Saturday, 25 March 2017

Inside edge

All posts from: February 2012

Margin call

Wed, 29 Feb 2012

Britain’s housebuilders are starting to do very nicely thankyou. If only the same could be said for housebuilding.

A succession of leading firms have revealed healthy results in the last two weeks featuring increased profits and margins, reduced debts and in one case a £1.9 billion dividend for shareholders.

The strategy in all cases is pretty much the same: increase margins through tight control of costs, building on land bought at cheaper prices since the downturn and building more houses than flats and more in the south than the north. The one thing they are not doing is increasing production. As Taylor Wimpey sums it up in its results today: ‘Our priorities remain value creation and margin improvement ahead of volume growth.’ Here’s a brief selection of the highlights from the results of five of the top 10 firms:

Taylor Wimpey: Profit before tax and exceptional items £89.9m in 2011 (2010: £27.9m loss). Achieved double-digit operating margin ahead of 2012 target with 10.1 per cent in H2 2011. Resumed paying dividend. Completions up 2 per cent to 10,180 of which 8,075 were private and 2,048 affordable.

Barratt: Interim pre-tax profit for six months to 31 December £21.6m in (2010: £4.6m loss). Operating margins up from 5.0 per cent to 6.4 per cent.  No dividend. Now operating from 400 sites with capacity to go to 460 active outlets ‘as a maximum – but this will only happen if market demand supports it’. Completed 5,117 homes jn first half (4,796) of which 1,089 were social housing and 545 supported by FirstBuy or HomeBuy Direct. Looking to take advantage of ‘build now, pay later’ initiative.

Persimmon: Underlying pre-tax profits up 55 per cent to £148.1 million for 2011. Operating margins up from 8.2 per cent to 10 per cent. Dividend up 33 per cent and programme to return £1.9 billion to shareholders over next nine years. 9,360 completions in 2011 (2010: 9,384).

Redrow: Interim pre-tax profit for six months to 31 December 2011 up 80 per cent at £15.3m. Operating margin up from 5.6 per cent to 7.5 per cent. Completions down 11 per cent at 1,168 following sale of Scottish business. No dividend.

Bovis Homes: Pre-tax profit for 2011 up 74 per cent to £32.1 million. Operating margin up from 7.2 per cent to 10.0 per cent. Completions up 8 per cent to 2,045 homes, of which 21 per cent were social housing. ‘With a clear focus on controlling the capital employed of the Group through rigorous management of the landbank and tight control of work in progress, the Group expects to deliver a strong improvement in returns in 2012 and beyond.’

Between them the top 10 housebuilders dominate the market. The top three (Taylor Wimpey, Barratt, and Persimmon) accounted for at least a quarter of completions in 2007 and about the same now. The top 10 account for around 40 per cent.

Last year saw just 109,000 completions in England. The top 10 are concentrating on building their margins rather than homes. That is a perfectly understandable business strategy given how close they came to annihilation when they expanded output up to 2007. However, it makes the prospects of matching the rate of new household formation (240,000 a year) look bleak for the foreseeable future.

The government is hoping that November’s housing strategy in general and its new mortgage indemnity scheme in particular will help to bridge the gap. I’ll be looking at the chances of success in another blog soon. 

Margin call

Wed, 29 Feb 2012

Britain’s housebuilders are starting to do very nicely thankyou. If only the same could be said for housebuilding.

A succession of leading firms have revealed healthy results in the last two weeks featuring increased profits and margins, reduced debts and in one case a £1.9 billion dividend for shareholders.

The strategy in all cases is pretty much the same: increase margins through tight control of costs, building on land bought at cheaper prices since the downturn and building more houses than flats and more in the south than the north. The one thing they are not doing is increasing production. As Taylor Wimpey sums it up in its results today: ‘Our priorities remain value creation and margin improvement ahead of volume growth.’ Here’s a brief selection of the highlights from the results of five of the top 10 firms:

Taylor Wimpey: Profit before tax and exceptional items £89.9m in 2011 (2010: £27.9m loss). Achieved double-digit operating margin ahead of 2012 target with 10.1 per cent in H2 2011. Resumed paying dividend. Completions up 2 per cent to 10,180 of which 8,075 were private and 2,048 affordable.

Barratt: Interim pre-tax profit for six months to 31 December £21.6m in (2010: £4.6m loss). Operating margins up from 5.0 per cent to 6.4 per cent.  No dividend. Now operating from 400 sites with capacity to go to 460 active outlets ‘as a maximum – but this will only happen if market demand supports it’. Completed 5,117 homes jn first half (4,796) of which 1,089 were social housing and 545 supported by FirstBuy or HomeBuy Direct. Looking to take advantage of ‘build now, pay later’ initiative.

Persimmon: Underlying pre-tax profits up 55 per cent to £148.1 million for 2011. Operating margins up from 8.2 per cent to 10 per cent. Dividend up 33 per cent and programme to return £1.9 billion to shareholders over next nine years. 9,360 completions in 2011 (2010: 9,384).

Redrow: Interim pre-tax profit for six months to 31 December 2011 up 80 per cent at £15.3m. Operating margin up from 5.6 per cent to 7.5 per cent. Completions down 11 per cent at 1,168 following sale of Scottish business. No dividend.

Bovis Homes: Pre-tax profit for 2011 up 74 per cent to £32.1 million. Operating margin up from 7.2 per cent to 10.0 per cent. Completions up 8 per cent to 2,045 homes, of which 21 per cent were social housing. ‘With a clear focus on controlling the capital employed of the Group through rigorous management of the landbank and tight control of work in progress, the Group expects to deliver a strong improvement in returns in 2012 and beyond.’

Between them the top 10 housebuilders dominate the market. The top three (Taylor Wimpey, Barratt, and Persimmon) accounted for at least a quarter of completions in 2007 and about the same now. The top 10 account for around 40 per cent.

Last year saw just 109,000 completions in England. The top 10 are concentrating on building their margins rather than homes. That is a perfectly understandable business strategy given how close they came to annihilation when they expanded output up to 2007. However, it makes the prospects of matching the rate of new household formation (240,000 a year) look bleak for the foreseeable future.

The government is hoping that November’s housing strategy in general and its new mortgage indemnity scheme in particular will help to bridge the gap. I’ll be looking at the chances of success in another blog soon. 

Sent back

Wed, 22 Feb 2012

So here is the predictable pong to the Lords’ ping: the bedroom tax amendment rejected in the House of Commons.

The vote by 316-263 is hardly a surprise given the coalition’s majority in the Commons and the payroll vote. Even Sarah Teather voted with the government this time although there were at least nine Lib Dem rebels that I could count plus two Conservatives.

Work and pensions minister Chris Grayling dismissed the Lords amendments on straight financial grounds – ‘we simply do not have a blank cheque that will cover the costs of the amendments’.

He also rejected claims that the change could end up costing more money if many of the 670,000 social tenants affected decide to move to smaller, but more expensive, private lets on the grounds that the homes would then go to people in temporary accommodation.

But if any peers were listening in and marking the debate on points to report back next week there can be little doubt which side won.

Simon Hughes, the Lib Dem who never ceases to remind us that his constituency has the greatest proportion of social housing tenants in England, questioned why the government was refusing to exempt the categories of people who were being exempted from the benefit cap. Reassurances from Grayling that the government would continue a dialogue seemed enough to convince him to fail to vote either way rather than rebel.

Stephen Timms for Labour outlined the effect on terminally ill tenants who would not be helped by discretionary funds designed to help foster carers and disabled tenants with adapted homes. And he attacked the claim that the cut was somehow a work incentive: ‘Let us call a spade a spade. This is a spiteful cut in people’s income.’

Conservative rebel Andrew Percy – who must surely deserve some kind of housing award - said that yet again he could not support the measure. ‘When we talk about people’s homes we need to remember that they are exactly that – people’s homes, not just a public asset that we need to release.’

He was speaking from personal experience as a councillor trying to tackle under-occupancy on an estate in Hull. ‘It was incredibly complicated and difficult to deal with. It is a fallacy to think that we will suddenly be able to move all these people out into more suitable accommodation.’

Labour’s Frank Field, a supporter of other aspects of welfare reform, called this one ‘shameful’.

‘Anyone who has sat through debates on the Bill will know that the Government’s body language is totally different to that in respect of other measures. They have been forced to take this measure by the Treasury. It goes against all that the Bill tries to achieve, which is to work with the grain of human nature. This proposal, which has been forced on the Department for Work and Pensions, works against that grain.’

He demolished the government’s arguments one by one. ‘This is not a welfare reform measure. It will be a recruiting sergeant to the money lenders and will be looked on as an eviction measure.’

And Lib Dem rebel David Ward quoted the stats from the largest landlord in his Bradford constituency: with 3,800 under-occupied households it would take three years with no re-lets or new lets to re-house them all.

If parliamentary debates were scored on points like boxing matches, Grayling would have been stopped to save him further punishment. But unfortunately they are won on government majorities, the payroll vote and pressure on rebels.

And so, with thanks to those coalition MPs who did rebel, the ping-pong ball is sent back with interest to the Lords.

Sent back

Wed, 22 Feb 2012

So here is the predictable pong to the Lords’ ping: the bedroom tax amendment rejected in the House of Commons.

The vote by 316-263 is hardly a surprise given the coalition’s majority in the Commons and the payroll vote. Even Sarah Teather voted with the government this time although there were at least nine Lib Dem rebels that I could count plus two Conservatives.

Work and pensions minister Chris Grayling dismissed the Lords amendments on straight financial grounds – ‘we simply do not have a blank cheque that will cover the costs of the amendments’.

He also rejected claims that the change could end up costing more money if many of the 670,000 social tenants affected decide to move to smaller, but more expensive, private lets on the grounds that the homes would then go to people in temporary accommodation.

But if any peers were listening in and marking the debate on points to report back next week there can be little doubt which side won.

Simon Hughes, the Lib Dem who never ceases to remind us that his constituency has the greatest proportion of social housing tenants in England, questioned why the government was refusing to exempt the categories of people who were being exempted from the benefit cap. Reassurances from Grayling that the government would continue a dialogue seemed enough to convince him to fail to vote either way rather than rebel.

Stephen Timms for Labour outlined the effect on terminally ill tenants who would not be helped by discretionary funds designed to help foster carers and disabled tenants with adapted homes. And he attacked the claim that the cut was somehow a work incentive: ‘Let us call a spade a spade. This is a spiteful cut in people’s income.’

Conservative rebel Andrew Percy – who must surely deserve some kind of housing award - said that yet again he could not support the measure. ‘When we talk about people’s homes we need to remember that they are exactly that – people’s homes, not just a public asset that we need to release.’

He was speaking from personal experience as a councillor trying to tackle under-occupancy on an estate in Hull. ‘It was incredibly complicated and difficult to deal with. It is a fallacy to think that we will suddenly be able to move all these people out into more suitable accommodation.’

Labour’s Frank Field, a supporter of other aspects of welfare reform, called this one ‘shameful’.

‘Anyone who has sat through debates on the Bill will know that the Government’s body language is totally different to that in respect of other measures. They have been forced to take this measure by the Treasury. It goes against all that the Bill tries to achieve, which is to work with the grain of human nature. This proposal, which has been forced on the Department for Work and Pensions, works against that grain.’

He demolished the government’s arguments one by one. ‘This is not a welfare reform measure. It will be a recruiting sergeant to the money lenders and will be looked on as an eviction measure.’

And Lib Dem rebel David Ward quoted the stats from the largest landlord in his Bradford constituency: with 3,800 under-occupied households it would take three years with no re-lets or new lets to re-house them all.

If parliamentary debates were scored on points like boxing matches, Grayling would have been stopped to save him further punishment. But unfortunately they are won on government majorities, the payroll vote and pressure on rebels.

And so, with thanks to those coalition MPs who did rebel, the ping-pong ball is sent back with interest to the Lords.

Net call

Wed, 15 Feb 2012

The end game on the bedroom tax is going to be about more than just whether the House of Commons continues the parliamentary ping-pong.

The Lords smashed the ball back over the net last night. They voted 236-226 for an amendment moved by crossbench peer Lord Best that will exempt groups including disabled people, war widows and foster carers from the under-occupation penalty where there is no suitable alternative accommodation available.

Reflecting the fact that the government had claimed financial privilege in the Lords, that was a much smaller majority than the 258-190 vote before Christmas for an amendment that would have exempted everyone with no more than one spare bedroom if there is no suitable alternative. Only six Lib Dem peers rebelled against the government this time around but that was enough.

Three cheers for that. The DWP says it will lob the ball back over to the Lords when the Commons returns next week although campaigners are still hopeful it will offer more concessions rather than risk going through the same thing again.

However, regardless of what happens, 670,000 tenants still face an average cut of £14 a week or £728 a year from April 2013 and social landlords still face a series of uncomfortable dilemmas over arrears and evictions.

Moving the amendment, Lord Best said he was hoping to ‘salvage something’ but ‘I deeply regret abandoning hundreds of thousands of households who, even if the amendment is approved, will still be caught by the penalty charge from 1 April next year’.

And even a government concession had a sting in the tail: ‘I confess to having been thankful for this small mercy—until I learnt that the £30 million for these discretionary housing payments is to be paid for not by the Treasury accepting any reduction in the gains achieved through the bedroom tax but by increasing the tax for the other tenants by another £50 per annum from the previous £13 per week to the new £14 per week.’

Backing him up, Baroness Hollis said the penalty had ‘fundamental dishonesty’ at its core because it said that people must downsize while the government acknowledged that the ‘smaller flats and houses to which people should move do not exist’.

And as chair of Broadland Housing Association she outlined the dilemmas facing landlords. ‘Either I evict a family with a disabled child into temporary accommodation or bed and breakfast—how I can do this to them?—or they stay put and arrears mount. I have already trebled the amount in my accounts for increased arrears… that money is not available to pay the debt charges of new building which alone will solve the problems of getting our stock right in the longer term.’

There was an interesting intervention from former Conservative social security minister Lord (Tony) Newton, who warned that ‘the government are playing a very dangerous political game, without quite knowing that will hit them when this comes into force’ and recalled a previous Treasury-inspired cut to housing benefit in the 1980s that Margaret Thatcher had to order to be reversed within a month once the impact became clear. He still voted with the government later but it was not exactly a vote of confidence.

It was a measure of the position welfare minister Lord Freud found himself in, stuck between losing the argument in the Lords and Treasury insistence on the cut, that he told Lord Best he had over-estimated the cost of his own amendment (it was up to £100 million not £150 million) and that he left no stone unturned in trying to find a non-financial way out.

The idea of taking in a lodger – first raised in a throwaway line by Steve Webb in the Commons – now seems to be a major part of the government’s toolkit. Any tenant who did take in a lodger see the first £20 a week in income disregarded from their own housing benefit, he said, and ‘we will expect social landlords to take a pretty liberal line on this’.

As Lord Best pointed out, it would not be appropriate for the disabled and vulnerable tenants covered in his amendment to take in a lodger. At the very least, any tenant will need some good benefits advice first.

However, Lord Freud had another idea too. ‘One aspect that has not been explored in our debates is the response from social landlords,’ he said. ‘The rent they receive reflects the size of their property. If there were, for example, a very small room such as a box room that the landlord called a bedroom, they might reconsider, if they have not done so already, whether to count that room when deciding on the number of bedrooms that should be written into the tenancy, as well as on the rent associated with it. The designation of property size is another area where there may be flexibility. We are exploring this with social landlords as part of our implementation work.’

Leaving aside the question of how many social rented homes really have a box room bedroom, is he really suggesting a way out for landlords and a way to evade his own bedroom tax?

A mass downsizing by landlords seems unlikely given the potential effect on rental incomes, property valuations and loan agreements, but is there scope for some creative thinking? If a three-bed flat is hard to let now, it could become even harder to let under the bedroom tax, so why not call it a two-bed in the tenancy? Is the bedroom with a computer in it proof of under-occupation or an office that is proof the tenant is doing what the government wants and preparing to launch a business from home? Is that smaller room used by your disabled tenant really a spare bedroom or a wheelchair storage area?

• There was no such excitement on the bedroom cap, where a Labour amendment was easily defeated, but there were a few more concessions. In addition to the original exemptions, the government had already pledged a nine-month grace period for anyone who has been in work for the previous 12 months, plus more discretionary payments plus an evaluation of the impact after a year. In the Commons it added an exemption for households with someone who get the support component of ESA who is not in receipt of DLA.

Last night Freud confirmed that the grace period will apply to couples where just one of them meets the criteria and added that he saw no reason why it should not apply to people whose hours are reduced as well as those who lose their jobs.

Net call

Wed, 15 Feb 2012

The end game on the bedroom tax is going to be about more than just whether the House of Commons continues the parliamentary ping-pong.

The Lords smashed the ball back over the net last night. They voted 236-226 for an amendment moved by crossbench peer Lord Best that will exempt groups including disabled people, war widows and foster carers from the under-occupation penalty where there is no suitable alternative accommodation available.

Reflecting the fact that the government had claimed financial privilege in the Lords, that was a much smaller majority than the 258-190 vote before Christmas for an amendment that would have exempted everyone with no more than one spare bedroom if there is no suitable alternative. Only six Lib Dem peers rebelled against the government this time around but that was enough.

Three cheers for that. The DWP says it will lob the ball back over to the Lords when the Commons returns next week although campaigners are still hopeful it will offer more concessions rather than risk going through the same thing again.

However, regardless of what happens, 670,000 tenants still face an average cut of £14 a week or £728 a year from April 2013 and social landlords still face a series of uncomfortable dilemmas over arrears and evictions.

Moving the amendment, Lord Best said he was hoping to ‘salvage something’ but ‘I deeply regret abandoning hundreds of thousands of households who, even if the amendment is approved, will still be caught by the penalty charge from 1 April next year’.

And even a government concession had a sting in the tail: ‘I confess to having been thankful for this small mercy—until I learnt that the £30 million for these discretionary housing payments is to be paid for not by the Treasury accepting any reduction in the gains achieved through the bedroom tax but by increasing the tax for the other tenants by another £50 per annum from the previous £13 per week to the new £14 per week.’

Backing him up, Baroness Hollis said the penalty had ‘fundamental dishonesty’ at its core because it said that people must downsize while the government acknowledged that the ‘smaller flats and houses to which people should move do not exist’.

And as chair of Broadland Housing Association she outlined the dilemmas facing landlords. ‘Either I evict a family with a disabled child into temporary accommodation or bed and breakfast—how I can do this to them?—or they stay put and arrears mount. I have already trebled the amount in my accounts for increased arrears… that money is not available to pay the debt charges of new building which alone will solve the problems of getting our stock right in the longer term.’

There was an interesting intervention from former Conservative social security minister Lord (Tony) Newton, who warned that ‘the government are playing a very dangerous political game, without quite knowing that will hit them when this comes into force’ and recalled a previous Treasury-inspired cut to housing benefit in the 1980s that Margaret Thatcher had to order to be reversed within a month once the impact became clear. He still voted with the government later but it was not exactly a vote of confidence.

It was a measure of the position welfare minister Lord Freud found himself in, stuck between losing the argument in the Lords and Treasury insistence on the cut, that he told Lord Best he had over-estimated the cost of his own amendment (it was up to £100 million not £150 million) and that he left no stone unturned in trying to find a non-financial way out.

The idea of taking in a lodger – first raised in a throwaway line by Steve Webb in the Commons – now seems to be a major part of the government’s toolkit. Any tenant who did take in a lodger see the first £20 a week in income disregarded from their own housing benefit, he said, and ‘we will expect social landlords to take a pretty liberal line on this’.

As Lord Best pointed out, it would not be appropriate for the disabled and vulnerable tenants covered in his amendment to take in a lodger. At the very least, any tenant will need some good benefits advice first.

However, Lord Freud had another idea too. ‘One aspect that has not been explored in our debates is the response from social landlords,’ he said. ‘The rent they receive reflects the size of their property. If there were, for example, a very small room such as a box room that the landlord called a bedroom, they might reconsider, if they have not done so already, whether to count that room when deciding on the number of bedrooms that should be written into the tenancy, as well as on the rent associated with it. The designation of property size is another area where there may be flexibility. We are exploring this with social landlords as part of our implementation work.’

Leaving aside the question of how many social rented homes really have a box room bedroom, is he really suggesting a way out for landlords and a way to evade his own bedroom tax?

A mass downsizing by landlords seems unlikely given the potential effect on rental incomes, property valuations and loan agreements, but is there scope for some creative thinking? If a three-bed flat is hard to let now, it could become even harder to let under the bedroom tax, so why not call it a two-bed in the tenancy? Is the bedroom with a computer in it proof of under-occupation or an office that is proof the tenant is doing what the government wants and preparing to launch a business from home? Is that smaller room used by your disabled tenant really a spare bedroom or a wheelchair storage area?

• There was no such excitement on the bedroom cap, where a Labour amendment was easily defeated, but there were a few more concessions. In addition to the original exemptions, the government had already pledged a nine-month grace period for anyone who has been in work for the previous 12 months, plus more discretionary payments plus an evaluation of the impact after a year. In the Commons it added an exemption for households with someone who get the support component of ESA who is not in receipt of DLA.

Last night Freud confirmed that the grace period will apply to couples where just one of them meets the criteria and added that he saw no reason why it should not apply to people whose hours are reduced as well as those who lose their jobs.

QE for housing

Wed, 8 Feb 2012

The Bank of England seems set to announce another round of quantitative easing on Thursday. Is that good news or bad news for housing - and is it time to consider an alternative?

QE is presented as the Bank’s only option for stimulating the economy given that it has already cut interest rates to a record low of 0.5 per cent. To simplify massively, it creates liquidity by creating money to buy assets like government bonds. The institutions holding the bonds then have new money in their accounts, which they use to buy other bonds and shares. The net effect is to reduce long-term interest rates and stimulate the economy.

The scheme boosts asset prices and increases inflation but that is seen to be a price worth paying for getting the economy out of the hole it fell into after the collapse of Lehman Brothers. The Bank released £200 billion of QE in 2009 and 2010 and another £75 billion in October. Following figures last week showing  a big fall in the money supply it is set to do more on Thursday.

But what about the effect on housing? QE is generally credited with putting a floor under house prices, which is good news if you already own a home but very bad news if you are struggling to get on to the housing ladder and paying a high rent. House prices, remember, are already propped up by ultra low interest rates that have reduced mortgage payments by thousands of pounds for anyone who can raise a deposit.

The problems don’t stop there. According to the Bank’s own analysis QE has increased the rate of inflation by between 0.75 and 1.5 percentage points. That has led to direct increases in rents for social tenants because they are linked to a formula of RPI inflation plus 0.5 per cent. If QE had never happened, landlords around the country would not need to be imposing such large rent increases at a time when their tenants are already suffering from falling incomes.

So what’s the alternative? It’s one I’ve mentioned before that is slowly gaining some traction. What if quantitative easing could be used to invest in new homes rather than buy financial assets?

Instead of government bonds, the Bank could buy bonds in a public interest company with a remit to build homes for future sale to the private or social sectors. A public interest company would be at arm’s length from the government and therefore not caught by restrictions on public borrowing. remit not to hold

A £50 billion scheme could potentially finance 500,000 homes, create 20,000 jobs and generate £10 billion for the Treasury in taxes generated and benefits saved without taking account of the knock-on effects for the wider economy. Rents on the homes could pay any interest in the short term and in the longer term the sales proceeds could go back to the Bank.

The scheme could be tied into some of the innovations in housing finance being developed by social landlords. It could generate the type and scale of stock that institutional investors say they need before they take the plunge into the private rented sector and be a way for the government to de-risk private rented investment without using public money. It’s surely also a good way of using the precious resource of public land.

The obvious objections seem to be more ones of mind-set than substance. A backdoor scheme for increased borrowing? Not if all the money was repaid on the sale of the properties and it generated a healthy return for the taxpayer in the meantime.  Wrongful use of a scheme intended purely for financial instruments? It may be difficult for the Bank to move outside its financial comfort zone but it would still be buying financial instruments and this would give the Bank a more varied range of assets to sell when the time comes to unwind QE.

Above all, perhaps, there seems no chance of the government achieving its ambition of using housing as a key part of its growth strategy without an extra weapon like this at its disposal. Brian Green argues on his Brickonomics blog that the scheme could be just the ‘big bazooka’ that Grant Shapps needs to stand a chance of meeting the target against which he said he wanted to be judged: building more homes than Labour. He also has more detail about how a public interest company might work and roles for the Bank, Treasury and HCA.

Without something like QE for housing, we seem stuck with housing completions at half the level needed to meet demand (even in 2016 Savills is predicting just 125,000). With it, and with the right approach to land assembly and managing the construction programme, we stand a chance of building the homes and delivering the growth we need.

The scheme has just won the backing of one of the leading trade bodies in the construction industry. The Construction Products Association, which represents the firms that make the materials and products that go into new homes, says it will be writing to the Chancellor to point out the advantages. Time for housing organisations to do the same?

The details would need to be worked up by people with more financial expertise than me. It’s possible that there is a fundamental flaw that I have missed. But doesn’t a QE that builds homes and creates jobs sound a hell of a lot better than a QE that boosts house prices and raises rents?

 

QE for housing

Wed, 8 Feb 2012

The Bank of England seems set to announce another round of quantitative easing on Thursday. Is that good news or bad news for housing - and is it time to consider an alternative?

QE is presented as the Bank’s only option for stimulating the economy given that it has already cut interest rates to a record low of 0.5 per cent. To simplify massively, it creates liquidity by creating money to buy assets like government bonds. The institutions holding the bonds then have new money in their accounts, which they use to buy other bonds and shares. The net effect is to reduce long-term interest rates and stimulate the economy.

The scheme boosts asset prices and increases inflation but that is seen to be a price worth paying for getting the economy out of the hole it fell into after the collapse of Lehman Brothers. The Bank released £200 billion of QE in 2009 and 2010 and another £75 billion in October. Following figures last week showing  a big fall in the money supply it is set to do more on Thursday.

But what about the effect on housing? QE is generally credited with putting a floor under house prices, which is good news if you already own a home but very bad news if you are struggling to get on to the housing ladder and paying a high rent. House prices, remember, are already propped up by ultra low interest rates that have reduced mortgage payments by thousands of pounds for anyone who can raise a deposit.

The problems don’t stop there. According to the Bank’s own analysis QE has increased the rate of inflation by between 0.75 and 1.5 percentage points. That has led to direct increases in rents for social tenants because they are linked to a formula of RPI inflation plus 0.5 per cent. If QE had never happened, landlords around the country would not need to be imposing such large rent increases at a time when their tenants are already suffering from falling incomes.

So what’s the alternative? It’s one I’ve mentioned before that is slowly gaining some traction. What if quantitative easing could be used to invest in new homes rather than buy financial assets?

Instead of government bonds, the Bank could buy bonds in a public interest company with a remit to build homes for future sale to the private or social sectors. A public interest company would be at arm’s length from the government and therefore not caught by restrictions on public borrowing. remit not to hold

A £50 billion scheme could potentially finance 500,000 homes, create 20,000 jobs and generate £10 billion for the Treasury in taxes generated and benefits saved without taking account of the knock-on effects for the wider economy. Rents on the homes could pay any interest in the short term and in the longer term the sales proceeds could go back to the Bank.

The scheme could be tied into some of the innovations in housing finance being developed by social landlords. It could generate the type and scale of stock that institutional investors say they need before they take the plunge into the private rented sector and be a way for the government to de-risk private rented investment without using public money. It’s surely also a good way of using the precious resource of public land.

The obvious objections seem to be more ones of mind-set than substance. A backdoor scheme for increased borrowing? Not if all the money was repaid on the sale of the properties and it generated a healthy return for the taxpayer in the meantime.  Wrongful use of a scheme intended purely for financial instruments? It may be difficult for the Bank to move outside its financial comfort zone but it would still be buying financial instruments and this would give the Bank a more varied range of assets to sell when the time comes to unwind QE.

Above all, perhaps, there seems no chance of the government achieving its ambition of using housing as a key part of its growth strategy without an extra weapon like this at its disposal. Brian Green argues on his Brickonomics blog that the scheme could be just the ‘big bazooka’ that Grant Shapps needs to stand a chance of meeting the target against which he said he wanted to be judged: building more homes than Labour. He also has more detail about how a public interest company might work and roles for the Bank, Treasury and HCA.

Without something like QE for housing, we seem stuck with housing completions at half the level needed to meet demand (even in 2016 Savills is predicting just 125,000). With it, and with the right approach to land assembly and managing the construction programme, we stand a chance of building the homes and delivering the growth we need.

The scheme has just won the backing of one of the leading trade bodies in the construction industry. The Construction Products Association, which represents the firms that make the materials and products that go into new homes, says it will be writing to the Chancellor to point out the advantages. Time for housing organisations to do the same?

The details would need to be worked up by people with more financial expertise than me. It’s possible that there is a fundamental flaw that I have missed. But doesn’t a QE that builds homes and creates jobs sound a hell of a lot better than a QE that boosts house prices and raises rents?

 

Small mercies

Thu, 2 Feb 2012

Yesterday’s events in the House of Commons have left me looking for some good news among the bad.

As if the reversal of the Lords amendments on the benefit cap and the bedroom tax were not enough to depress all those who have campaigned against them, the government has now claimed financial privilege to kill off any further debate on the Welfare Reform Bill.

On the housing clauses, David Orr has condemned the ‘economically suspect and socially divisive’ policy. On the wider Bill, campaigner Sue Marsh has angrily accused the government of lying and betrayal.

So what are my two bits of good news? I don’t mean the usual mix of discretionary housing payments and reviews that were a feature of last year’s housing benefit cuts and seem to have been enough to buy off enough Lib Dem opposition yesterday.

On the cap, the good news is the nine-month grace period for anyone who loses their job. That is three months more than the period sought by Lord Best in an amendment that he withdrew in the Lords last week and it should help limit the number of families who risk losing first their job and then their home.

Work and pensions minister Chris Grayling explained yesterday: ‘We will not penalise those who are in work and doing the right thing. We will put in place a nine-month grace period for those who have been in work for the previous 12 months and lose their job through no fault of their own. We have always intended to make this measure, and I am happy to make that clear to the House today.’

Questions remain. It’s easy to see how the grace period will apply to people in continuous full-time work but what happens to people who can’t get enough hours to be exempt from the cap (16? 23?) and do people who’ve lost one job and then found another still get the grace period? However, nine months is still better than six and considerably better than nothing.

My second piece of good news is on the bedroom tax, though admittedly this is scraping the barrel a bit. Despite the defeat, it’s worth noting that there were not just 14 Lib Dem MPs who rebelled against the coalition but two Conservatives as well.

It’s maybe no coincidence that both of them have strong connections with social housing. Gordon Henderson, MP for Sittingbourne and Sheppey, grew up on a council estate, while Andrew Percy, MP for Brigg and Goole, was previously a councillor representing the estate where his father grew up and his grandmother still lived.

This is not the first time that Andrew Percy has rebelled on a housing issue. During the third reading debate on the Localism Bill last year, he voted against the government on scrapping security of tenure on the grounds that we were talking about ‘homes’ and ‘not merely a facility that belongs to the council’.

He made a similar point yesterday: ‘I am sure that the ministers understand this, but I plead with them to take account of the fact that houses are not only public assets; they are also people’s homes, and people have an attachment to them. This is not a simple matter to resolve, even though we should encourage an end to under-occupancy.’

In the scheme of things it’s a very small compensation that the housing message has got through to at least some government MPs and that not all of them (to quote work and pensions minister Maria Miller) regard claimants and tenants as ‘these people’. But it’s still good to see. 

Small mercies

Thu, 2 Feb 2012

Yesterday’s events in the House of Commons have left me looking for some good news among the bad.

As if the reversal of the Lords amendments on the benefit cap and the bedroom tax were not enough to depress all those who have campaigned against them, the government has now claimed financial privilege to kill off any further debate on the Welfare Reform Bill.

On the housing clauses, David Orr has condemned the ‘economically suspect and socially divisive’ policy. On the wider Bill, campaigner Sue Marsh has angrily accused the government of lying and betrayal.

So what are my two bits of good news? I don’t mean the usual mix of discretionary housing payments and reviews that were a feature of last year’s housing benefit cuts and seem to have been enough to buy off enough Lib Dem opposition yesterday.

On the cap, the good news is the nine-month grace period for anyone who loses their job. That is three months more than the period sought by Lord Best in an amendment that he withdrew in the Lords last week and it should help limit the number of families who risk losing first their job and then their home.

Work and pensions minister Chris Grayling explained yesterday: ‘We will not penalise those who are in work and doing the right thing. We will put in place a nine-month grace period for those who have been in work for the previous 12 months and lose their job through no fault of their own. We have always intended to make this measure, and I am happy to make that clear to the House today.’

Questions remain. It’s easy to see how the grace period will apply to people in continuous full-time work but what happens to people who can’t get enough hours to be exempt from the cap (16? 23?) and do people who’ve lost one job and then found another still get the grace period? However, nine months is still better than six and considerably better than nothing.

My second piece of good news is on the bedroom tax, though admittedly this is scraping the barrel a bit. Despite the defeat, it’s worth noting that there were not just 14 Lib Dem MPs who rebelled against the coalition but two Conservatives as well.

It’s maybe no coincidence that both of them have strong connections with social housing. Gordon Henderson, MP for Sittingbourne and Sheppey, grew up on a council estate, while Andrew Percy, MP for Brigg and Goole, was previously a councillor representing the estate where his father grew up and his grandmother still lived.

This is not the first time that Andrew Percy has rebelled on a housing issue. During the third reading debate on the Localism Bill last year, he voted against the government on scrapping security of tenure on the grounds that we were talking about ‘homes’ and ‘not merely a facility that belongs to the council’.

He made a similar point yesterday: ‘I am sure that the ministers understand this, but I plead with them to take account of the fact that houses are not only public assets; they are also people’s homes, and people have an attachment to them. This is not a simple matter to resolve, even though we should encourage an end to under-occupancy.’

In the scheme of things it’s a very small compensation that the housing message has got through to at least some government MPs and that not all of them (to quote work and pensions minister Maria Miller) regard claimants and tenants as ‘these people’. But it’s still good to see. 

Newsletter Sign-up

IH Subscription