Rent Reform and the Too difficult Box

 

Over the last 20 years, I have worked on at least five discrete projects about rents and rent-setting. This has included studies funded by governments and by individual providers in Scotland and Northern Ireland. A feature of this experience has been on the one hand that precious little reform of how rents are set followed on from this work (score zero for ‘impact’), but at the same time, it has been a learning curve. In this post, I want to reflect on these lessons.

First,  we are primarily interested in the pricing of social housing. By that we mean the level of the average rent, the way that rents are distributed around that average reflecting variations in, or differentiating the, quality of the stock, and, how we uprate rents each year. A fourth theme is whether these principles can be established not just for one provider but across a housing system (e.g. all social landlords), be that a local authority, a region or even a country. A fifth theme is whether rents should be consistent across the entire stock or whether pooling would not extend to separate well-defined schemes and new developments? Most of the following discussion assumes complete pooling (e.g. with a premium applied to new build should it be required).

Second, this desire to look at rents may arise because of policy seeking to remove anomalies and put rents on a more coherent basis than current perception or evidence would suggest. It may also arise because of the actions of a single landlord (e.g. taking over another landlord’s stock), it may be due to external policy challenge such as welfare reform or the sense that competitive threat makes its necessary to review the rents. It may also reflect asset management strategies and the use to which rental income is put. There could conceivably also be internal pressures from board members or tenant groups, or indeed staff groups, to address perceived shortcomings. However, we should not underestimate the ability of these groups alongside other stakeholders like lenders or the regulator – to resist or dilute rent reform proposals.

Third, what are the key principles involved? One would be consistency – that rents are differentiated on a rational and credible basis e.g. bigger properties, more space and more amenity command higher rents and do so in a coherent way. A second would be affordability (a thorny issue in its own right) but typically about securing low cost housing for low income households, especially those just above HB ceilings, often in low wage work. A third point would concern viability – does the rent allow development to take place and does it support the ongoing operational delivery of housing services thereafter?

Many readers will recognise longstanding problems of archaic rent structures lost in the mists of time, of anomalies in rent levels comparing similar properties from different landlords and inconsistencies within a given landlord’s portfolio when looking at different areas, vintages of stock and other similar problems. There is also often the sense that rent systems may be past their prime and are slipping into entropic disorder accelerating over time.  These discrepancies can be brought to light particularly during periods of new development, when stock transfers or mergers take place and when the external policy environment sheds perhaps too much light on the way rents are done.

So how to reform? I worked with one landlord who initially wanted to bring the full weight of evidence and analysis through a sophisticated formula rent. The stakeholders I mentioned earlier thought not and subsequently a much simpler model based really only on size and property type became the favoured option. Others lose their zeal for reform when they see that, as in England in the 2000s. shifting to a national formula rent (complete with local average rent convergence across landlords) requires long term adjustment over 10-15 years and also implementing protection measures for those losing out in the form of damping to lessen year-on-year effects. While the English model was relatively complex – such a process of transition and convergence could be devised for much simpler internally consistent models. But a big lesson from the English experience for me has been the unwillingness of Governments to see these sorts of policies through. The simplicity of a national formula rent, for all its problems (e.g. the financial pressure it put on landlords who had to slow down planned rent increase), fell apart after a change of Government and their desire to set off on different paths for non-market housing and required rents for new models. This was then followed up by statutory rent cuts to save on housing benefit – massively expensive for social landlords who in good faith planned reinvestment (as well as  just trying to retain the resource levels of  their landlord operations).

Geography is interesting concerning policy trajectories over rents. Alongside the English experience since 2000, Northern Ireland’s social sector appears to have had quite a lot of discretion though in fact almost all social landlords base their rents on some version of sorts of the dominant (Housing Executive) landlord’s rent points policy from the 1980s.  Again, this has gradually become less recognizable over time (and average rents remain lower for Housing Executive properties). In Scotland, on the other hand, despite earlier research studies examining the merits of a more national system of rent-setting, there has been absolutely no interest from those who would champion rent reform. And as a result, Scotland probably has the least coherent and comparable rents in the social sector across the UK. Yet no-one gets that excited about it, other than in terms of the starting rents required for new build, and the impact of LHA caps on rents and rental income received.

So, does viable, affordable and consistent pricing of rents matter? At one level, of course it does. But more broadly, surely it still makes sense for tenants to be able to make rational, informed judgements about price and quality both within a landlord’s stock and between different landlords? Arguably the growth and encroachment of private renting into the non-market housing sphere is another reason for more not less transparency. But if the regulator is tolerably happy with the situation, if tenants are not too despondent about annual rent increase (outside of England), and if providers are up to their necks in operations and crises, unless the policy environment forces it on them – rent reform is not going to be coming anytime soon. Like so many public policy reform questions, the rationality and benefits of rent restructuring are outweighed by their time, resource and political costs (and it is of course a nontrivial process) – but like council tax reform, not making the necessary change will only in due course make things worse.

 

 

Glasgow’s rental market affordability challenges

 

In Scotland we have statutory housing strategies for each local authority. Even though it has no council housing, this is a big deal for Glasgow. The city has control over the distribution of capital grant funding to the housing association sector, remains a key landowner and rightly sees housing as central to the delivery of many of its wider corporate objectives. Glasgow like all Scottish councils manages a number of statutory functions such as homelessness and housing planning. Tuesday past was the first set-piece external consulting event and I was speaking at it on the topic of private housing, need and affordability.

The central evidence base that the housing strategy is informed by is the Glasgow Clyde Valley joint Housing Needs and Demand assessment (HNDA). This is an impressive piece of work and one that conforms to a standardised model of quantifying demographic and economic trends, and the overviews the existing housing system, before then going on to examine sources of housing need and estimate three scenarios (low and high migration and the principal projection). This Scottish Government supported statutory analysis is built on earlier eras of housing planning (such as the Local Housing Systems Analysis framework that I was earlier involved with). It is a solid and internally consistent approach that makes best use of data but, as is widely recognised, it is replete with conventions, judgments and assumptions. There are undoubtedly weaker areas in all HNDAs and one of the main challenges is the private rented sector.

Private renting has grown rapidly in the city (and is now over 60,000 units or 20% of the stock) and while we can put together a narrative about the emerging market based on different sources of quantitative and qualitative evidence, it remains impressionistic and I would argue that, generally, we know little about market behaviour on either the supply or demand side. Consequently, we risk undesirable outcomes if our policies for the sector are not based on firm evidence and convincing models of how the sector works and interacts with the rest of the city. Below is my impressionistic version.

Citylets data for the 4th quarter of 2015 suggested an average monthly rent in Glasgow of £701 (compared to £741 for Scotland). While the level is lower, Glasgow how has higher rental inflation (4.2% compared to 2%) and a reducing time to let period – 21 days compared to 30 for Scotland as a whole. So, the market has rising real rents and a tightening around vacant units being filled more quickly Wider evidence suggest that Glasgow (and in some cases Greater Glasgow has been experiencing rising real rents since 2010 and again this is outpacing the Scottish average. Scottish Government evidence also suggests that rents are diverging with upper quartile rents growing quicker than lower quartile rents.

I sat in a breakout session at the conference yesterday where it was suggested by someone in the industry that Glasgow’s 60,000 or so private rented units and no fewer than 35,000 landlords – that is quite a stylised fact if broadly true. It makes policy intervention, regulation and analysis of the sector highly challenging. Landlords may be largely single property landlords alongside a smaller number of multiple unit portfolio landlords. The former may be more ‘amateur’ and short run in perspective – but some actually may see the property as a pension substitute and hence be in for the longer haul unless external drivers like tax changes force then out.

Two things struck me about the landlord suppliers – the recent tax changes to mortgage interest tax relief, LBTT and capital gains tax will have highly differential effects on landlords. Those with stock and not planning to invest will be less affected by LBTT increases but those investing will. And as was pointed out in the meeting, constraining the tax relief to the basic rate could turn for some a profitable business into a loss-making one. Another colleague, second, differentiated between the amateur landlords being likely to be more likely to exist as the market recovers and in the face of these negative fiscal pressures but also as a result of concerns about the new Scottish legislation and how this all affects capital gains. On the other hand corporate investors with several properties will be more concerned about cash flow and income returns.

I remember my former colleague Peter Kemp used to talk about a highly segmented private rented sector with landlords composed of volunteers and conscripts. I think that both notions apply all the more so now – we have a highly differentiated market which caters for discrete groups: students, generation rent working households, those with short run easy access housing demands, and those at the bottom end of the housing ladder unable to access social housing.  I am not convinced we have the research evidence or monitoring capacity to really understand what is going on in each of these segments. Policy is overwhelmingly concerned with the latter problematic group but actually there is much more going on which has an important impact on the rest of the urban housing system.

I think the other really interesting idea raised by Peter’s characterisation is that we cannot assume all tenants are conscripts but indeed some of them are clearly volunteers. Not all Generation rent working tenants, usually younger households. are potential home owners. Some are clearly happy with their rental experience, do not expect to have the sort of job security associated with a traditional mortgage and certainly do not have the savings required for a deposit). But many are content with that reality and would rather trade off a good location (and a relatively high rent) to be able to access the amenity important to their preferences. But we simply do not know enough about the profile of these two forms of tenant who essentially substitute for the presently less accessible home ownership sector. But we need to know more and Glasgow needs to prioritise this in its evidence gathering and ongoing monitoring of its housing system.

Finally, it is interesting that, in a small way, housing associations in Glasgow are dipping their toe into mid market rent and indeed ‘normal’ private renting. Do they have the skills to manage properties commercially and which segment should they operate in? How do you manage estates or neighbourhoods where you have tenants with quite different rights and conditions? This may be anathema to some housing people but to others it is a diversification that makes sense and offers opportunities to improve local housing quality and widen the range of housing on offer.

Changing times.

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.

 

 

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.

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 2^nd 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?

The OBR and Welfare and Housing Benefit Spending Trends

The intrinsic difficulties facing agencies tasked to produce reliable forecasts for future years spend and caseload across different policies, are well known and understood. In the present debate over how future cuts in welfare spending will be achieved and the all too frequent implementation gap between planned savings and actual outturn spend, a degree of skepticism about deliverability is appropriate (before we get to questions of desirability or otherwise).

While scanning through the Budget’s supporting documents, I happened upon the OBR’s Welfare Trends Report, published in the Autumn of 2014. Of course, this turns out to be part of the immediate political narrative about welfare spending cuts following from the Chancellor’s statement, but I am actually interested here more in what it says about underlying factors and expected trends in welfare spending and their ‘forecast-ability’. In particular I want to look at the figures for Housing Benefit. I may be rather late to reading this report but I thought it was still worth exploring a little.

OBR argues that past data on a small number of drivers explain long-term trends in welfare spending (and implicitly will continue to do so in the future). The main candidates are: demographic trends, labour market trends, inflation & earnings growth, and, housing market trends. We can also point to successive incremental and then non-marginal policy changes especially after 2010. How policy change impacts on spend and caseload is of course far from straightforward, particularly in terms of assumptions made about second round behavioural changes conditional on benefit policy changes e.g. on labour supply or landlord behaviour. We return to this below.

Future welfare spending trends are forecast of the period 2013-14 to 2018-19. OBR expects welfare spending to rise in cash terms by 12.5%. However, this is less than the forecast growth in the economy. Thus, as a percentage of GDP, welfare spend will fall from 12.8% to 11.6%.

The forecasts are of course subject to risk. The chief risks are seen to be, first,  the uncertainty associated with the future of Housing Benefit, which may vary as a result of how the economy performs (jobs, wages and rents are the key variables). Second, policy change associated with disability and incapacity benefit is also viewed as an important source of risk to the forecast. Third, and believed to be less significant than the first two, the introduction of universal credit is also identified as a risk to the accuracy of future welfare spending forecasts.

Chapter 9 is the Housing Benefit (HB) chapter. Spending on HB in 2013-14 was £23.9 billion (more than £20 billion of which counted within the benefit cap). The OBR forecast that HB will rise in cash terms to £27.4 billion by 2018-19 but that because of forecast larger economic growth this will constitute a falling share of GDP – from 1.5% to 1.3% between 2013-14 and 2018-19.

There are some striking facts in this chapter. The remarkable rise, for instance, in those in employment on HB. This was 0.4 million in 2008 but had risen to 1.1 million in the middle of 2014 (i.e. 3.5% of all employed adults). Second, the important drivers of trend growth in HB has been real rent increases over time, the shifting caseload by tenure into the private rented sector (with its average higher rents) and also the impact of being the recipient of other benefits associated with HB. In this case the forecasts also assume an impact from the cumulative effects of welfare reform and that includes the retention of the bedroom tax.

OBR disaggregates the source of the increase in HB spend up to 2018-19 and much of it is the result of what they call HB only cases – almost entirely, renters in employment. They also point to the importance of the expected growth in Incapacity Benefit caseload linked to higher HB average awards. The growth is offset by expected falls in JSA through anticipated falls in unemployment, and also as a result of a decline to come in the pensioner HB caseload as a result of shifts in their treatment via benefits like pensioner credit.

However, OBR recognises that they have systematically underestimated the growth in HB spending in the (recent) past, and, while they think they have corrected for this, we should be cautious. It turns out that much of the risk or uncertainty in their forecasts will depend on the future pattern of tenure change and in particular how much home ownership grows relative to renting.

The home ownership tenure change  outcome is construed as the net effect of different policy impacts on home ownership rates: between help to buy schemes like the new ISA package versus the restrictive impact of the Mortgage Market Review condition.  I think there are several other tenure choice variables and market processes, not least likely rising future mortgage rates, that will shape this home ownership figure and perhaps, in the end, housing policy is actually less important to that change than the commentariat believe but that is another story. OBR also recognise that the future path of rents and the way the labour market evolves (in terms of wages and employment) will also matter. It would be helpful and very interesting to see how the model builders at OBR conceive of and operationalise the underlying housing and mortgage market within the wider models they use to construct these key parameters for welfare spend forecasts.

Coherent pricing – rents in social housing

Regular readers will know I have talked about this before but like housing taxation the issue does not and should not go away. Some observers would doubtless describe the pricing of social housing, the distribution as well as the level of gross rents, as a second order issue compared with subsidy, investment and regulation. On the other hand, I see it as a necessary condition of a durable system to have a coherent basis by linking prices to quality of housing on a basis that everyone understands and is consistently applied.

A number of contemporary housing issues are materially affected by pricing:

1. The dismantling of English formula rent-setting after more than 10 years of greater or lesser convergence and the Affordable Homes Programme driving a coach and horses through it by (a) setting new build rents at much higher (but spatially varying levels) and (b) allowing participating landlords to set the rents of relets on the same higher basis.

2. The complete absence of any approach to national or consistent rent policy in other parts of the UK – e.g. Scotland and Northern Ireland. In Glasgow alone, there are dozens of local rent policies and social/affordable rent levels. Glasgow Housing Association has its rents differentiated according to principles established in the 1970s based on the then local amenity differentials suggested by local housing managers.

3. With shallower subsidy and hence higher new build rents, affordability and public expenditure (HB) pressures may require inevitably a more coherent approach.

4. Is it rational and fair for otherwise identical tenants in similar properties to be paying wholly different rents? While one may hold that landlords should have a degree of autonomy in how they set rents (i.e.in the wider offer they can present their tenants and residents), should there not be more coherence in the interests of a better working housing system more generally?

5. Moreover, there is also the strange case of the level and inconsistent application of service charges on top of rents.

While there appears to be little appetite for this kind of policy stance in Scotland, this is not the case in Northern Ireland. The examination of the restructuring and disaggregation of the Northern Ireland Housing Executive (NIHE) and the legacy of the province’s housing association movement basing its rents loosely (and idiosyncratically) on the NIHE’s points system, has created the policy space to  consider a harmonised rent structure across all social housing. It is also the case that the NIHE has a large annual revenue subsidy keeping its rents down, and the smaller association sector, which has been continuing to seek to develop new build social housing, has generally higher rents. Into this mix there is also the question of welfare reform – the Northern Ireland Government has used the variations in social security policy law applying there to amend how the Universal Credit will work and has delayed the introduction of the bedroom tax.

Earlier in 2013 I was part of a team that examined these issues for the Northern Ireland Department of Social Development and the NIHE. We proposed a fairly simple rents system and damped formula for converging rents over a decade that still allowed local discretion for landlords within a +/-10%  dispersion around the target rent. Nice on paper though the English experience suggests that convergence is practically very difficult to achieve and requires enduring political consensus and robustness to external shocks. Some of these issues may be less of a problem in Northern Ireland but there needs to be both an appreciation of interdependent issues (e.g. affordability, investment, financing costs and subsidy levels, the service charge regime and the wider HB implications). There is also the need for full consultation with providers, stakeholder buy-in and fundamental support for what is being proposed given the non-trivial transactions costs implied.

Policy commentary fixates, understandably, on the issues of the moment, of dealing with ‘flow’ questions such as levels of new investment, homelessness and proposed rent increases or house price inflation. But we also need to prepare the ground for longer term system-wide reforms that will address ‘stock’ issues like the way rents cohere and influence decisions and help consumers make more reasonable choices while balancing out the other requirements of a rent system (fairness, affordability, viability, etc). No-one is saying it is easy to do, far from it, but letting it slide and watching the entropy of incoherence accumulate over time should be simply unacceptable.

Reference

Young, G, Orr, A, Gibb, K, Wilcox, S and Redmond, D (2013) Review of Social Rent-setting in Northern Ireland. Northern Ireland Housing Executive/Department of Social Development: Belfast.

Private Renting and Institutional Investment: Possibility, Grail or Fable?

Ever since the original deregulation of private renting in 1988, there have been repeated calls for policies intended to promote private renting investment by means of our financial institutions. The pension funds and insurance companies need to earn a target rate of return across a diversified portfolio.  If that portfolio includes a small share (typically) held in commercial property, might they not also invest in market renting? This, it was argued, would help to modernize the sector, encourage new build purpose build renting, normalize the rental market and even encourage new partnerships with a potential role for housing associations as management agents. This would be good for the fluidity and stability of the housing system as a whole and would further wider economic objectives.

We have seen over the years tax based vehicles, plans for guarantees, loan funds and trusts – but the sector remains largely unincorporated and is fragmented among many small-scale landlords (the exception being the student housing model). This is despite the growth of buy to let and the sector over the last 10 years (even with the interruption of the housing market and economy collapse), as owning became less accessible and more expensive to achieve.

What now for institutional investment and will the current wave of policies and subsidies for the rental market achieve the desired effect? I was a minor player in a new report published this week for Homes for Scotland, written with Christine Whitehead, Kath Scanlon and Peter Williams. The report is called Building the Rented Sector and is available at http://www.homesforscotland.com/publications.aspx . The focus of the research was to clarify how to help house builders increase the supply of new homes for the rental market. The research sought to identify key barriers to investment and development and how we might overcome them through new financial models.  Aimed at the Scottish housing sector, the research also speaks to the wider UK rental market.

What were the main findings?

First, the principal challenge is to create investment opportunities that are profitable for developers but also earn a sufficiently high risk-adjusted rate of return for investors (from both income and expected capital gain) that exceeds their opportunity cost of investment. While most of the growth in private renting has come from the reuse of existing stock in the last few years, the underlying strong demand for rental housing could be met from new investment in purpose built rented housing provided the barriers to earning the required returns could be overcome. Our starting point was evidence from the sector that there is increasing interest in the potential for large-scale investment on higher density urban sites financed by institutions and managed professionally.

Second, interviewees told us that the main barriers to investment were: the difficulties developers have in competing for land for renting against owner-occupation; the lack of development finance; low yields; lack of investor experience and hardly any performance data to benchmark with; the need for scale; negative investor and local government attitudes to the sector; poor quality and expensive management; reputational risk and uncertainties around the taxation and regulatory regimes. The lack of investment, also came down to a number of specific factors, prominent amongst them were variations in professional language and understanding of basic issues such as planning and development risk and even the determinants and interpretation of yields.

Interviews in Scotland and England suggested that the barriers did not really differentiate between Scotland and elsewhere in the UK. There is evidence of yields approaching the investment level, of demand in Edinburgh and potentially also in Glasgow and Aberdeen. However, UK investors will demand evidence of success first but may yet stall investment in the absence of the perceived scale required which may not be forthcoming outside of London and major English cities.

Third, what’s to be done?

• Land, probably in mixed tenure developments, is required for new build and land for rented housing needs to be identified in local plans and perhaps in some cases exempted from S75 conditions. English policies have covenanted land, often public land, so that it remains in long term private renting.
• Development finance is often an important market failure and may require something like the Build to Rent fund partnership with the State to overcome it.
• Intermediaries will be required to aggregate up providers so that they match the minimum scale requirements of investors.
• Investors are looking for a guaranteed income stream, especially as the market is in its early stages – the UK Government’s guarantee scheme for the PRS only applies to debt reducing cost but not addressing the need for secure income.
• Management costs in Scotland appear to be relatively high, professional management is scarce and housing associations would have to learn to work in a quite different setting.

Fourth, the report made a number of specific recommendations. While there is no magic bullet in the form of a single financial model that seems workable without subsidy, guarantee or state-led partnership participation, it may be possible that a few practical steps might encourage the basis for developers and institutions to work together effectively. These would include: promoting a champion of the sector who would work with key stakeholders, trade bodies and government; explaining what the sector requires; supporting pilots and seeking to strengthen the environment that would encourage investment while at the same time encouraging innovation and experiment (there are 20 recommendations in all in the full report).

Reflecting on the wider questions, it seems to me that the current controversy over short tenancy length and calls for more regulation miss the point – the rental market is highly varied and the need for raising the floor of standards and protecting tenants at the bottom should not undermine the quality end of the rental market that purpose built institution-funded rental property would seek to promote. There is a challenge for policy to find ways to improve the quality of the poorer end of the market without dissuading the increasing interest in investment in different higher quality market rental segments. We all know the sector is split up into distinct sub markets – can we not facilitate regulation that recognises these differences? Wouldn’t a strong housing association role as a managing agent help do this as well as diversify their income base and promote the reputation of the market segment?

There is institutional investment taking place in London despite the lack of information transparency. There is demand in Scottish cities. There appears to be growth in interest from a range of investment funds in general. Will it be tapped this time? Will the pump-priming of subsidy and finance form Government make enough of a difference to support a self-sustaining market sector of new well managed housing? Perhaps it will in London but like the report says, much else has to be done to help support the rental market quality enhancement – and of course much resistance in Scotland remains in certain quarters. We are at a critical juncture.

The UN comes to town: to see ourselves as others see us

Earlier in the summer at a conference I met Raquel Rolnik, professor of architecture and urban planning at the University of Sao Paolo and UN special rapporteur on the right to adequate housing. I was interested to hear that she was planning a ‘mission’ to the UK. Shortly thereafter I agreed to convene and host a group of Scottish housing academics talking to Raquel and her UN colleague, Juana Sotamayor. We finally met last week and I have been reflecting on it and the wider responses that emerged.

The UN seeks an invitation from governments – so this ‘mission’ was an officially sanctioned one that involved meetings with organisations, academics, politicians, public servants, citizens and communities. This is an important point, as when they went round England, Scotland and Northern Ireland, they were accused of meddling in UK housing; yet, they were here by invitation. We will see what the report says when it comes out and what sort of response follows.

Although I think they would agree that one function of such a visit is to allow comparative policy analysts look at our housing system afresh and objectively but also to, as a result, ‘shake things up’ in the host country. Apart from questions of housing need, housing adequacy and the rights of minorities, The UK was of material interest to Raquel and the UN because of its status as a key source of the Global Financial Crisis, its financialised housing and mortgage markets and the apparent fact that the housing system had not collapsed in quite the spectacular way that was found elsewhere (indeed it had shown a degree of surprising resilience). Thus, they were interested in the causes of the 2007-08 crisis and the extent to which (and why) we have managed to apparently do a little better than anticipated in the most recent bust of the housing system.

A second reflection is that in the media spin world we live in, a structured and analytical focus on a range of topics (as Raquel intended to work through) can be somewhat lost in the froth of the major political debates of the moment. Perhaps it is therefore not surprising that the mission was to an extent overtaken by the housing sector’s antipathy to the bedroom tax (as opposed to the mid-range tabloid support of the policy).

I want to focus on a few of the general themes that emerged in the Glasgow meeting three days ago in an unattributable way. We did talk about welfare reform and the bedroom tax but more in the wider context of the fit into how the housing system integrates with welfare benefits i.e. we have spent so much money on housing benefit because (a) the private rented sector has grown in an uncontrolled unregulated fashion, (b) social security in the UK has been long premised on rather miserly general cash support because HB paid most eligible housing costs for the poorest and (c) in-work benefits like HB help to support low wages and maintain high levels of relative poverty internationally in the UK. This is a poor all-round background to the reforms underway.

Second, we discussed at length the new force of the private rented sector, its aforementioned lack of standards regulation, the consequences of higher rents and, in particular, the desirability of moving away from standard 6 month tenancy agreements.

Third, the Scottish homelessness policy and its implementation featured prominently, as you might expect. This is of course not independent of the changes to the rental market and the lack of sufficient new social and affordable housing given the financial constraints facing investment in the housing system in recent years.

Fourth, the rise of asset-based welfare through home ownership housing equity and its link to rising house prices and their societal and wider damaging effects was also thoroughly rehearsed. The case for a more balanced housing system, house price stability and more progressive subsidy and more investment also flowed – though I recognise that these questions raise important public policy opportunity costs – under austerity or certainly tightly constrained shrinking budgets, which other departments will pay for more housing funding, even if the case is objectively strong?

There was a final thing that struck me as our conversations widened into broad questions of funding and supply, levels and nature of material poverty and a long term view of housing in an urban setting like Glasgow . This was how much fun and how rare was the opportunity for housing academics across Scotland (and disciplines) to have this sort of roundtable free for all. I was a little anxious before the meeting about whether it would work or not – but it was a wholly worthwhile exercise that whetted the appetite for more of the same. I don’t think I was alone in reaching that conclusion.

I for one was therefore pleased to take part in this exercise and will be look out for Raquel’s report and in that way see ourselves a bit more as others see us.

On Rent Policy (again)

What is going on? Inside Housing has reported (‘Rent convergence plans threaten build rates’, July 12 2013) the threat arising from the UK Government’s recent statement that it was minded to end the English rent convergence process after 2014-15. The threat is that business plans will have to be ‘torn up’ and plans for building and investment will be undermined. The IH story suggested that ending convergence early means that the incremental increase of traditionally lower council rents towards association rents will not occur fully and that this might impinge on their ability to repay debt agreed in the 2012 HRA settlement. As a result, less new homes than planned can be built. Moreover, in London, where several developing housing associations have rents still below target rent levels, would also face reduced development capacity.

This is only the latest in a series of disconnecting policy changes that appear to be doing much to undermine social providers’ capacity and tenants’ ability to make sense of price signals.

We know that it is highly likely that affordability problems will grow through HB increases being capped and that this will be lower than the new rent increase caps recently proposed in England for the next 10 years. We also know that both the current 3-year affordable housing programme and the one recently announced by the Spending Review are premised on reletting vacant properties at ‘affordable’ rents – rents based on the local proportion deemed affordable of the equivalent local housing allowance. The first decision (reported on today) can be rationalized, can make sense on one level or is perhaps inevitable – given the continuing commitment to this form of cross-subsidy and the ongoing lack of alternatives.

I have written several posts now that have touched on this direction of travel. After the pain of rent formula, convergence and lengthy adjustment to business pans, this is in effect now to be dismantled. Yet, development is increasingly to be premised on low capital subsidy, sweat equity from the existing stock and cross subsidy from now higher relet rents. It does not really add up.

This new commitment to localizing (ultimately to individual landlords) social rent-setting will take years to unwind but one cannot but think this has been an expensive and ultimately fruitless business. In Scotland there has never been enthusiasm for a national rent policy, partly because rents are lower and the pressures (at least until recently) have been appreciably weaker. Yet in Northern Ireland, alongside the proposed selling off the Housing Executive stock, there is considerable appetite for a national rent formula and a convergence or harmonisation process.

What I find striking is that the tenant’s perspective and the principle of informed choice have been wholly lost. While one may rightly quibble with the model for the formula rent and its technical shortcomings, it did nonetheless promise to provide consistent local price signals for consumers and thereby make choices a little more transparent. This was, at the turn of the millennium, supposed to be part of a three-part process including choice-based lettings and benefit reform. It is ironic that while the Government struggles to implement its much further-reaching benefit reforms, it is at the same time making non-market price signals that much more obtuse.

Essentially, a short run housing supply programme requires local rent freedoms to work so we give up the coherence of a well-established long-term system thereby creating wider unintended business plan consequences in different parts of the country. Yet, no-one really thinks of, or argues for, the affordable housing programme as a long tem basis for augmenting non-market supply on a large scale into the long term. It is another unhelpful example of short-termism.