Wednesday, 01 October 2014

Stating the obvious

I discovered recently that I had an elder brother. He was born in 1947 and died at birth. He is buried in an unmarked grave, the location of which was only known to my Dad. He had been born in a breeched position and those in attendance were not able to save him. I was born five years later and even though I was also a breeched birth I survived. There are many reasons for this. Maternity provision was much better under the newly established NHS and my parents were no longer sharing accommodation in a terraced slum. Benefitting from the ‘spirit of 1945’, I was born in the bedroom of a newly-built council home which was a product of the post-war housing boom. A boom that was based upon government investment in social housing and which led to the economic recovery that took place in the 1950s. In those days it was clear to politicians of both major parties that there were many social and financial reasons for investing in social housing. Today’s politicians seem to have forgotten this fact.

“Why is there no political support for investment in a housing led economic recovery, the benefits of which were so obvious to the politicians in the 1950s?”

On his last day at Inside Housing [on Friday] Gavriel Hollander mischievously tweeted the question, is it possible to build sub-market housing without some form of subsidy? I responded with something that is obvious to everyone working in housing, saying that the strange thing about subsidised housing is that it needs a subsidy. Ever since I can remember housing providers have been searching for the holy grail of how to develop real affordable homes with no subsidy. As far as I know no one has succeeded in doing this in any volume. The reduction in grant and the changing face of our business model has led to the pursuit of many diverse ways of producing new homes, most of which are in the private rented sector. This has increased risks, raised the spectre of more proscriptive regulation and initiated a debate about the values and purpose of the sector. In response to a question at a recent conference, 50 per cent of the audience said they were planning to do more private rented sector work. We are told this caused [Homes and Communities Agency regulatory committee chair] Julian Ashby to raise a worried look. I think a different question would have provoked a different answer. If the audience had been asked ‘would you do more PRS work if more grant was available?’, the answer would have been no. Most chief executives would rather use their resources to boost the number of truly affordable homes, if grant was available. 

So why is there no political support for investment in a housing-led economic recovery, the benefits of which were so obvious to the politicians in the 1950s? I think that one of the problems lies in the use of the word subsidy. If we replaced it with investment, it would be a more accurate and more acceptable description. We invest for a return and it is possible to show quite simply the real value of the return on this investment. Recent work by hact has shown the financial worth of the social value and well-being created by new housing. Other research has shown that truly affordable homes reduce benefit payments. New house building creates jobs both in the construction industry and beyond and would help kick-start a recovery. Building with grant reduces risk for housing providers and thus the cost of borrowing. Less risk would reduce the need for more regulation and allow the regulator to concentrate on more important issues. And most important of all, investment in affordable homes would reduce waiting lists and help those people in housing need find what most of us have – a decent home. The value of this to someone’s life is immeasurable. Recent reports by Shelter, the Joseph Rowntree Foundation and the National Housing Federation reveal the real cost of the lack of affordable homes and show how shortages increase costs in other services. By any definition it makes business sense to increase investment in social housing. If it is so bloody obvious why aren’t we doing it? I benefitted in so many ways from investment in social housing in the 1950s, surely it is right for this and the next generation to benefit in the same way.

Tom Murtha is former chief executive of Midland Heart and chair of Hact

Readers' comments (10)

  • It is obvious that social housing reduces benefit payments. If the rent is lower that is less Housing Benefit. Putting rents up never helps tenants, only landlords. The fact is this government is torturing society with a lack of really affordable housing (no social rent). The scandal is why formerly socially-conscious HA's have not resisted. "Sell-out" is the phrase I'd use.

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  • Precisely! Investment in council housing in the past means that this so-called 'subsidised' housing has no current subsidy at all. In fact it often makes a profit on its relatively low rental income.

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  • "So why is there no political support for investment in a housing led economic recovery, the benefits of which were so obvious to the politicians in the 1950s?"

    The answer is pretty simple - the housing / housebuilding profession and its representative bodies are fairly hopeless at making the case for it, and have taken in some cases a deliberately combative and argumentative tone with the government, opposing everything the coalition come up with without offering credible alternatives of their own. Add to this the margins required by housebuilders to actually develop and the reluctance to substitute margin with volumne profit, and the reluctance of banks to take on risk, and its fairly obvious.

    If someone can come up with a magic money tree to finance a whole load of new council housing without hammering taxpayers or shafting future generations with piles of debt then that would be a simpler answer to the problem.

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  • ManWithAbacus

    Given section 106 cannot be delivered by private rent, the average HA will be delivering these properties at c.80% cost value - or probably more!

    On a £175k OMV property this is a cost of £140k.

    If the average private rent in London is £1,400 per month (£16.8k per annum) this is a 12% gross yield (I have not seen any HA seriously looking to develop in markets outside London).

    Looking at social rented development s.106 should push the cost:value to c.60% meaning a cost of £105k per property.

    If the average weekly rent on these new London properties is £110 per week(£5.7K per annum) this is a gross yield of c.5.4%.

    With long term borrowing costing c.5% the obvious problem is the cost of maintenance and HA operating costs (which are 70%+ across the sector as a whole).

    If the sector really wanted to deliver social rented without subsidy it could do so by using some of the excess yield from the private rents and being much more efficient... like, say, saving some of their £10bn cost base... or paying execs less.. or there not being over 200 HAs operating in the 33 London Boroughs... However this will use affordable housing assets and covenant to fund private high risk activity.

    If the HAs used Shared Ownership (an affordable housing tenure under s106 and much more affordable than private rents in every local authority in London and across the UK) then using the examples above the cross-subsidy of a 25% share would be £44k the yield (assuming a 3% start rent) would be a gross yield of 5% (but more of this would be retained given the reduced cost of management via the shared ownership position and lease).

    Assuming 3 properties were bought using the figures above, the total cost (which would need to be borrowed) is £105k + £105k + £105k - £44k - £44k = £227k. The annual funding cost will be £11.4k. The Shared Ownership properties would generate net rents of £7.8k (2 x £175k x 3% x 75%) leaving £3.6k to be found from the social rented property (which if the rents were £120 per week would produce £6.2k per annum) - leaving a operating cost of 41% on a new build property.

    (I note that L&Q's accounts state an operating margin on social housing lettings below this level for 3 out of the past 5 years! - Unfortunately Tom Murtha's Midland heart is reflective of the sad 'sector norm' operating margin of a 75% cost base)

    Clearly these calculations are rough and based on 2:1 (3:1 would be better still) but not to "state the obvious" but... it seems like the sector has no desire in making social rent delivery work.

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  • Here, here ManWithAbacus.

    I pose the question, why is the social housing sector so reluctant to recognise the economic and social benefits of investing in sustainable, affordable home ownership?

    The Government, via Help-to-Buy, has just put £3.5bn into a shared equity programme to support the working classes realise their home ownership aspirations.

    If the social housing sector had shown a greater appreciation of this market place and/or been more politically astute (stopped whingeing for a sec), it might have revived its central involvement in what is effectively the previous government's Key Worker strategy. Then, Help-to-Buy would have also been an opportunity for housing associations to:
    - Help-to-Build-Balanced Communities
    - Help-to-Build-Better-Gearing-Covenants
    - Help-to-Build-Better-Influence-with-Governments

    What on earth are all the social housing sector leaders and PR teams up to, missing out on £3.5bn?

    Or maybe the Gov't cottoned on that giving the loan to the customer to procure a home would be more cost effective?

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  • ManWithAbacus

    Dear WWL

    Thank you for your wise words... Let's hope 'leaders' in the sector take note.

    I find your question particularly poignant given so much has been written and talked of by sector participants about unaffordable, high risk activities like private rent and outright development.

    As I have stated in a number of recent posts, the sector has a massive inherited or publicly funded value base that it is currently not maximising and it has effectively "folded its arms" in defiance of a government (which regardless of political persuasion) who simply has not got the economic means to continue to fund the sectors' historically inefficient supply. (Although the role of the regulator in perpetuating this over years of grant hand outs for "unit delivery" rather than "efficient delivery" must be seriously questioned.)

    In doing so the sector has achieved 2 things... massively failed the millions of families on waiting lists and forced government to move on to other delivery agents (potentially never to return).

    If the sector wants to regain its role as the primary delivery agent (and as custodians of billions of pounds of value it should have no choice to) then it needs to do 3 things..

    1. remember that their primary role is to deliver housing for those in need - supporting existing customers but more importantly housing those in need.

    2. stop believing that the ways of the past are the only ways for the future, do "less talking" and start "doing"

    3. focus on efficiency in everything they do - including merging to reduce costs and co-ordinating strategies to minimise delivery costs

    Finally, take the "rally call" to government and fight for it!

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  • "...truly affordable homes..."... "real affordable homes..."... If even committed people avoid using the term "social housing" and come out with all sorts of euphemisms to disguise the fact that there is no more "social" housing being built, there really is no hope for the future. Stop pulling wool over your own and other people's eyes. "truly affordable homes" and "real affordable homes" or even just "affordable" homes are not social housing. If they were social housing the term "affordable" would not need to be applied.

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  • they have no interest in this subject itsnot
    party of their dogma you have to remember
    bye and large these are NOT TORY party
    voters so there is no incentive to act,
    and now they want the RSLs to enter the
    private rented market this is the back door to make it all in the private domain this would then take it out of westminsters hands.

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  • I cannot see a way past the divisive left, right, political system. Whatever innovation is available, we will continue to stutter and start. Sadly and perhaps more importantly, use social housing as a weapon to dissuade those with progress in mind. Could this be true?

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  • What utter patronising twaddle from WomanWithLexicon and somewhat oddly matched with wait for it... ManWithAbicus..'
    One of the great moral, as well as economic, failures on UK housing policy has been the ludicrous pouring of tens of millions (Billions for all we know?) into the myth of 'affordable home ownership for all'. Huge amounts of taxpayers pounds are used as incentives to get low and moderate income households onto mortgage indebtness when that is the last place they should be.

    The middle classes are already so struggling in the home ownership sector that a new term has come into use to describe them - the 'squeezed middle'. Would-be advisers ought to put down their lexicon or abacus and try to read and assimilate some of the hard facts and researched evidence on the 'Dirty Big Lie' of home ownership in the UK. Shelter, JRF, have produced ample evidence - if some folks find them to 'left-wing' then look at the other high quality research on the matter from the Resolution Foundation... even the right wing free market Adam Smith Institute has called for a 'walk up call for UK politicians' and for them to realise that sustainable well regulated rented housing delivered and managed by a range of providers is the only practical way forward for the UK. The outgoing Bank of England Governor has even felt impelled to stretch his remit in order to warn Chancellor Osborne about the irresponsibility and unsustainability of his nonsensical Help to Buy smoke & mirrors scam. The Audit Commission [England[, was scathing in its findings of the UK Coalition's mortgage 'rescue' scheme for its overwhelming failure at great cost.
    Meantime, if the women/man/lexicon/abicus terminology has anything to go by he/they/she do not have a credible case, e.g. a few risible examples:
    "... why is the social housing sector so reluctant to recognise the economic and social benefits of investing in sustainable, affordable home ownership?... The Government, via Help-to-Buy, has just put £3.5bn into a shared equity programme to support the working classes realise their home ownership aspirations.... If the social housing sector had shown a greater appreciation of this market place and/or been more politically astute (stopped whingeing for a sec)".
    Yes indeed it is time that we all' "... recognise the economic and social benefits of investing in sustainable, affordable home ownership" And then we will conclude they are very little (if any) and applicable only in the most limited and well researched situations of demonstrable and measurable benefits and as part of a comprehensive, spatial, regeneration project or programme.

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