Costs and benefits

Lefroy, the MP for Stafford, explained it like this: ‘Some people have asked whether the result of increased rents for new tenants will be to transfer capital subsidy  to the cost of welfare because much of the increase will  be covered by housing benefit. There is a clear difference of views here, with the Government saying that there is likely to be little or no increase in the cost of housing benefit, and others estimating the annual cost after four years to be up to £1.5bn. This issue cannot be brushed under the carpet as a minor detail, and I ask the Minister to update the House regularly so that we can see the true consequences of the shift in funding new affordable rented housing more out of rental income and less out of capital grants. This is an important policy change, and we need to evaluate it.’

That £1.5bn figure is an estimate of the extra housing benefit cost per year by the end of the spending review period in a Building and Social Housing Foundation (BSHF) in a briefing to MPs on the Localism Bill committee. The government had denied the BSHF access to the modelling that went into the impact assessment published earlier this month.

However, even the impact assessment has not settled the argument. According to Seabeck, it puts the extra housing benefit cost at £1.2bn. According to Shapps, it will be ‘in the region of £25m to £50m’.

The minister went on: ‘We do not recognise the figures running into billions of pounds that have been thrown around, for the simple reason that when somebody moves into affordable rented accommodation, they often come from the private rented sector where 100% of their rent is paid for and supported by housing benefit. They might then move into a property where the average rent is 67% of the market rent…and in such cases, the cost of housing benefit would not rise but fall.’

And: ‘There seems to be a fundamental misunderstanding about the affordable rent programme that I hear mentioned time and again. In fact, the programme will assist with the housing benefit bill.’

That’s true of course - but only if you compare affordable rent with doing nothing and only if you ignore the conversion of social rent homes to higher affordable rents. 

That sent me back to the impact assessment in a bid to find out what’s going on. It compares three options:  the existing policy of social rent plus some low-cost home ownership (option one); putting everything into affordable rent (option two); and affordable rent plus some home ownership (option three). Each also has three different scenarios based on economic criteria but to simplify things I have compared the central scenario in option one with the central scenario in option three. 

According to the impact assessment, option one would deliver 27,000 additional affordable homes. It looks at the cost and benefits in terms of the present value over 30 years. The net government cost would be £749m, consisting of £1.6bn of HCA capital funding, less £625m saved on housing benefit and £212m saved on wider exchequer costs. The net economic benefits (from increases in the value of the land associated with its change of use, employment generated through the construction programme and additional distributional benefits) would be £1.6bn.

In contrast, option three would deliver 56,000 new affordable homes and see 18,000 social rent homes converted to affordable rent. The net government costs are put at £1.8bn: £1.6bn of HCA funding plus £553m more on housing benefit less £358 saved on wider exchequer costs. And the net economic benefits are put at £3.2bn.

Add the £625m housing benefit saving under social rent to the £553m extra housing benefit costs under affordable rent and you come up with Seabeck’s £1.2bn.

After checking with the DCLG, the £25m to £50m range used by Shapps seems to come from taking that £553m figure and spreading it over the four years of the spending review period. In other words, it ignores the housing benefit saving that would have been made from continuing with social rent and the 30-year timescale used in the impact assessment.

And that sleight of hand got me thinking about the figures on a deeper level. 

After all, if the main aim of the government really is to reduce the deficit, it would seem to make sense to go for the option with the lowest net government cost: £749m for social rent as against £1.8bn for affordable rent.

However, the impact assessment concludes: ‘Option 3 delivers the greatest net economic benefits, maximises the delivery of new social housing, provides the most diverse range of products for those accessing social housing and would deliver the largest reduction in housing need.  On this basis, despite higher estimated costs to government in the long term, it is the preferred Option.’

Fair enough: it would be a major surprise of course if government policy did not emerge from a government impact assessment as the preferred option but at least we know the justification.

And that got me thinking again. Is the assessment really comparing like with like? 

This is obviously a massive simplification of a complex process. There are some big ifs in there and some big assumptions too. The Treasury will be looking at the short-term costs over the spending review period rather than the long-term costs over 30 years.

However, option three delivers 56,000 homes and net economic benefits of £3.2bn at a net cost to the government of £1.8bn.

Imagine for a moment if the government invested that £1.8bn in option one (rather than £749m). If output of new homes and the net economic benefits increased by a similar amount, we would get 65,000 social rented homes and £3.8bn of economic benefits. So which is the preferred option now?