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Fund households not home builders

Moss John Moss says that switching Government funding from house building to housing benefit to pay for higher rents would end up allowing more housing to be built.

Here’s an easy question.

Would you like to spend £6 billion a year over the next ten years to support the building of 500,000 new, affordable homes, as the Labour Government is planning. Or spend £6 billion a year over the next ten years to support the building of one million new, affordable homes.

The choice is yours. Which is to be? 500,00 homes or one million? Surely, the answer is obvious?

The problem is, that to build the one million homes, you have to do something which sounds perverse. You have to stop giving the money to house-builders.

What happens now is that about £6 billion a year, possibly more, is given to The Homes and Communities Agency, (which got £5.3 billion this year), and to Regional Development Agencies and Councils to support the building of new, affordable housing.

Most of this cash is given to Housing Associations by the HCA as grant to fund the difference between what the property they are developing is worth at the low rent they are forced to let it at and the cost to acquire or build it. Once that grant is given, it is lost, sunk in the bricks and mortar of a home so it can be rented out at an “affordable” rent. The only way you can get it back is if the home is sold at full value.

However, what would happen if, instead of giving that £6 billion to RDAs, Councils and Housing Associations and sinking that capital forever, you gave tenants more Housing Benefit with which to pay higher rents on their homes?

Because we have an estate of around 4 million social homes in England, the vast majority of which were built quite some time ago and which cost, in today’s money, not very much to build, the effect of doing this would be to raise the income of Councils and Housing Associations without raising their costs. Were they run as a business, this would raise their “profits”, but they are not, they are Registered Social Landlords so they don’t pay tax on profits, they re-invest them in more housing.

But if you raise the rent, you raise the value. Taking a simple approach, if the rents go up by £6 billion a year, then the capital value of the estate goes up by a multiplier of that. Let’s say for simplicity that  the “yield” used is 6%, then you have increased the value on the “balance sheet” of social housing by a cool £100 billion!

So how can that double the output of new homes?

Well, by doing what every successful property company has done for centuries. Borrow on the value of the existing assets to build new ones.

If Councils and Housing Associations borrowed 50% of the increased value over ten years, that would provide £5 billion a year. At £100,000 per home, that builds 500,000 new homes. But those new homes are debt free, because the money to build them was borrowed against the 4 million existing homes we built all those years ago.

So do it again, borrow 50% of the value of those 500,000 new homes and build another 250,000. Keep going, like the fly jumping halfway to the end of the table – you never quite run out.

Over ten years, you can build one million new homes, rather than the 500,000 which are projected to be built by giving the money as grant to Housing Associations.

Now, I hear you ask, surely adding another one million homes with higher rents funded by higher Housing Benefit is just going to ramp up the benefit bill and cost us just as much as if we had given the Housing Associations enough money to build those homes? Well, maybe not.

We spent £12.8 billion on Housing Benefit in 2007-08, with 3.4 million households claiming.  Around 800,000 of those households were already being paid higher Housing Benefit to fund market rents in the private sector.

Of the 4m households on low rents in existing social homes, only 2.6 million claimed Housing Benefit. Of those, only 2 million were claiming other benefits as well. So 600,000 households had an income sufficient that they didn’t get any help, other than Housing Benefit and 1.4 million households did not claim at all, or were not eligible, or did not want to claim because they were doing something dodgy.

The impact on individual households would be to see their rents rise by around 50% on average from the current average “affordable” rent of just under £70 a week to around £100 a week. The increase would be
steeper in higher value areas, but so would the increase in Housing Benefit. It is suggested this increase be phased over three years so the explicit link to rising Housing Benefit is clear. This also allows the capital grant programme to be run down over this period to take account of existing commitments.

Yes, those households who are earning a good wage will have to pay the higher rent without any additional support, but I doubt many people would agree that they should be getting a “welfare” benefit anyway. It is rumoured that Labour MP and former Cabinet Minister, Frank Dobson lives in a Council flat in Camden. Can he really be deserving of a subsidy to his rent when he earns over £60,000 a year?

A lot of these households would become eligible for Housing Benefit, because their rents would go up to a level beyond what they could afford on their income, but we have got a £6 billion pot to play with here, very close to the £6.6 billion which the seminal Hills Report estimated to be the net cost of low, social rents. So it only needs about 400,000 to still be ineligible for the pot to be big enough to cover the increase in the Housing Benefit bill.

There are other benefits as well. Those who are under-occupying social homes will be nudged to move to more appropriately sized property as their benefits will be related to their household size, not the home they occupy. They can stay, but they will have to pay more. Those in over-crowded homes will get more support and will have the ability to go out and find a new property for themselves. Another bonus is that illegal sub-letting will be largely driven out, as there will no longer be the incentive of profiting from an illegal, market rent over a low, social rent.

For the people who are earning enough that they do not qualify for Housing Benefit, even with higher rents, then they might well be nudged towards buying and if they got a decent incentive, then they might do this willingly, releasing more capital back to the Councils and Housing Associations to use to build more homes. For those over-occupying because children have grown up and left, maybe they can buy as well, or maybe the 70 year old couple with dodgy hips are ready for a move out of their fourth floor, walk up apartment to something new, with a lift? For those illegally sub-letting, good riddance.

The dynamic here is clear. Fund households, not house-builders and empower people not property owners.  Families get to choose in the market, supported by income subsidies, instead of queuing for the few social homes which come available every year. Those who really should not be getting welfare in the form of low rents are encouraged to buy or move on and the very real prospect of truly mixed communities, with the bank cleaner living alongside the bank clerk and the bank manager, moves just a little bit closer.

That this has the potential to secure double the number of homes built with the same amount of money, makes this a win-win situation.


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