ao link
Twitter
Facebook
Linked In
Twitter
Facebook
Linked In

You are viewing 1 of your 1 free articles

Budget 2014: the next five years

Linked InTwitterFacebookeCard

Never mind today and tomorrow: what does the Budget mean for housing over the longer term?

As usual, some of the most revealing information comes not in the speech or the Treasury’s background documents but in the Economic and Fiscal Outlook published by the Office for Budget Responsibility. This time around the detail and the forecasts for the next five years have a lot to say about housing benefit, the welfare cap and the housing market. 

On the welfare cap, the OBR has a detailed breakdown of the benefits and tax credits that will and won’t be included:

Cap

We already knew that ‘the vast majority’ of housing benefit would be covered. This shows that 86 per cent of the current housing benefit bill will be within the cap – but that that the proportion will rise to 90 per cent by the end of the decade as the uncapped bit linked to unemployment falls.

The figures could also answer my question in my Budget live blog about the impact of above-inflation social rent rises: policy decisions like these seem to be already factored in to the cap level.

Which might be ok were it not for the fact that the OBR has constantly changed its forecasts of the housing benefit bill. It now says the total cost will be £1 billion more over the next five years than it forecast at the time of the Autumn Statement in December. However, that figure was itself £6 billion higher over five years than it estimated at the time of the Budget a year ago, which in turn was £3.7 billion higher than it said at the 2012 Autumn Statement.

Unforeseen increases in any capped benefits could automatically trigger cuts under the new system. The OBR’s forecasting difficulties on housing benefit highlight the fact that increases are quite likely not to be foreseen. As the Centre for Economic and Social Exclusion points out, these sort of problems go well beyond the 2 per cent per year tolerance for breach built into the cap.

And a separate part of the report on trends in welfare spending makes clear that these problems are directly related to our housing system.

While the government has consistently claimed that the housing benefit bill is ‘out of control’, the OBR points out that:

‘The largest driver of the rise in spending on housing benefit has been caseload growth in the private rented sector. This reflects both a rising share of households living in private rented accommodation and a rising proportion of those households claiming housing benefit. As a result, the share of spending accounted for by the private rented sector is forecast to rise from 30 per cent in 2007-08 to 40 per cent by 2018-19.’

The main reason for that is of course the long-term shift from owner-occupation to private renting that began long before the recession but accelerated in the last five years. The OBR says that:

‘The rising proportion of the renting population claiming housing benefit may be related to the weakness of average wage growth relative to rent inflation. This explanation is supported by DWP data, which suggest that almost all the recent rise in the private-rented sector housing benefit caseload has been accounted for by people in employment. We expect the share of claimants in the private rented sector to continue rising over the forecast period, but for average awards to rise more slowly than nominal GDP per capita due to policy, including on uprating.’

So much for being ‘out of control’ or the product of the so-called ‘dependency culture’. The OBR sees the growth in the housing benefit bill as a direct consequence of shifting tenure and rents rising faster than wages as more people in work have to claim. The total bill will keep on rising but that last bit on policy and uprating could suggest that if the bill does fall as a proportion of GDP it will be because more people will face greater shortfalls between their housing benefit and their rent.

And will it fall even in those terms? Elsewhere in the report, the OBR forecasts big increases in house prices as a result of the economic recovery and policies like Help to Buy:

Price

Annual house price inflation will rise from the current 5.5 per cent (using the ONS index) to a peak of 9.2 per cent in the third quarter of 2014. Over the next year or so prices will rise significantly more than it expected three months ago. Over the next five years, prices will rise by 30 per cent to reach a level of just 0.5 per cent below their pre-crisis peak in real terms.

When ministers argue that their policies are not generating a boom they tend to rely on the real terms comparison with 2007 to reassure us all. However, if this forecast is correct, we will be all but back at the house price levels that triggered the sub-prime mortgage crisis, the credit crunch and the financial crisis within five years.

Bear in mind too that earnings have been falling in real terms ever since the crash, so house prices will actually be more unaffordable than they were at the peak of the boom. I find that alarming rather than reassuring. 

However, long-term trends in the housing system may not matter so much to the chancellor if the OBR is correct in its forecasts about rising tax receipts from stamp duty. As house prices and transactions both rise, the OBR says the £6.9 billion receipts from stamp duty in 2012/13 will rise to £9.5 billion in 2013/14 and £12.7 billion in 2014/15. By 2018.19 total receipts will stand at £18.1 billion.

That’s £9 billion more over the next five years than it was forecasting three months ago. The OBR notes: ‘The housing market, particularly in London, has continued to outperform our forecast and receipts have been higher than expected.’ Little wonder that Osborne resisted calls for reductions in this Budget – and housing is also generating more modest but still significant gains for him in inheritance tax. Could it be time to reinvest some of it?

As house prices rise, so more and more homes cost more than the thresholds for higher rates of stamp duty. The average house price is expected to pass £250,000 this year, meaning that buyers will have to pay 3 per cent duty on the whole amount. The average effective rate of stamp duty is expected to rise from 1.7 per cent in 2008/09 to over 3 per cent in 2018/19. 

The bigger question is what this will mean for levels of home ownership and ultimately for the housing benefit bill. The government may hope that extending Help to Buy 1 will create 120,000 new owners but those unaffordable house prices would be creating many more new renters who need help with their rent.

It’s not housing benefit that is out of control but our whole housing system. 

Linked InTwitterFacebookeCard
Add New Comment
You must be logged in to comment.
RELATED STORIES