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UK Housing Policy >> Sold Down the River >> Sold Down the River Programme Three: How to mis-use public and private money

UK Housing Policy: Sold Down the River

Sold Down the River Programme Three: How to mis-use public and private money

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This video uses two simple graphs to show how over the past few decades: (a)    changes in the use of public subsidy and (b)    failure to regulate the lending industry have resulted in a huge rise in prices and rents, rapid growth in household debt, vastly increased and expensive benefit dependency, instability in the finance sector and failures to increase housing output. At 00.40 – Graph A In essence there are two forms of Government support for housing: (a)    supply side subsidy (helping private and especially public housing providers to produce more housing) and (b)    demand subsidy (paying poorer people housing benefits and allowances and allowing housing-related tax concessions to better-off people – most of whom are owner-occupiers either still paying a mortgage or with the loan paid off). ‘New right’ ideology (inherited by the Blair/Brown Governments) promotes the idea that almost everything in the economy, including housing provision and management, should be left as much as possible to ‘market forces’. But ability to compete in any market obviously depends upon one’s means. So if people cannot compete effectively in ‘markets’ where inability to access the product means problems for government (such as housing), then targeted benefits and allowances should be paid so that they can. And this, according to the theory, will in turn stimulate production. This strategy is also intended to enable ‘social cases’ (as Mrs Thatcher once termed local authority tenants) to ‘stand on their own two feet’ and compete as consumers. The theory looks a little threadbare when the cost of this targeted support escalates by very sharply in real terms, when there has been little apparent effect on stimulating output and when widespread dependency on Housing Benefit and allowances generates its own social, economic and administrative problems (2005 Z2K Memorandum to the Prime Minister on Unaffordable Housing, Appendix 7 ). The first graph shows that in the 1980s there was roughly a 50:50 balance between supply side subsidy and demand side subsidy. In fact before then the balance had been weighted heavily in favour of supply side subsidy and this helped to produce something like 47,000 new local authority and housing association homes in 1980 – and much higher numbers in the 1970s. By 2005 the demand side support has risen sharply while investment in new social housing, the subsidies to ‘bricks and mortar’, remained stagnant. As a result the ratio of support had moved to 80:20 in favour of the demand side – and the combined ‘social housing’ output was down to about 16,000 homes. It is difficult to escape the conclusion that this heavy emphasis on ‘market forces plus targeted support’ - supporting consumers and housing users rather than investing more in construction, has had the effect of stimulating prices and rents, not output. Graph B shows five key indicators with values reduced to 1.00 at the 1980 base year – one year after the election of the first Thatcher Government. They are: -    the consumer price index -    the average earnings index -    the index of total number of owner-occupied homes -    the index of total housing debt outstanding (the total amount lent out to buy houses still unrepaid) -    the index of house prices Earnings have risen faster than consumer prices (excluding housing) so that there has been a real advance, on average, in the standard of living. But the house price index has moved up much faster than both these. It might be asked ‘how can this happen – surely the growth in earnings must limit what can be paid for housing?’ The explanation lies in the flood of lending, shown with the sharply rising dashed line, that has conditioned the effective demand for housing – while the stock available for purchase has remained relatively stagnant (the bottom line on the graph).  Clearly the same basic economic law would apply to any commodity – if the supply remains fairly static and the effective demand rises by a factor of over fifteen, there is bound to be a price effect. It can be seen that the house price curve has been strongly ‘drawn up’ by the house purchase debt curve. The five mechanisms by which house prices have been ‘uncoupled’ from earnings growth are set out in the text for Programme Two. And it was also pointed out earlier that had house prices risen in line with retail prices for the last three decades the average house price would now be about £60,000 – facilitating much more owner-occupancy for those who prefer this option. The rise in the volume of lending since the 1980 Thatcher deregulations of the finance sector have unbalanced a very important relationship between incomes and housing costs. The house purchase debt has risen from around 25% of GDP to about 80% - well out of line with comparator EU countries. It has produced a situation where much of UK politics and the management of the economy (for example the setting of interest rates by the Bank of England) has to take into account the fortunes of UK home-owners and the effects of the ‘credit squeeze’ – a costly reaction and adjustment to a period of unsustainable growth in lending and prices. Now (in mid 2008) we can see the chaotic effects of all this unravelling. Lenders suddenly introduce more stringent policies, house purchase loans dry up sharply affecting the number of new mortgages, prices of existing properties fall, houses become difficult to sell and debts become more difficult to service (much increasing the risk of repossessions which carry huge human costs), demand for houses drops drastically – and output slumps as an obvious result. Ironically, in a report commissioned by the Treasury from Sir James Crosby (formerly of HBOS bank) the finance industry and the housebuilders now call for some urgent action from Government to help them through this situation. All these damaging consequences might be loosely seen as ‘market failure’. But it might be more accurate to see them not so much as a failure of the market per se but as the failure of successive governments to exert sensible regulation of the market – in other words governmental incompetence. What are the lessons? The two general trends in policy illustrated by the two graphs reflect one unifying philosophy – reliance on ‘the market’ as the dominant element in housing provision and management. With ‘the market’ goes the persistent obsession with owner-occupancy as the ‘normal’ form of tenure (an obsession not shared by many EU comparator countries), emphasis on ‘getting onto the housing ladder’, the concept (not justified by the facts) of ‘the subsidised council tenant’ and the demonisation of the recipients of Housing Benefit – as if these recipients were the cause of the rises in prices and rents that have made their dependence inevitable. The hugely important point now is to learn from this analysis. We cannot re-run the last 30 years – but we can learn from them and base future policies on this learning. The clear lesson is that some more effective form of regulation of the finance industry is necessary to ensure that the total ongoing volume of home loans is kept in some sensible relationship with the ongoing volume of housing for sale – both new and second-hand. In other words the main aim should be to keep the house price index in some sort of alignment with the retail price index. And ideally to keep both these below the earnings index so that the standard of living rises in real terms. It follows that a simple approach that advocates ‘increase housing output by x% and prices will stabilise’ (as per Barker Review ) does not work. If output is increased by some factor, even say 10% per year, the total volume of stock will be little affected (only about one in seven housing transactions are in new homes as existing houses far outnumber the number added in any given year). The key relationship is between the volume of stock (and thus transactions) and the volume of money lent to buy that stock. If the housing volume rises by 1% in a year but the volume of loans rises by 5% there will still be rapidly rising prices and rents. It will clearly not be easy, either technically or politically, to regulate the collective behaviour of a set of extremely powerful profit-driven institutions working in an international context where activities can be relocated according to the world trading environment. But having said that, the Bank of England, the Treasury and the FSA are there just for that purpose. This series of videos does not pretend to provide policy answers to these complex issues – only to urge that policy development, and Ministerial statements, be based on a better analysis of the problem and the evidence than has been the case so far. Professor Peter Ambrose BA, AKC, MA, D.Phil, FRSA Visiting Professor in Housing Studies Health and Social Policy Research Centre Brighton University Friend of London Citizens Associate of the Zacchaeus 2000 Trust   Links: Profile of Peter Ambrose Urban Process and Power Article on Affordable Housing Housing Affordability Standard - April 2008 (2,454 KB) Professor Ambrose works with the Zacchaeus 2000 Trust and their principles are as follows: We will combat poverty, and related ill health and educational underachievement; We will promote the improvement of living and working conditions on the basis of economic and social justice in pursuit of a society that is fully inclusive of people of every race, colour and creed through the provision of evidence based policy alternatives to government. We will pursue policies that are rooted in the experiences of the disadvantaged and excluded people of the United Kingdom, and the work of NGOs among them. They will be designed to reform the structures that create those conditions. We oppose discrimination and inequality, both between men and women and between generations. Aware of the pressures placed on the national economy and society by the globalised free market we will promote an economy in the United Kingdom aiming to generate the conditions of full employment in which all can share the financial burdens and opportunities of a democratic nation. We will operate without allegiance to any political party while promoting, vigorously, policies that are consistent with this statement of principles to all political parties and to the government of the day. 38 Ebury Street, London SW1W 0LU Telephone: 020 7259 0801 - Fax 020 7259 0701 - Mobile: 0796 11 77 88 9 e-mail: admin@z2k.org    Andrey Vinogradov  supplied the music for this programme for which we are all very grateful. Born in 1959 in Ekaterinburg (Northern Ural), Andrey Vinogradov has studied and been exposed to a variety of musical genres, everything from classical jazz to jazz-rock. He has now settled down in folky niche, where he creates his classic but unique blend of sounds. He graduated with highest honors from the Moscow Gnessin Music College and completed his education at Gnessin Academy of Music. Later, as part of well-known Russian jazz-rock group, he  recorded two LPs: The Arsenal, directed by revered saxophonist Alexei Kozlov, The second, Wind and Pulse 3, which were later released on the CDs Time-scorched III and Time-scorched IV (1997-1998). Ever since his youth, Andrey's goal has been to create innovative unions between the most diverse of musical genres by combining elements of classical, jazz and folk music. Fair Use Notice This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. 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