Thursday, 05 March 2015

Economic ally

From: Inside edge

Housing has gained an unexpected new ally in the battle to convince the government to fund more affordable new homes.

City broker Tullett Prebon is better known for its warnings of financial Armageddon and for shoot-from-the-hip appearances on the Today programme by its chief executive Terry Smith. It has even argued that financial austerity and severe cuts in public spending are a myth spun by the government to the bond markets.

But now a report by its global head of research Tim Morgan argues not only that a house building programme is one the few options left for the government, but also that it must be social housing funded by public investment.

The less good news (apart from some apocalyptic warnings about the economy) is that he also supports housing benefit cuts in high-value areas and swallows wholesale the case made by Policy Exchange last week for all ‘expensive’ social home to be sold as they become vacant. However, that still does not completely drown out the good.

What’s intriguing is to see the case for a fundamental change in our housing system being made by someone outside the sector – and on strictly economic grounds with barely a mention of housing need or homelessness.

Morgan argues that ‘for at least two decades, Britain’s housing policy has been a disaster’. It has ignored the relationship between supply, demand and price, put excessive faith in the private rented sector, fallen into the trap of favouring current over capital investment, failed to recognise inter-generational inequalities and lacked the courage to tackle vested interests.

We have deluded ourselves that high property prices are a good thing, he argues. Instead, they swallow up capital that could have been used for more productive purposes and, although they may temporarily boost demand, they inflate debt. Meanwhile, they price out and blight the lives of young people and even the older generations who imagine they will fund their retirement will find that nobody younger can afford to buy.

Morgan claims that house prices are over-valued by at least 25 per cent in relation to incomes and possibly by as much as 40 per cent. Meanwhile low interest rates have blinded us to the size of the mortgage debt we have taken on as a result: a 1 per cent increase in mortgage rates would put 24 per cent of mortgages at risk while a 3 per cent increase would put 69 per cent at risk.

We have not just put too much faith in owning houses but also cast tenants into a limbo of insecurity and high rents by favouring private renting over social renting. That has been compounded the shift from bricks and mortar to personal subsidies as the government expands demand, drives up prices (rents) and bails out buy-to-let landlords by paying housing benefit.

As I argued earlier this week on my other blog, the housing market is dysfunctional because house prices are too high, propped up by emergency financial support, and yet there is no easy way to allow them to fall without replacing one set of problems with another. The government’s solution of hoping that prices will slowly fall back in relation to incomes while it encourages a private housebuilding stimulus to boost supply looks a longshot at best. Another City firm, Fathom Consulting, has been touting a plan based on forcing the banks to repossess people and then indemnifying them against the losses (for more on this unpalatable proposal listen again to the second half of this item on Wednesday’s Today programme).

Morgan’s overall case is that Britain is in trouble because of a decade of dependence on private borrowing and public spending. Conventional fiscal and monetary policies have been ineffective in tackling a deleveraging recession. In these circumstances, a housebuilding stimulus is one of the few viable ways of kick-starting the economy. Most of the benefits will go to the domestic economy rather than leak into imports (as would happen with the alternative of a cut in VAT) and the Treasury will get back most of the costs in reduced benefits and increased taxes.

The report is not without its problems: Morgan’s approach is broad brush and he mixes up starts and completions at one point; he fails to consider that rising housing benefit might be a consequence of rising property prices and rents as much as a cause; and he grasps at Policy Exchange’s plan to sell off expensive social homes as they become vacant without taking into account the practical or social problems of the policy.

However, he goes on:

‘We would be inclined to go rather further than this, adding directly-funded capital investment of £4bn to the £6bn projected by the Policy Exchange report to lift the annual investment programme to £10bn. This could be supplemented by a new levy on second homes.

‘We would stress that this investment should be undertaken by local authorities or housing associations, and not through private-public gimmicks like PFI. The government and social sectors should act as owners and commissioners of new housing, whilst the role of the private sector would be to build the new homes as contractors.’

Just for good measure, he adds that the government should take on NIMBY resistance to new social housing with a new wave of planning reforms.

It’s a case that’s been made before by many people in the housing world but it’s all the more powerful coming from a City firm that otherwise sees public spending as the problem. Whether the government is listening or not, the case for investment in housing has never been stronger.

Readers' comments (5)

  • Chris

    Why is it though that those who are more often listened to are so bloody slow to understand reality?

    When those in the sector have been arguing for decades that social housing investment, increasing supply to meet demand and so ensure affordability across all tenures, whilst at the same time gaining real and sustainable economic growth from the investment, as an absolute no-brainer, it has been such an uphill struggle against 'the majority' arguing for don't spend and sell it all, or at very least charge it out at maximum market rate.

    Still, if even the stallwarts of wrong thinking are coming around, perhaps there is hope. Except of course the powerful and influencial have invested so much of their time and our money convincing everyone of the opposite postion such that the vast majority of electors believe it to be so, and that the markets are convinced that building so much as a single subsidised home will lead to an economic meltdown, there are considerable barriers of political face to be overcome.

    This is where traditionally a political opposition would step in, profess recognistion of previous wrongdoing, and pledge to introduce the new age wherein everything will get better.

    In that case, my advice is to invest in tent manufacturers!

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  • Christopher Dale

    Great Scott, even the Capitalists are finally getting it! Albeit, his support of the HB reforms are proof that he hasn't been entirely cured.

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  • Joe Halewood

    I've just scanned the report and it broadly agrees with the simple point I have been making repeatedly - that because social housing is always seen in the political sphere (and as a political football) that the economic arguments for it have been ignored.

    Or in short any suggesting a social housebuilding programme is labelled a dinosaur and the (economic) argument set down is not even read.

    The £1.2bn of 'subsidy' that social housing receives delivers a £5.3bn saving to the taxpayer as take away the 'subsidy' and social housing must get its HB increased to private sector levels and then cost the taxpayer £5.3bn more.

    Private rented properties receive £2.25bn more in HB that the equivalent 1.6m social housing properties get - this alone is more than any subsidy social housing receives each year.

    The old council house model that Morgan describes is the solution that is in the best needs of the country economically. I have even argued that high private rents are a bigger cause of worklessness than welfare benefits - and there is a compelling case for that view (see here -

    That same blog comments on a Valuation Office report on half a million private rent levels across England and in each local authority area which says that high private rent levels are the biggest disincentive to taking up employment, which also damages Britain's economy and job creation.

    When even a (hard) right economist comes to the same conclusions its time social housing was taken out of the political sphere and put into the economic one where it belongs.

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  • I remember Chemical Ally and then Comical Ally - are they related to this Economic Ally?

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  • Well said Joe! Separately we need to take a close look at allocations policies to ensure that actually the homes that are created go to those who do need them and not just those who float to the top - Looking at our CBL short lists recently I feel hugely disincentivsed to continue to try to create new affordable homes - the most deserving in terms of real need are not the ones getting them.

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