Figuring it out

What saves the government more money: providing grant for social rented homes or for affordable rented ones? There has been much debate and posturing about this in recent years, though admittedly it’s a debate that loses more political relevance with each passing day. But it’s still an interesting question because the answer is closer than many believe. Unfortunately it is also the wrong question to ask in the Spending Review context.

The recent Capital Economics report, Evaluating the Economic Case for Building 100,000 New Social Rent Homes, considered both the fiscal impacts and the wider economic impacts of government continuing its ‘current policy’ of building 31,500 affordable rent homes a year, versus an ‘exemplar policy’ of building 100,000 social rent homes a year.

The incorrect figure of 31,500 aside, this was an entirely misguided exam question for SHOUT to have set Capital Economics when they commissioned the report.

This is because it conflated two issues: (1) what the overall level of spending on social/affordable housing should be; and (2) whether that spending should be on homes for social or affordable rent. A more transparent comparison, and a more relevant one in a Spending Review context, would have been: government providing social housing grant to build 100,000 social rented homes each year, or spending the same amount of money providing grant for affordable rented homes (or, with likely even greater pertinence now, shared ownership ones).

Thankfully, this was precisely the analysis government officials did back in 2010 for the affordable rent policy impact assessment (IA). The key figures below are extracted from that IA:

*30-year net present values

This told us that, for a given fixed spend, building social rented homes saves housing benefit compared to building affordable rented ones. It also told us that the difference in the housing benefit bill between the two is £1.1bn spread over 30 years, or £36m a year. Now admittedly £36m a year is a lot of money, but it isn’t actually that much in the context of a housing benefit bill approaching £25bn a year. Unfortunately the housing benefit savings of building social rented homes have been exaggerated by advocates of social rented housing wedded to it for ideological reasons.

Moreover, the fiscal implications are not the main basis on which Spending Review decisions are actually made.

At the Spending Review, government has to look at the whole picture and on many levels, including the wider economic benefits of its investment. Government’s resources are finite so, in simple terms, Treasury officials have to consider whether to invest, say, £1bn of taxpayers’ money in affordable housing or that same £1bn in schools, or hospitals or transport.

And, applied at the housing level: £1bn on homes for social rent or affordable rent. The question is which investment will derive the greatest net economic (and social) benefit? Here, crucially, with the affordable rent policy, IA concluded that building affordable rented homes would deliver far greater net economic benefit (£3bn) than building social rented ones (£1.6bn).

“For every fixed government spend on building one social rented home, it could instead build nearly two affordable rented ones.”

But how on Earth did it reach such a conclusion? The answer is fairly simple: for every fixed government spend on building one social rented home, it could instead build nearly two affordable rented ones.

Much of the net economic benefit of either policy stems from the amount of construction activity it generates – so spending £1bn on affordable rented homes gets us nearly twice the amount of construction activity. Some readers will be aware this conclusion nudged the 2010 Spending Review outcome towards £1bn a year for affordable rented homes, rather than nothing for housing at all.

I am no great fan of the affordable rent model, but the fiscal case for social rent over affordable rent is not as overwhelming as some make out. The economic case, as shown by the official (and thus impartial) published impact assessment, is actually extremely poor.

The reason the housing benefit bill has been rising inexorably is because we’re not building enough homes per se, not because of failure to build enough social rented homes, or because we are now building affordable rented ones instead. Besides which, another powerful way to get the housing benefit bill down is to get more social tenants out of paying rent altogether, ie into affordable homeownership.

In the forthcoming Spending Review, we need to help them do just that.

Chris Walker, head of housing and planning, Policy Exchange