SHOUT response to the spending review

We choose to build.    Up to a point, Chancellor 

George Osborne’s spin doctors were obviously working hard yesterday to give political correspondents a preview of the Autumn Statement’s announcements about housing.  Or parts of it, anyway. Talk of “400,000 new homes”, “doubling the budget for affordable housing,” and over £6billion of spending, sound great and the coverage was largely uncritical.  But we in SHOUT fear that short term presentational success may be the most successful feature of today’s announcements. 

Starting with the money, it is not as much as it seems. No more money at all until April 2017, we get to £2bn in 2018-19 (“Blue Book” page 49) Over the next five years, for every pound George Osborne plans to spend on supporting new housing, he will spend £13 on housing benefit. 

400,000 homes (or 80,000 a year for five years) also sounds a lot, but the latest research suggests we need 220,000 new homes each and every year until 2031 at least. Since we are only building around 120,000 a year currently, even if the 80,000 a year were additional, we would still only be building 200,000, or 20,000 a year less than we need. 

OK you might say, over 90% of the way there isn’t bad.   The problem is that, although the 400,000 homes will be ‘new’ in the sense they weren’t there before (leaving aside the question how many may be built on the sites of demolished existing homes), there is no guarantee that all (or even most of them) will be new, in the sense of additional to homes which would have been built anyway under existing policies.   We will have to wait for the fine print, but we do know that: 

  • some Starter Homes will be delivered on commercial developments instead of the sub-market rent and shared ownership units which would up to now have been handed over to social landlords under planning agreements; 

  • despite the direct subsidy the Chancellor is offering them for other Starter Homes, there is no guarantee that these properties will be additional to properties which developers would have built anyway for sale to owner-occupiers or buy to let landlords; 

  • grant support for shared ownership will be switched from grant previously made available for sub-market rent.  It seems very uncertain that the announcement will enable housing associations to supply more than the 25,000 units or so they have been building recently.  It’s just most or all of them will be low cost home ownership rather than (mostly) for rent, as in the past. 

Set purely against the yardstick of “are we building the extra homes we need”, we are very pessimistic that we will see much upward shift from the 125,000 or so total new units which we have seen in the recent past.  So, except for those who benefit from the various lower cost ownership schemes, there is no prospect of supply increasing to the extent which would start to moderate rises in house prices and rents. 

If that wasn’t bad enough, today’s announcements are bad news in three other ways.   

First, they won’t actually do much to reverse the decline in home ownership over the last 10 years.  Doing “much more” to help people become home owners means (at best) leaving around 8 million households as renters at the end of this programme.   On some (generous) assumptions, it would shift the proportion of owners from the current 63% of households to between 64% and 64.5%.  At that rate, it would be 20-30 years before we get back to the 70% in owner-occupation at its peak just after the millennium. 

Second, millions of households can’t afford to buy, even one of the lower cost home ownership products which the Chancellor’s plans are intended to produce.   A London Starter Home at £450,000 will cost over ten times average household income in London.   Even buying a 25% share of a £400,000 shared ownership property is likely to require a deposit of £25,000, an annual mortgage payment of up to £5,000 plus continuing to pay 75% of the rent.  Since the approach is to swap homes which would otherwise have been available for lower cost rent, the availability of such properties will decrease, and an ever higher proportion of lower income households will end up in the expensive and insecure private rented sector. 

That brings us on to the third problem, which is that the Chancellor’s approach is ruinously wasteful of public money.   He is passing up the opportunity to invest in genuinely affordable social rented housing, which City economists have demonstrated would save the taxpayer £70bn at today’s prices over the next 50 years.  Instead, the cost of housing benefit in the private sector will continue to spiral, even if individual entitlements are reduced.  Starter Homes are also an appalling wasteful way of supporting home ownership, compared with traditional shared ownership.  As householders buy more shares in their property, developers get receipts which they can invest in further new development.  A lower rent or shared ownership home delivered under a planning agreement is also a gift which keeps on giving.  Even once sold through staircasing or right to buy, its value can be recycled back into further development.  In contrast, the subsidy embodied in a Starter Home is lost for ever.  Worst of all, the direct grant the Government is now proposing for some Starter Homes is just money straight out of the door, at £38,000 a pop.  If it doesn’t end up as a windfall for landowners and developers, it will become one for the (relatively affluent) owner, who will be able to sell after five years at full market price. 

Some very nasty looking dogs people were expecting to bark have been kept in their kennels, for now at least.  Some new claimants in social housing will get less: don’t lose your job or get sick if you are in an Affordable Rent property.  But, contrary to speculation, the poorest social tenants not affected by the Bedroom Tax will continue to get their rent paid in full. Nor has the Government gone beyond the 1% a year rent cut announced in the summer Budget.  There was also speculation that the Government might sell its historic grant to housing associations, but there is no sign of that in today’s announcements. 

There is no more clarity before about the money-go-round which is supposed to translate the proceeds of selling higher value council properties into meeting the Government’s commitment to replace housing association right to buy properties, and the council properties sold, one for one. When the existing one for one replacement policy is actually delivering one replacement for nine sold, we really need to know whether or not the Government’s aspirations are deliverable, financially or practically.  If they are not, that would be further bad news for the supply of homes generally, and for genuinely affordable rental homes in particular. 

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    UPDATED October 2016 Capital Economics report: Building Social Rent homes
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