Britain forgot subsidised housing needs a subsidy
[LONDON] There’s no shortage of explanations for Britain’s affordable-housing emergency – overregulation, environmental worries, planning bottlenecks, labour shortfalls or a toxic combination of them all.
But the heart of the matter is that policymakers have forgotten a fundamental truth: Subsidised housing requires a subsidy.
Back in the 1980s, Prime Minister Margaret Thatcher began a programme that was to eventually lead to the sale of roughly 2.4 million affordable homes. Along with the sales, she effectively privatised the provision of social housing. Instead of local councils owning properties and letting them out at affordable rents, low-income tenants would receive payments to be applied in the fast-growing private rental market. This model was relatively cheap for both local and national governments as it required no capital investment. The cost was, of course, the housing-benefit subsidy, but the messy business of risk-taking, investment, construction and management moved steadily to the private sector.
While not ideal, it had the virtue of allowing supply to respond flexibly to changes in demand. If rental yields rose in a particular area, additional private capital would flow into the market.
However, the rapid growth of amateur landlordism drew criticism from many quarters. In 2015, then Chancellor of the Exchequer George Osborne raised taxes on landlords. Successive governments have since added to the fiscal and regulatory burden, while also imposing additional costs by mandating large investments to rectify building safety defects and to improve the energy efficiency of rental properties.
The frequently stated view of policymakers is that it doesn’t really matter if landlords were forced out of the market. This is based on two subtle half-truths that have some intuitive appeal, but are ultimately deeply flawed.
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The first is that properties don’t simply disappear when a landlord sells to an owner-occupier. While true, rented properties are far more likely to be under-occupied than owner-occupied homes. Over 90% of not fully occupied homes in England are owner-occupied. Renting, by contrast, provides both the incentive and the means to ensure higher rates of occupancy.
The second half-truth is that small landlords don’t build homes. In reality, private investor “off-plan” purchases – made before a building is finished – became a vital source of early project finance. This significantly reduced the risk to property developers. Absent their capital, new planning applications have fallen to the lowest level on record in a series dating back to the 1970s.
The coup de grâce came in 2020 when benefit payments to social tenants were frozen. Exacerbated by a period of rapid inflation, fewer low-income families are now able to access the private rental market. The waiting list for affordable-rent homes has spiraled into the millions. More pressingly, 132,000 families in England alone languish in emergency accommodation, which can be up to three or four times more expensive than private-market rentals. More are living on the streets. On a single night last autumn a survey indicated that 4,667 people were sleeping rough, an increase of 20% over the previous year.
Unfortunately, few problems are so bad that they can’t get worse. While the government is planning minor concessions to foster development, it really is too little too late, as other levers of government are set to significantly increase construction costs. The price of disposing of inert excavation waste, for example, is set to skyrocket. Currently developers pay a little over £4,000 to remove 1,000 tons of inert waste to a landfill. This will rise to £126,000 (S$215,819) by 2030 under the new regulation. The same charge will incidentally add a further £427 million to the cost of the already eye-wateringly expensive HS2, high speed rail project.
The upshot is that, without the assurance of funding from cornerstone investors, including those who buy flats from plans, developers have little incentive to even submit planning applications, especially when faced with escalating construction costs. At the same time, both private and public-sector landlords are faced with returns that fail to meet their cost of capital and ownership. This is critical, because when new investment is required, such as to meet mandatory environmental or building safety remediation, the most cost-effective means of funding this is to reduce their existing portfolios. It makes no financial sense to introduce more capital into a business that is already failing to cover the cost of its existing capital.
This is the ultimate home truth of Britain’s housing crisis. There is neither the incentive nor ability to finance the rebuilding of Britain’s affordable rental stock.
To paraphrase an old Chinese proverb, you must keep riding your donkey while looking for a horse. Britain’s housing policymakers have instead been searching for a subsidy-free unicorn having already euthanised its funding donkey. BLOOMBERG
Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. Previously, he was chief markets strategist for Haitong Securities in London.
Stuart Trow is co-host of “Money, Money, Money” on Switch Radio and author of “The Bluffer’s Guide to Economics.”
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