australia, part of an AHURI project led by Nicole Gurran. I have spoken at three events and participated in three other more informal meetings. Next, we head on to Wellington to see family for a few days before returning to Glasgow and the actual start date of the UK collaborative Centre for Housing Evidence (CaCHE) on August 1.

Several of the meetings have been directly relevant to the new housing evidence centre. I met Ian Winter, the director of the Australian Housing and Urban Research Institute (AHURI) and discussed the ‘space’ between housing research and housing policymaking and policy influencing. In recognising the common interests between us (CaCHE is loosely based on the AHURI model), we explored how we might work together. For me, it is clear that AHURI delivers some of the best housing research anywhere – there is much to learn from them.

I also participated in an interesting knowledge exchange event about social housing regulation chaired by Michael Lennon, formerly of Glasgow Housing Association. My job was to provide an overview of regulation in the UK and its key role in supporting both capacity and the wider evolution of the sector. Hal Pawson (University of New South Wales) contrasted the UK position with that in Australia and the need for a working, national, comprehensive system across Australia. While the UK regulatory system has changed several times over the last 25 years or so, and faces the considerable challenges of reclassification now, it has undoubtedly been an essential element in the growth, stability and progress of the sector.

The AHURI project on affordable housing supply involved a public lecture event (again, I was to identify and draw lessons from the UK) before we had an ‘inquiry panel’ day where the three projects that constitute our inquiry were discussed with policy and practice experts along with the research team and AHURI. The inquiry seeks to build an evidence base about affordable supply mechanisms across Australia, drawing on international evidence, and operating at different levels – from federal government and state down to specific sites and case studies. The material has all been categorised around recognition of local context, assessment of specific mechanisms and evaluation of outcomes on the ground

The inquiry panel day was a bit like a Joseph Rowntree Foundation advisory group meeting for a programme of research. It was an excellent discussion and it was great to hear the presentations from Nicole, Steven Rowley (Curtin) and Bill Randolph (UNSW) as well as the great contributions made throughout the day by Vivienne Milligan (UNSW). It is clear that there is considerable variety in practice across the country and that good things are going on in Western Australia, in particular. I was really impressed by the quality of the policy instruments discussion regarding the interplay between market, finance and planning. Bill and his colleagues presented a very helpful (and intuitive) stripped-down spreadsheet model of specific affordable/market developments which allow the user to vary policy and market assumptions and with which one can see the impact on key financial outcomes.

It has been a very enjoyable week with much to reflect on for CaCHE. Thanks to Nicole and her colleague Catherine Gilbert for all their help and hospitality while I have been in Sydney.

 

Private Renting Redux

This post follows three different rental market developments in the last few weeks. First of all, I chaired Professor Peter Kemp speaking in a seminar reflecting on Scottish market renting and PRS policy from the remove of England (though he is a former colleague of mine in Glasgow). Peter was joined by an excellent panel of  Rosemary Brotchie, Nick Bailey, Susan Aktemel and Anna Evans. Second, the Scottish Government published online their instructions for landlords and tenants regarding the new private rental tenancy that will come into effect for new tenancies in December 2017. This will assume tenancies are ongoing unless specific mandated conditions for termination are met (and are verifiable). It also creates the right for councils to seek local pressured rent zone status which would allow them to seek caps on annual rent increases (though not on initial contract rents. Third, my new colleague in the Collaborative Centre for Housing Evidence, Tom Moore, has recently published an (currently) open access paper in the International Journal of Housing Policy contrasting regulation and rental policy for the PRS in each of the UK’s four nations.

Tom’s policy review paper does the interested reader a great service by laying out the background context and policy divergence across the UK in terms of tenure security, regulation and affordability. While all four nations have experienced considerable growth in private renting since devolution, there are both common and distinct trends across the home nations. While traditionally a sector of transition, more people are living longer in the sector and more families and other longer term household structures are opting for the rental market. A key question is the contribution of either lack of choice forcing people into the sector or whether the sector is a destination of choice (perhaps this also suggests the weakness of the use of the word ‘choice’). Tom stresses that not only are tenure rights and regulation very different across the UK (with England as the default most deregulated n most regards), none of the UK nations approach the levels of protection and regulation found across much of the continental Europe.

Moore stresses that to the extent that more low income households are now in the sector, their vulnerability may exacerbate inequalities and disadvantage. Second, he rightly emphasises the importance of greater tenure security in policy discussions as the sector grows in importance. Third, management practices by some landlords remain a cause for concern.

There is much to like in this paper especially the comparative analysis of divergence across the four nations. If I was being picky I would challenge a few points: Scotland does have limited policy control over housing-related aspects of the housing elements of universal credit and discretionary housing payments. They can also top up and create new benefits – but they have to pay for them out of their budget. Second, I think the paper downplays important UK level ‘reforms’ of the sector, particularly via HM Treasury (the Scottish Government chose to follow the 3% uplift in stamp duty via the devolved Land Building Transactions tax).  I am also one of those people sceptical about rent regulation and in particular the ability of people like the rent officer to find a balance between tenant and landlord interests. Scotland’s reforms will be an important natural experiment for Scotland and the rest of the UK.

The Glasgow seminar with Peter Kemp was both stimulating and challenging. Peter made many important points. First of all, he noted that there is a definite asymmetry in terms of the new Scottish tenancy in that it is considerably easier for a tenant to leave under the new settlement than it is for a landlord to end a tenancy. Second, he stressed that the likely cap on rent increases is likely to be CPI plus 1% – which, compared to the Scottish average rents as described as ONS is actually quite high (unaffordable areas excepting).

While there was some concern in the seminar about policing the landlord grounds for repossession of property, there is clearly much anticipation about the impact the new tenancies will have for Scottish housing.  There was also a focus on other concerns of the moment like short term tenancies and Air BnB.

For me, Peter’s most insightful comments concern the changes to the tax regime for private landlords. Until listening to Peter I had generally considered these to be a tax grab that was rather unthinking about its housing system consequences (ie reducing the supply of lets just when the rest of the market is difficult to access, possibly pushing rents up). That may be true but I interpreted what Peter said as a sort of blindside attack on individual ‘mum and dad’ landlords in favour of the corporates – not by subsidising them (although there is some of that going on  via guarantees, etc.) but by using the tax system to penalise small landlords. (who make up 90% of the supply side)

How so? First, they do this by charging an 8% surcharge on capital gains tax compared to other assets. Second, there is the 3% surcharge on the tax on buying properties if you are a landlord (which may help potential first time buyers but might just push rents up or broadly discourage investment). Third, mortgage tax relief has been cut to the basic rate (unlike for other forms of investment business loans) and this is also has been turned into a tax credit which essentially means that rather being applied to corporation tax, it is now really a turnover tax and this has the unintended (?) consequence of pushing many small-scale landlords into higher tax bracket. There is concern in the sector that will lead to a large scale departure of small scale landlords. Will this gap be closed by other providers? Will first time buyers fill the gap as properties come onto the market – perhaps to an extent but they still face high deposits even if prices weaken.

This highly dynamic sector is the fulcrum of the housing system and its segments and interdependencies remain comparatively poorly understood and recorded. This has to change. And now social landlords are increasing their interest in and provision of mid-market rent – slightly sub market rents on short tenancies aimed at key workers (though this will also have to change for new tenancies after December in Scotland). How will this new sector niche perform and will it impact on the quality of the traditional private offer (and indeed how will it impact on social tenancies also provided by the same landlord)? Peter made much of the growth of the sector but did point out that it started from an incredibly low base in the 1980s – perhaps is the real international comparison to note-  just how did the UK end up with such an infeasibly small sector, something which of itself creates much deeper inflexibilities in the wider housing system?

 

Land, Tax & Housing Supply in Scotland

 

The Scottish Government has its five-year target of 50,000 new social and affordable homes and is exploring ways that the sector might overcome bottlenecks and impediments to the required levels of new build. Not surprisingly, there has been a focus on the supply delivery system, planning, the development industry and the land market. Scotland has recently had an independent review of the planning system chaired by Crawford Beveridge and earlier inquiries by RICS Scotland  and by the Shelter Commission on Housing and Wellbeing. Now, as a sidebar to the recent proposed reforms of the council tax, it has been suggested that the Scottish Government would consult on the efficacy of a tax on vacant and derelict land, so as to incentivise the supply of housing land from those relatively untapped sources. This follows on the recent introduction of a similar levy on such land in Ireland.

This was the context for a roundtable discussion I attended Tuesday morning about the pros and cons of such a tax chaired by the minister and populated by stakeholders across the housing supply delivery system, professionals, policy, academics and practice. It followed the Chatham House Rule so I will simply reflect on themes expressed around the table.

The meeting was structured around three key questions: why can’t we deliver more housing supply; would a tax on vacant & derelict land help; what other policy instruments might help? There was a wide range of views on show both in terms of diagnosis and what needs to be done.

Regarding what prevents housing land supply coming forward more speedily, there was (unresolved) disagreement over whether or not speculative land banking played a part. Other culprits were identified as high levels of risk, infrastructure constraints, construction capacity questions, the reduction in SME builders since the crisis, the cost of decontamination many derelict sites relative to the funds available, and lack of access to sufficient affordable land – amongst several other issues. Underlying much of what was said was the continuing large discrepancy between the volume of housing land with consents in the housing land supply figures and the much lower number of what actually gets completed. How do we rectify this and what quantitative significance does vacant and derelict land play as part of this story?

Contemplating a tax on vacant and derelict land means having clear definitions of what it means to be derelict or vacant and targeting the tax appropriately. That is not easy. Assuming that it can be done the tax would have to overcome a series of standard hurdles: the tax should be cheap to set up and run, it should be simple, transparent and be credible as a fair burden. It should also minimise wider distortions or unintended consequences.  I argued that if these criteria could be met through careful design, the tax should also possess local discretion so that the nuances of locally heterogeneous markets could to an extent be addressed. Overall, a wide range of views were expressed about the feasibility and desirability of such a tax.

In the course of the discussion a number of important wider points were made. First, there is of course a major issue about dereliction in our town centres and working on creating residential demand and solutions for these properties could play an important role in the future of many urban areas across Scotland. Second, there was a sense in some quarters that derelict and vacant land was a part of the problem of land supply for housing but it should not be over-cooked against the wider questions of how we best deliver on new housing targets. One view was that there was essentially nothing that far wrong with the planning systems aims and goals but there was a too common failure to actually deliver the housing delivery public policy outcomes we desire – and we need a range of mechanisms to make that happen.

How might this be done? First, there was discussion of the prospect that planning permission might be taken away on a site if it is not used. This is often discussed but of course there are dangers here – the site may nonetheless be a viable site and its development will be delayed and, moreover, by taking consent away, the effective housing land supply is actually being reduced. Second, there was discussion of national and regional land development agencies that could overcome market failures by delivering serviced affordable land for housing. To that end I would also support local revolving land funds that could do the same once they are pump-primed with initial funding. Third, it was suggested that the state can borrow over much longer periods than the private sector and should do more to exploit this by playing a larger role as an investor in infrastructure versus the relatively short run requirements of market sector developers and that, furthermore, there was an appetite for this long term state investment debt from pension funds.

Finally, there was debate about whether the local state has the capacity and even the confidence to use its existing powers, notably CPO as a way of braking log jams, assembling land and moving sites forward. Several speakers stressed the opportunity to use compulsory sales of land which has the added advantage that it is far cheaper to do in terms of transaction costs than CPOs from the point of view of local government.

Plenty of those present brought specific experienced examples to the table to make their arguments. Only one academic brought detailed research evidence (it was not me). One takeaway point for me from the debate in public policymaking terms, therefore, was that the Scottish Government still has an exercise ahead of it to collect different forms of rigorous evidence as well as this distillation of key stakeholder views – before decisions are taken about the direction of, and specific instruments for, a policy aimed at successfully expanding housing land supply and completions.

 

 

 

What do we know about the demand for private renting?

Regular readers will know that I have previously argued that we know surprisingly little about the UK rental market, despite the magnitude of growth in the sector in recent years. Evidence is hard to come by because of the disparate diffuse nature of the sector, which is really a series of well-defined demand segments. But this does not stop many people writing about the sector as if it was homogenous, simple to understand, monitor, evidence and, consequently, intervene in to moderate excesses.

Unfortunately, this over-generalisation has extended to the former Chancellor of the Exchequer who introduced tax changes that will reduce returns and increase borrowing and transactions costs (but without any proper analysis of the impact of these changes). But the sector is not simply an investor question – it is also about who lives in the sector and their aspirations and experiences; and it is all the more important because at the margin it is the sector where the action is because of credit constraints on entering owner occupation and, for others, because of the insufficient level of affordable housing supply of social housing.

It is against this backdrop that a couple of weeks ago the Bank of England’s blog site Bank Underground issued an interesting paper on the drivers of the demand for private renting by Mariana Gimpeliewicz and Tom Stratton. In what follows I will summarise their paper and its findings and then reflect a little on what they say.

Noting the observed growth in the share of total dwellings privately rented since 2002 and the growth since 2008 of buy to let mortgages (BTL) rising at more than 6% per annum (a subset of all private renting), the authors argued that it made sense to try to understand the growth in PRS demand, what its main components are and then divide the analysis between pre-crisis and post-crisis and also make some projections about future demand levels in the sector. The authors note that BTL loans explained about 70% of PRS expansion before the crisis but that tighter underwriting may explain why BTL only supported about a third of the growth after the crisis (most of which came from ‘cash purchasers’).

The main drivers of demand for the PRS are (1) demographic sub-groups i.e. students, in-migrants and younger people, who all have a higher propensity to rent privately; (2) where the provision of social housing falls, households will be funneled to the rental market; and, (3) potential first time buyers who are credit-constrained or face affordability shortcomings will be obliged to either rent or live with parents. In this study, the lack of affordability data means the focus instead under (3) is on credit conditions.

The authors found that pre-crisis, net inward migration was the largest contributor of PRS demand ie about a quarter of all sector growth (2002-07). Additional students helped explain another 12.5% of growth, with slightly less growth due to the reduction in social housing available. Their analysis explained about half of the growth in the sector n this period. Between 2008-13 (the credit crunch period), migration remained an important factor, with a declining role for social housing and student growth. Much more important was tighter credit conditions for first time buyers ie the withdrawal of high LTV loans – they found that this accounted for two thirds of the growth in the private rented sector in this period. Overall, their drivers account for 82% of the growth in the sector and all of the BTL segment’s growth. The authors recognise that affordability may be driving the unexplained growth – in other words that by driving up house prices new BTL supply may be making owning less affordable and hence more are directed towards the rental market (but this is supposition).

Looking ahead, the authors expect demand to grow to 2019 but much less slowly than in recent years. This amounts to as much as a million additional properties in the PRS in this period. The key to how this turns out will turn on the extent to which frustrated home-owners actually manage to purchase their first home. Buy to let growth is forecast to slow.

This paper is on the one hand an interesting thought experiment that allows us to see how the different segments are growing at varying rates and have done in the recent past. It shows also that buy to let is far from all of the story. One just has to look around our University cities, for instance, to see the growth in bespoke purpose-built student accommodation. The split between pre and post crisis is also intrinsically sensible and a useful exercise.

However, despite the value of the disaggregation of the sector, the use of different data and its creative manipulation, it is worth noting that there is not much underlying economics in the construction of these different numbers. So, relative rents and housing costs and income play no direct role in coming up with these numbers. Instead, a series of generally reasonable assumptions, extrapolations and extraneous propensities are adopted. This is reasonable in the absence of the economic data of the right kind but we should be cautious.

We need more work more on these sub-sectors – what are the economic drivers in different segments; how is individual tenure choice governed by things like relative prices, credit availability, income, down-payment constraints and household variables? These models may well fluctuate over the credit and wider business cycle but do they also vary across space in different regional labour markets? What about the industrial economics or theory of the firm of different kinds of landlords – what are their motivations and how responsive are decision makers to changes in financial and economic variables (this latter question is vital to understanding the impact of policy interventions?

 

Owning Housing in the UK: Snakes and Ladders or just Snakes?

One of my favourite ‘angry’ songs from the first Tom Robinson Band album (Power in the Darkness) was ‘I’m Alright, Jack’. The song always conveyed to me the sense of ‘pulling up the ladder’. I was reminded of this reading the new report by the Resolution Foundation: ‘Living Standards 2016‘. In the report they argue that the UK housing ladder has been ‘withdrawn’.

The Resolution Foundation argues that only now are living standards returning to pre-crisis levels. The study focuses on the experience and position of low to middle income working age households. They stress the cumulative impact of long term wage stagnation only recently recovering though ‘flattered’ by low inflation. FRS household survey data rolled forward to 2015 suggests that mean household incomes remain 1.6% below their 2009 levels though they are rising relative to recent years (median income has been doing a little better). Household type (pensioners have done much better since 2002 than working age households), tenure (though with a mortgage facing very low interest rates have done much better than those renting) and place (London is the second best region in terms of household income growth before housing costs but at the bottom of the pile after housing costs).

For the Resolution Foundation these points indicate strongly the central role of housing in affecting incomes and allied to the intergenerational differences in outcomes, helps explain the ‘drastic changes’ to the levels and rate of home ownership. They point out that 1/3 of home owners are aged over 64 (compared with a quarter in 2000) and 16-34 year olds account for just 10% of owners compared to 19% in 1998. They acknowledge that the trend was downward pre-dating the economic crisis but stress that it is among low to middle income households that the reversal has been greatest. They predict that in comparison to 2000 when around half of such households aged under 35 owned their home, today it is more like a quarter and will be just 10% in 2025 if trends continue and only 5% in London. The authors argue for policies to successfully implement the national living wage, reverse the ‘most punitive’ aspects of welfare reform and pursue a sustained and enlarged housebuilding programme.

These figures are important facts that we should be aware of. I would make a couple of additional comments. First, we stressed in the 1980s and 1990s that some national policies have important regional implications, such as the spatial impacts of mortgage interest tax relief. Today, the same can be said about the tightened regulation of the mortgage market since it is deposits that play such an important role rendering home ownership inaccessible – and that has huge spatial consequences particularly for overheated housing markets. Ability to meet such deposits remains arbitrary and increasingly a function of previous generations’ success in ‘winning’ the housing market game and recycling the proceeds to their children or grandchildren. This it seems to me is where a fundamental constraint on home ownership bites and where policy needs to be more innovative and creative (as we will continue to need a more regulated mortgage market compared to a decade ago).

Second, I return to that question about millennials and their changing attitude to housing and the greater insecurity of job tenure in the labour market, to renting in particular, and issues of location, and life-work balance. We need to understand housing demand, tenure aspirations, choices by households and the limits to changing these through policy interventions much better than we do. Aspirations studies are important in this but we do critically need a better understanding of aspirations modified by constraints and actual or likely economic choices. As I have argued before my sense is that the rental market is highly segmented and differentiated but that for a growing number of younger households who do not know anything else other than the parental home – it is is increasingly normal and often quite satisfactory as a housing outcome. It is clearly less well suited for other groups like families but if anything policy work needs to focus on lengthening tenancies and not by simply seeking to ‘solve’ home ownership without tackling the down payment issue.

Three (tax) strikes and you are out

A relatively little-mentioned aspect of this week’s budget was the continuation of the fiscal assault on buy to let landlords. As we know, the rate of capital gains tax has been cut but the private landlord has been exempted from this effective tax subsidy. The rate of CGT remains at the old higher rate for them. While this is only a relative disadvantage compared to other forms of assets, it is a continuation of a process whereby the Treasury has accumulated fiscal penalties on the sector over the last year or so (reducing tax relief to the basic rate for interest on borrowing and also the 3% hike on all rates of stamp duty quickly replicated in Scotland).

The rationale from the UK Government is two-fold: they want to pursue a tenure-based housing policy that promotes the growth in home ownership and are of course pursuing a range of more or less credible policy proposals to do just that. Second, however, they are justifying this approach insofar as it means reducing the incentives to invest in private renting (or stay in the sector), because the Bank of England published its view that BTL investment may be pricing out home owners and creating bubble like inflation in the housing market (that needs to be moderated).

The logic of this argument is I think pretty ropey. It is one thing to say that rental investors are bidding up the properties they purchase (they obviously are very active and taking a large chunk of new lending and yes may be pushing prices up a bit); but it does not follow that by choking off the return to such investment via blunt fiscal interventions will (a) deflate any such bubble (whether or not it is a real issue consistently or largely outside of the Metropole) or (b) that this will in the short to medium run actually make things better in terms of the supply of housing. Let’s unpack the argument a bit.

A THOUGHT EXPERIMENT

Clearly, private renting and owner-occupied segments of the housing market are interdependent – they are a more or less functioning system where change in one affects the other. In recent years, largely though not wholly as a result of the non-affordability of home ownership and linked  long term supply shortages, demand has grown and supply has responded on the rental market to accommodate unfulfilled home ownership demand and, to an extent, meet new demands independent of this frustrated non-owning segment. Intervening through fiscal levers to make the rental sector less attractive may well reduce new investment and stimulate disinvestment – slowing the growth and even reducing the sector’s actual size. But there are least three problems that arise in this system where I think the Treasury is not thinking it all through.

First, it will take a long time for any downward pressures on prices caused by a landlord or investor exit to impact on house prices to the extent that they make a material difference to potential first time buyers (and it is questionable if this would ever be the case in some parts of the U.K.)..

Second, the PRS is not the only force acting on house prices – there remains the chronic weakness of new supply to deliver and the myriad host of new announcements and policies supposed to unlock housing supply, as well as of course other demand side policies like Help to Buy.  Where is the evidence that this strategy adds up or that BTL is the critical driver of prices?

Third, in the (potentially lengthy) intervening period while we wait optimistically for this supply renaissance to deliver large numbers annually of a range of owner-occupied supply to locations where there is demand and a good proportion of it is accessible to potential purchasers – just where are the growing number of households going to be accommodated? Will a shrinking rental market simply not reduce the options for people to rent and bid up market rents?  Surely, this continuing long term problem in the home ownership sector is precisely why we need a well-functioning, better regulated (e.g. longer length of tenancy) and well policed rental market? Actively trying to make it less competitive and less attractive to investors is simply wrong-headed.

In Defence of Buy to Let?

A few months ago I was speaking at a Scottish housing policy conference and I struggled to articulate a point about UK government policy on private renting. The essence of the idea was to question how the initial unfavourable tax changes to the private renting sector proposed by HM Treasury in the 2015 summer budget and then reinforced in the Autumn Statement actually helped deliver more housing supply and expansion in home ownership.

Mark Stephens recently pointed me to the February 2016 report by the House of Commons Treasury Committee on the Spending Review and Autumn Statement 2015 [1]. The report contains a chapter on housing, which has much to recommend it. Here, I want to focus just on what they say about Buy to Let.

The broader argument is contextualised by a belief stated by OBR that the private rented sector is expected to continue to grow, in part because of continuing affordability problems shutting young would-be purchasers out of home ownership. A critical question therefore is whether sufficient rental housing opportunities that are affordable exist for these and other households unable or unwilling to own. 

The Committee also stresses support for the idea promoted by the Bank of England’s Financial Policy Committee that they should have the power over direction of the BTL sector. The FPC note that in the year to September 2015, BTL lending grow by 10% compared to just 0.4% for owner-occupier lending. The worry is that BTL lending could threaten or risk wider financial stability. However, for reasons that the Treasury Committee terms ‘inexplicable’, the Government’s continues to delay granting this power of direction. Moreover, the Treasury Committee, rightly, also wants more detail on what the power of direction over BTL leading would mean, what tools would be used to achieve impact and how would the effects of such intervention be analysed.

The point of course is that there is a world of difference between promoting the case for greater financial scrutiny by the independent Bank of England and its Financial Policy Committee, as compared to using Bank concerns about BTL to warrant two examples of crude tax measures aimed at curtailing BTL investment. So, my concern is first that these are the wrong measures and have been introduced prior to realising the more sensitive and flexible regulatory role potentially to be played by the Bank. Second, there are grounds to argue that these are poorly specified policies in terms of what they are set out to do.

The decision to reduce mortgage tax relief to the basic rate for BTL landlords, to be introduced over 4 years from 2017 is justified by the HM Treasury analysis on the basis that the taxation of private renting is lighter than home ownership. As Paul Johnson of the IFS said in evidence: ‘this line of argument is plain wrong’ (section 101). Private landlords pay more in tax and in addition allowances for wear and tear depreciation (worth 10% of rents before tax) have also been removed.

Second, the decision to add a surcharge to all rates of stamp duty (repeated in Scotland’s land and building transactions tax) in the Autumn Statement was criticised by those giving evidence to the committee in terms of further increasing the tax disadvantage confronting private landlords and doing so via a ‘bad tax’ i.e. one on transactions which reduces mobility and will inevitably be passed on to tenants in the form of higher rents – reducing affordability. Peter Spencer from York University also made the point that the delayed implementation of this announcement, like in 1988 when double MIRAS was abolished several months after the announcement, would lead to a rush by investors to complete sales before the surcharge came into effect, followed by a dearth of sales thereafter (Section 111).

The point is that you do not need to be an opponent of bad private renting to see that these kinds of poorly constructed policies damage the housing system as a whole, reduce affordability and do little if anything to expand housing supply. We need a larger scale quality private renting sector if we accept the fundamental difficulties of developing a more balanced housing system. If in our hearts, we do not think that home ownership is going to be rendered much more affordable any time soon, there needs to be a sensible rental market alternative. It should be monitored and regulated as suggested by the Treasury Committee through the FPC (subject to the caveats raised by them), and we need of course need proper quality control and standards enforcements, But, it seems to me, the Chancellor’s policies as presently constituted, simply do not help.

1. House of Commons Treasury Committee, 6th report 2015-16, February 2016 Spending Review and Autumn Statement 2015. HC 638.

Rethinking Rent Indices

 

Private renting in the UK has been the primary beneficiary of the home ownership affordability crisis that predates the financial problems that occurred after 2007. The Buy to Let model allowed small landlords to grow quickly and the BTL formula responded well in the aftermath of the housing market downturn. Private renting has grown strongly from 8.7% in 1991 to 17.8% in 2012 (GB).

However, the sector has not been short of critics. Bad practice in some quarters had led to call for stronger regulation alongside growing interest in establishing longer more secure tenancies. This is now happening in Scotland through legislation currently at Bill stage. The Bill also includes limited controls on rent increase after a tenant and landlord agree the initial rent, provided the local area is deemed to be high pressure. At the same time, and perhaps linked to the belief coming out of the Bank of England that there may be a bubble in the Buy to Let sector, the Chancellor has been explicitly moving against the Buy to Let sector. First of all, he removed higher levels of tax relief on mortgage interest payments and then, second, in the recent Spending Review, he announced adding 3% to all levels of Stamp Duty Land Tax on second homes and rental investment properties.

So, there is a lot of policy action currently concerning the rental market. In this light it is striking how impoverished our evidence base remains on the rental market. A long standing view among researchers is that the sector is highly regionally varied, it is made up of quite distinct segments and sub-markets; it has problematic aspects undoubtedly but it also has areas that appear to be working well. We know relatively little about the behavioural impulses and motivations of the large number of small scale (often recent) landlords who dominate the sector. At the same time, we assume that most tenants are, in Peter Kemp’s nice phrase, conscripts rather than volunteers i.e. it is a constrained choice because of a lack of affordable alternative tenures especially home ownership that puts people in private renting, rather than a direct preference to rent. But is that really true and is it still as true as say ten years ago?

All of this heterogeneity is not reflected in much of the policy discourse about the sector. One area of evidence that is remarkably absent is good consistent data on rents. ONS have an experimental rent index, which suggests Scottish rents have risen 2.1% in the year to June 2015 and 2.5% in the UK. There was a good index developed in Northern Ireland  and there are a few other significant commercial data providers. However, compared to the high quality house price indices available there is a serious lack of consistent local market transparency, despite the small number of  honourable exceptions noted.

This is all the more important because, for one thing, the local housing allowance system relies on robust measures of the distribution of private rents by size across so-called broad rental market areas (something that assumes that these are in all places well-defined unitary market areas).

Why am I writing this just now? The main reason is that, and given this context, I saw today an interesting article in the new issue of the Review of Economics and Statistics by Brent Ambrose, Edward Coulson and Jiro Yoshida (‘The Repeat Rent Index’, Volume 97 (5) pp. 939-50). In an American context they point to the lack of data on housing flows (as opposed to the stock prices transacted as assets for home ownership and investment).

Interestingly, the authors seek to construct a repeat rent index modelled on the famous repeat sales index developed by Case and Shiller and now widely adopted, particularly in America. The essence of the idea is to link sales or, in this case, new leases, when the same properties come back on the market. One can measure price/rent change on the same property directly, as, if suitably controlled, you have the same broad quality of property and hence can overcome quality variation problems that bedevil house price data. There are well known problems in the repeat sales index. Bias in the type of properties that trade more frequently e.g. starter homes and also heterogeneity in terms of the time gap between two sales points for different properties – but this is arguably  different and less serious in the rental market. Based on national rent contract data held by a major data provider, the authors worked with observations  from 1998-2010 involving 1.4 million leases. Analysis was then conducted on cleaned and filtered data on metropolitan housing markets and the research also included robustness checks and careful supplementary empirical analysis.

The actual results are less important in a sense than the  filling of a significant  evidence gap – providing robust rental data for American cities to a level that simply did not exist before. The authors did find considerable spatial variation across the cities and over time. While this is new research, and by no means the final word, it is an indication of what is possible.

While repeat sales or rent models are not without their problems, it does seem to me that with sufficient observations, some of the constant quality assumptions that are important for sales indices are arguably less problematic for rental market housing. This is in itself a reason to seriously consider such indices as a useful way of adding consistency, transparency and policy relevant knowledge about how our rental markets actually behave.

 

 

A Housing Research Legacy: Remembering Alan Holmans

I was in London today at an event put on at the LSE in honour of the life and work of Alan Holmans. Alan had a long and valuable career in housing first as a civil servant and then as a researcher mainly at Cambridge’s Centre for Housing and Planning Policy. Alan was originally an academic economist and lectured at Glasgow but he really made his mark in the Government Economic Service because of his interests in statistics, historic data time series, housing needs and demand research and especially the role of demography in supporting forecasts and projections. Alan was also a stalwart of the Housing Studies Association and was author or co-author of innumerable papers, reports and other research publications.

The event today was ably organised by Christine Whitehead and featured many colleagues who had worked with or knew him, several for more than three decades. There were quite a few stories and anecdotes but, as is often the case with these sorts of events, there was actually a lot substantively to get your teeth into from the many and varied contributions by speakers and from the floor.

More than anything Alan was an enthusiast and advocate of robust evidence supporting the development of policy, be it a local or regional needs or demand study or making sense of land requirements for new housebuilding to meet demand. Some in the room lamented the shift away in recent years from evidence and analysis in policy development. But Alan went further arguing that in some cases the evidence simply took you so far and then the politicians had to make choices.

A case in point is the handling of backlog or existing housing need. Should a needs assessment assume that policy intervention will attempt to ‘clear’ it in three, five or even ten years? At one level this is a resource or commitment question but the choice has a massive effect on the numbers. Recently, the new national affordable need estimates in Scotland chose five years – twice the implied commitment and spend than the ten years often used in local studies. The key thing is to be upfront about the judgement made and equally explicit about your assumptions.

At the heart of much of the debate this afternoon was the old controversy between economics and demography. Which is more important to understanding the housing market? Of course, it is really a false argument: both are important and matter and they are undeniably connected. Some of the most interesting points made concerned the economic elasticities that impact on household formation decisions I.e. Non-affordability may well reduce household growth below more unconstrained projections, just as jobs and relative wages impact on net migration. At the same time, understandable scepticism about economic forecasting can also be a sensible attitude with which to approach long range demographic projections. Alan was comparatively rare, as Glen Bramley pointed out, because he was an economist interested specifically in demography.

A recurring theme was the importance of uncertainty both for the researcher as an undeniable feature of the contemporary housing market but also for thinking about demographic trends e.g. the effects of ageing on the market, let alone the effects of the blizzard of often incoherent housing policies coming from Whitehall. To be clear, people were not talking about quantifiable risks but a series of unknown parameters and unknowable futures that can impact in quite different ways on the housing system. This was more Keynesian uncertainty than expected utility calculation. My colleague Geoff Meen warmed to this theme noting that market volatility made it hard to predict house prices in the short run of say a year hence, let alone contemplate the complexities of long term forecasting for housing planning purposes in the face of multiple uncertainties.

Several speakers noted the historical analysis conducted by Alan which chimed with a number of people in the room. Geoff argued that a longer view suggests that affordability can’t keep getting worse – at some point there will be a correction, a reversion to the mean, but this may not be a pleasant experience! At the same time, Alan’s historical housing supply data suggested that there is no long term trend in supply so making the kind of step change required i.e. sustaining 200,000 to even 300,000 completions, does seem fanciful. Geoff is leading a book (that I am also involved with) which explicitly ties historical urban development to housing economics today. It will be published in the new year.

Alan was fondly recalled by all who attended today. There was also recognition of the significance of the research he did, the rigour with which he did his work and the need for analysts and Governments to carry on the work and the spirit it was done in. In a way, this is (and should be) a continuing challenge for future housing research, research commissioners and the users of that research.