The Broken Housing Market Conference, London

The Institute for Civil Engineering in Westminster hosted a one-day housing conference – ‘the broken housing market’ on June 1, 2018. The conference was organised by RICS, NIESR and CaCHE. The conference had a starry array of speakers, including David Miles, Ian Mulheirn, Kate Barker, Steven Aldridge, Paul Cheshire, Christine Whitehead and John Muellbauer, among others. I was asked to provide closing remarks which meant I had to stay honest and really concentrate throughout the four sessions, 13 speakers and discussion sessions. Short videos from several speakers can be found here.

The event was named after last year’s white paper – Fixing our Broken Housing Market – and covered different dimensions of what is conceivably wrong with housing and what needs to be done to address such shortcomings. It is important to state from the outset that different views were forcefully expressed about these problems e.g. whether they were ostensibly on the supply-side or demand side (or indeed both) or indeed were mainly about policy failure. Some of these differences reflected disciplinary or background factors but also in some cases concerned different approaches to housing economics as a sub-discipline.

The structure of the conference was in four parts. The first session was entitled housing and consumption and dealt with many of the familiar housing and macroeconomy questions – how does rising house prices feed into consumption and additional mortgage re-leverage; what role does housing collateral play; how has the UK market been changed by mortgage stress tests, lower LTVs and the macro-prudential policy context. The second session was ostensibly about affordability though it somewhat morphed into a much more fundamental discussion of how one views housing as either a consumption good or as an asset. After lunch Kate Barker reprised the housing supply question 14 years on from the review of housing supply. Stephen Aldridge provided a substantial reply. The final session involved four policy papers aiming different cases for reform and one which raised wider questions about what we actually mean by housing policy.

The main things that struck me today were the following:

• There is a lively debate between mainstream housing economists about what is going on in the housing market, how it fits together and what needs to be done.
• Mulheirn argued that the housing problem is primarily an asset issue, not a housing services question (in many places housing consumption costs are reasonable and stable). He also argued that the problem is much more a demand than a supply shortage issue. This was not accepted by many in the room who remain wedded to the need for more supply.
• There was much discussion of housing tax reform but it was strongly encouraged that promoters of housing/land tax reform invest in good policy design and careful, cautious implementation.
• Ian Mulheirn also spoke about a policy trilemma i.e. that it is possible to have one or even two but not three policy objectives simultaneously – where those objectives are financial stability, home ownership growth and pro-owner fiscal policies.
• We are still arguing about the definition of affordability but linked to this the assumptions set out in banker affordability stress tests are highly sensitive and contested i.e. they seem much more conservative than most credible independent forecasts of inflation and interest rates.
• David Miles sketched out a model that might help explain the future long-term trajectory of real house prices and argued because of the sensitivities of two key elasticities (between land and structures) and between housing and non-housing consumption, it was very difficult to confidently work out the fundamental real house price – and this matters materially for macro prudential policy if one is to have a benchmark from which to assess how far away prices are from a fundamental equilibrium. As an aside, he also argued that the tax relief reductions on private renting landlords were ill thought through.
• Christine Whitehead distinguished her interest on policy details from the grand design others had for housing and policy reform (even though she agreed with the aims). Her point was that housing policy has different governmental masters (MHCLG, DWP, Treasury, the Bank, etc), a plethora of different stakeholders and an alarming tendency to generate new policy instruments; yet little clarity on what the housing policy was really for or about – and more to the point in her view, it has always been much like this.

I particularly liked the eight stylised housing facts (i.e. that we should all agree with and take as our starting point) as laid out by Stephen Aldridge. These were:

1. Affordability pressures exist, particularly in London and the south east
2. There has been a 50% rise in the number of concealed households (alongside many more young people staying with parents)
3. Most young people who don’t currently, still want to own their own home
4. A shortage of housing supply is indicated
5. We can build more homes
6. We are building more homes than in recent previous years.
7. A sustained substantial increase in housing supply is required to impact on affordability
8. There is plenty of land in the right places for additional housing supply.

In my wrap-up, I tried to set out how CaCHE might play an ongoing role in this area. Kate Barker had indicated in her talk that the new centre was a rare opportunity to provide evidence and build conceptually. We certainly want to do just that. I also made the point that the private rented market is a complex mosaic of well-defined and largely independent segments on either side of the market. This is neither well evidenced nor conceptually understood sufficiently to allow us to have confidence that policy-makers reflect the sector’s subtleties. This led to my final comment, arising from the on-going policy transfer exemplar project we are undertaking, that we do not as housing researchers make anything like the full use of the policy studies or policy analysis literature i.e. the models that might shed light on the policy process in housing. We need to change that fact as we move on to our more empirical research.

 

Scotland’s Housing Needs

It has been nearly 10 years but Scotland once again has a contemporary estimate of the national level of affordable housing need. In the first half of the 2000s, Glen Bramley of Heriot-Watt University produced a number of studies for the Scottish Executive. Government analysts continued working on methodologies for local housing needs and demand studies. But only now in 2015 has the 2006 Shelter/SFHA/Chartered Institute of Housing been updated.

Researchers from Sheffield Hallam University, the University of Sheffield and the University of St Andrews carried out the study. The material published and circulated on social media is the summary report – so more detail is to follow as well as an opportunity to look closely at the assumptions and methods deployed to arrive at a national estimate of housing need. Today we are just talking about the summary highlights.

The research team constructed a pan-Scotland estimate of affordable housing need, which is internally consistent and builds on the needs and demand (HNDA) work by Scottish Government analysts. The authors contend that their work complements rather than challenges the official HNDA approach. The summary report only provides an overview of the model deployed but it is based on core assumptions found in the Scottish Government’s HNDA Tool for local analysis. It is based on a common type of needs model constructed from the sum of backlog and newly arising housing need from which the normal level of new affordable housing supply is subtracted to arrive at the ‘gross affordable housing requirement’.

As an affordable needs approach, the research effort is to estimate the additional affordable housing required for households whose needs would not met by the market. The research team point to a number of reasons why needs are substantial and may be rising: welfare reform, the steady rate of growth in the number of Scottish households, an upward trend in house prices and private rents, low levels of housebuilding and continuing though falling levels of homelessness.

The research team derive the central estimates of their core model a requirement for additional affordable housing of 12,014 dwellings per annum (overall, estimates vary from 10,435 to 14,678). A number of scenarios are run to test these estimates and the authors conclude that house price inflation is likely to be a more important source of sensitivity to these numbers than would be migration. The figure of 12,014 housing need is not only substantially higher than the 2006 estimate, it is twice the level of the Scottish government’s target for social and affordable housing supply that has applied through the current Parliament (2011-2016). The authors estimate that for the same level of average grant support as at present, (£58,000 for new social housing), fully funding meeting the 12,000 need target annually would cost the Scottish Government just below £700m, which is £360m more per annum than current levels of new supply affordable subsidy spend in recent years. This is a significant additional commitment in these austere times.

It is good to see these new numbers and their degree of support from both the funders and, implicitly, from the Scottish Government too. Closer scrutiny will have to wait for more leisurely examination of the full report. For one thing, it will be interesting to see what Glen Bramley makes of the new study. I will also want to see just how the model works in detail.

A few years ago I was involved in Scottish Parliament scrutiny of the housing elements of the 2013-14 draft budget and we were keen then to have a credible up to date level of housing need with which to compare the nature and level of the programme in place. Now we have a sense that need has increased significantly and that funding would have to increase substantially to meet it. Unless there are other ways to increase the supply of affordable housing which allow the Scottish Government to spread the public cost of the programme in different ways with some other mix of instruments and interventions. Currently, the affordable homes programme is targeted to provide a mix of 2/3 social to 1/3 affordable supply. On the basis that per unit affordable housing subsidy is shallower (but still enables HB to be paid on the higher rent), it might be possible to derive a larger total supply programme with a change in the mix. Could that be acceptable?

Talkin’ about housing

Not content with going to a housing economics workshop, with all of that presenting, chairing and discussing academic papers, Alex Marsh and I also ventured into the world of the podcast interview. Alex has recently started doing policy conversations and interviews around structured themes and we decided to forego an hour walking Alicante’s promenade to go and have a chat about housing policy, supply, affordable housing and a range of other related housing questions.

 There is a link to the podcast at Alex’s site below. All done in one take and yes that is the sound of waves hitting the shore that you can hear from his balcony. We hope you find it interesting.

 I am glad that media training was not (wholly) wasted.

 http://www.alexsarchives.org/policy-unpacked-2-housing-shortage-and-housing-supply/#more-7065

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.

Guaranteed?

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

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

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

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

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

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

What sort of criteria might be considered?

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

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

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

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

Towards a Scottish Land and Building Transactions Tax

I had a day out in Edinburgh today. I was part of a panel assembled by the David Hume Institute talking to the Scottish Parliament’s Finance Committee about the economic implications of the Scotland Act (2012). The Act expands devolved powers in a number of important respects including giving Scotland’s Parliament powers over 10p of income tax at each tax rate, widening borrowing powers and devolving two taxes – on landfill and for Stamp Duty Land Tax (SDLT). The tax changes create many economic risks not least in terms of behavioural responses to any prospective tax changes (which in turn impact on revenues) and how to negotiate the spending block adjustment that follows (e.g. the Scottish spending block is adjusted downwards on a one-off basis to account for the fact that stamp duty will be raised in Scotland). Getting this right is clearly very important.

My focus was on the land and property transactions tax. The Scottish Government is developing a new tax to replace SDLT called the Land and Building Transactions Tax (LBTT). It is presently going through the legislative process and is different from SDLT in one key respect – it will not be a ‘slab’ tax but instead is ‘progressive’. What this means is that instead of paying the highest eligible tax rate on the entire property value, there is a marginal progression, as with income tax, so that you only pay the highest rate applicable on the portion of property value above the relevant threshold (and for much of that value it will be zero-rated). This would also tend to suggest that a revenue neutral LBTT will require higher marginal tax rates. There are likely to be three tax rates, a 0% for the first portion and then two higher rates. However, the Scottish Government will announce these rates nearer the time of the tax’s introduction (2015-16) – so we are presently a little in the dark on these key questions.

The standard discussion points about SDLT are as follows. First, UK property transaction taxes are relatively low (as recently borne out by an OECD study in 2011).  Second, the revenue from the tax is strongly pro-cyclical but is also correspondingly unstable (it is the product of the tax rate, the price of housing and the volume of transactions). Third, it is as we saw a slab tax and this encourages bunching of property prices just below tax rate thresholds. Fourth, as a transactions tax, it may discourage mobility (the recent Mirrlees Review argued for its abolition on these inefficiency grounds). Fifth, regional variations in house prices mean that the burden of the tax varies in local markets (note that according to Register of Scotland figures, at local authority level in Scotland average property values can vary from less than £100,000 to more than £230,000).  Sixth, at the individual level, the tax is counter-cyclical in that rising prices push properties in to higher tax brackets slowing market activity while falling prices move properties into lower tax brackets encouraging mobility (as discussed in the JRF Housing Market Task Force report written by Mark Stephens). Moreover, unless, the tax threshold rates are regularly revalued, this means that there will be an element of ‘fiscal drag’ – as prices rise, transactions will slowly shift into higher tax rates discouraging mobility. Finally, SDLT is one of very few policy clubs left to the policy maker to intervene in the housing market – and it has been extensively used as a temporary stimulus.

What does this imply for the proposed LBTT? While it does away with the slab characteristics of the SDLT, until we know about the tax rates and plans for their uprating (i.e. periodic revaluation) we cannot say whether it will be a more or less efficient tax on that score. The tax will still be clearly pro-cyclical in revenue terms. On this point it is interesting to note that the OBR have predicted increases in revenues from the SDLT in the years ahead, premised presumably on a general housing market recovery. This seems a little heroic to me. In its negotiations over the spending block adjustment, the Scottish Government would be surely correct to view cautiously future revenue growth from this source.

On the Mirrlees point, there is a basic trade-off between the economic loss of a transaction tax inhibiting commerce and the revenue security of a tax on immobile property. However, Mirrlees is also making a wider point that housing taxation should be normalized and be taxed on the flow of consumption services and investment returns similar to other activities and assets. This would entail a tax on the annual rental value of properties in place of SDLT and council tax, and an end to investment tax advantages. This has much to commend it, as does a land value tax – at least in theory. Such long-term goals are shared by many housing economists, myself included, but the political unpopularity of housing tax reform keeps it hidden in the long grass.

So, we need caution about the future level of LBTT revenue.  We need to think carefully about the tax rates still to be chosen for LBTT and about the necessity of their regular revaluation. I also hope that the new tax will not be an easy target for interventionist schemes but instead will be allowed to do its modest counter-cyclical work relatively unimpeded. It will not change the housing system in Scotland but it could do a little good rather than the opposite.

References

Mirrlees, J et al (2011) Mirrlees Review: Reforming the Tax System for the 21^st Century. IFS: London.

OECD (2011) ‘Housing and the Economy: Policies for Renovation’, in Economic Policy Reforms 2011 Going for Growth. OECD: Paris.

Stephens, M (2011) Tackling Housing Market Volatility in the UK. Joseph Rowntree Foundation: York.

A Scottish Affordable Homes Programme?

Speaking at the CIH Conference in Glasgow, the Scottish housing minister, Margaret Burgess, was reported to be considering a form of Scottish Affordable Homes Programme (AHP) for the post-2015 period. One can speculate the extent to which this is simply floating different ideas to see how they are received. Or, it may actually be something at a more advanced stage of development. It is certainly the continuation of the longstanding search for new ways to provide more non-market housing with less public funds (and still constrained private finance).

Most of the attention on the speech focused on the welcome initiative by the Government to set up a sector-wide working group to discuss in broader terms options for more housing supply – including the Scottish AHP. It will also explore closely related core elements of non-market housing models, namely, affordable rents, financial capacity and subsidy rates.

This is all to the good – but I remain intrigued by the possibility of a Scottish AHP. It is worth doing the thought experiment. First, what are its key features in England?

• Much lower grant per unit (of the order of £22,000).
• Reliance on ‘sweated equity’ – essentially drawing on the balance sheet growth housing associations enjoyed prior to the Global Financial Crisis.
• Rents on new build in the programme are set at up to 80% of the Local Housing Allowance, depending on the depth of affordability problems i.e. councils in London have demanded rents at often levels closer to 65% (if they are willing to participate in the first place).
• Local deals were often premised on utilising section 106 planning agreements – which have of course now been significantly undermined by subsequent policy changes to encourage market supply.
• Additionally, participating providers can provide cross-subsidy by reletting vacant properties at higher AHP rents. Steve Wilcox estimated that to square the AHP finance circle, about three properties need to be relet on average for each new AHP unit. Among other things, this drives the proverbial coach and horses through the previous decade’s social sector rent restructuring.

There is much critical scrutiny of the English AHP. Good (sceptical) overviews are to be found in the relevant 2012 reports by the House of Commons Public Accounts committee and the DCLG select committee.

The English model raises big questions for Scotland. Do we have sufficient housing association financial capacity (and sweated equity at that) to make much lower grant rates worthwhile – and is that the best use of that capacity? What would this mean for the composition of development in terms of the providers who could work on this basis? Would AHP not create yet another niche in an already crowded social-affordable housing landscape? How acceptable would the sector find the new build rent levels and what about revenue subsidy based on higher rents for relet property? Would councils support the scheme through the use of Section 75 agreements (or might it vary across the country, as was the experience in England)? The English system will deliver large volumes – can that be achieved in Scotland and just what scale is involved? Both the Innovation Fund and Round 1 of the National Housing Trust each produced a little more than 600 units. Is that what we are talking about, or, like in England, is the wholesale replacement of the main housing association programme being contemplated?

Whether or not AHP is indeed part of this forward look, the new working group will have its work cut out. I wish them well and insofar as they are looking at AHP I hope they draw fully on the evidence from the experience in England.

London Calling (Is Anyone Listening?)

Rising waiting lists and estimates of housing need tell us clearly and consistently that more non-market housing supply is urgently needed. Adding to our number of homes is, however, often confounded by a trinity of problems: a much reduced subsidy-funded programme and accompanying lower subsidy rates; rents at the wrong level (too high for tenants and too low for investors) and, of course, housing benefit reform.

Nowhere is the problem more pronounced than in London. In the year to end March 2012, Greater London built more than 16,000 non-market units. Despite this achievement, private rents and house prices remain much higher than anywhere else in the country. Waiting lists are high and rising (more than 366,000 in 2011), unmet need worsens (homelessness acceptances grew by 27% in 2011-12 alone) and the 2011 Census suggests population is rising strongly. Indeed, the overall picture is an imbalance of more households than homes.[1] Despite major efforts across the sector, the problem is likely to get worse.

Yesterday morning I spoke at a housing sector seminar run by Future of London and the Joseph Rowntree Foundation. Ostensibly, my focus was on reviewing international and cross-UK innovative financing models of affordable supply. However, I came away with a number of broader messages about the plight of housing in London.

First, there is controversy about the desirable composition of new supply between market, intermediate and social housing. The growing net deficit may suggest a case for prioritising the injection of more market housing across London and more intensive use of the large social housing stock (24%). This would focus on more need-based allocation of vacancies for social housing and wider use of income ceilings for affordable housing. This can be done and would help on several fronts but it is not a particularly attractive prospectus for the poorest in need in the capital.

Second, I think there is an important distinction to be made here between stocks and flows. The stock of London’s social housing is large but the key question is what dent will relets make in waiting lists? Will this be as effective as new social supply?  Relying to a greater extent on vacancies in a system characterized by chronic excess demand sounds like a slow way to eat into the problem, even if it does switch to a more priority-based allocation.

Third, fingers were pointed at features of the planning system constraining housing supply.  In part, this was about the perceived failure of S106 agreements to deliver more non-market housing. More basically, it represents a private sector sense that the planning function has not delivered enough new sites for development. There was also a view that supply is concentrated in certain parts of London in a way inconsistent with the actual geography of need (which is more dispersed).

Fourth, many commented on (or lamented) the long-term shift from supply-side to demand-side subsidy for non-market housing and highlighted the latter’s exposure to risk in the form of austerity or ideology-driven welfare benefit cuts.  One delegate made an interesting contribution comparing the reliance on demand-side subsidy to PFI – low public capital outlay initially but considerable risk in the form of long term on-going revenue costs. Will the current housing model turn out to be as bad a bet?

Many of these points share a common strand: inconsistency in policy and action locally. This is true of the supply mix, the often ‘incomprehensible’ rent variations facing tenants making choices (as one person said), allocation systems, and S106 practice  – to name four. Can London’s leaders build a more consistent system from the bottom-up but still reflect local variety of preferences and encourage local experimentation and innovation?

Politicians and practitioners are understandably focused on delivering their current affordable supply targets for London. But we should not let it obscure the long-term requirement to tackle the housing pressures documented earlier.

Nor is this just a matter for London. The capital’s housing sector performs an integral role in the world city’s economy and it matters hugely to the rest of the country, and not just adjacent regions. We can’t afford to either let housing dysfunction continue in London or to imagine that all points North are somehow unconnected and independent – they are not.

1. All figures from: Ben Harrison, Joanna Wilson and Jennifer Johnson, Future of London (March 2013) Changes to Affordable Housing in London and Implications for Delivery. Joseph Rowntree Foundation: York (www.jrf.org.uk)

Scotland’s Sceptical Housing Leaders

In today’s Chartered Institute of Housing’s Scotland news and views (27 February 2013), there was a report that Scottish ‘housing leaders’ were sceptical that independence or greater fiscal powers would improve the ‘deal’ for housing. The report goes on to say that:
• One in eight thought there would be a better deal
• Three in eight said it would make no difference
• Fifty per cent needed more data before they could make up their minds.

A few caveats are in order. I don’t know what the sampling frame was for this Scottish housing leader survey or its representativeness, other than it was drawn from council and housing association senior staff (i.e. it would be good to hear from the private sector too). It is of course a survey done to help market the Institute’s upcoming conference in Glasgow next month (and one in which I am also presenting –  the Joseph Rowntree international evidence review I have just completed with Duncan Maclennan and Mark Stephens). Nonetheless, the short piece raises interesting questions.

One of the reasons it suggests for the lukewarm reaction is that housing is already largely devolved. However, there was more enthusiasm for changing London’s control of the purse strings. This is as much about the public accounting rules over borrowing and identifying the legitimate limits to state activities in housing programmes, as it is about the actual level of the block programme to the Scottish Parliament. While any independent European nation has to operate within EU State Aid rules and conform to general principles of public accounting, it is well-known that the treatment of, for instance, councils as housing provider trading bodies could open up significant additional investment opportunities, were the UK/Scottish Governments to view this differently to the status quo (as has been repeatedly pointed out by Steve Wilcox and others).

Would housing be a bigger priority if Scotland was independent or had substantially greater financial autonomy? The sceptics surveyed worried that housing capital programmes are an easy target for cuts. Indeed we know that in the present review period such programmes took a larger hit than capital spending as a whole (broadly 45% against 33%) but that this differential has subsequently been narrowed by additional housing spend, Barnett consequentials and other in-year revisions. Nonetheless, it is difficult to see housing as a protected area and indeed the direction of travel is to spreading shallower subsidy further rather than growing social housing programmes.

Respondents also pointed to the general lack of appetite for using tax-raising powers (including the frozen council tax) for housing. The long-term consequences of sustained council tax freezing should not be ignored in this context. Last week at a David Hume Institute seminar, the former Lib Dem MSP, Jeremy Purviss, made the point that the freeze has the cumulative effect of weakening local financial accountability (and becomes harder to unpick later on). Perhaps the Government will get their nationally fixed local tax (promoted then dropped in their first term) after all – but through the back door?

But in any case – there is the small matter of the new Scottish land and buildings transactions tax shortly to be legislated on and offering the promise of a form of progressive stamp duty for Scotland. Can it be used creatively and innovatively?

Finally, in the survey, the respondents suggested that there should be a better balance between the Scottish housing system, the tax system and benefits. I will leave benefits for another day but, apparently, two in three want more taxation for home ownership!

I would welcome the opportunity of creating the conditions to normalise housing as a commodity and an investment. Along with greater supply elasticity and stronger rental markets, moving to more neutral taxation is the way to eventually provide long-term stability to the volatile housing market. This has been promoted for many years in certain quarters, most recently by the Joseph Rowntree Foundation Housing Market Task and in a paper by Tony O’Sullivan and myself in Housing Studies last year. However, despite making (we thought) coherent academic arguments about sensible and fairer long-term objectives for the housing system and the positive role taxes can play – the point of our paper was to set these against the political difficulties of making that change credible and feasible. I suspect it will be just as hard ‘an ask’, politically, in Scotland as elsewhere in the UK?