Neil O'Brien: How to make housing more affordable for everyone

Neil O'Brien is Director of Policy Exchange, which today publishes Making Housing Affordable: A new vision for housing policy.

Last week there was a big debate about “fairness”.  The Government are doing a number of things which will tackle the underlying causes of our social problems. IDS is trying to reform welfare to reduce unemployment, and Michael Gove is trying to narrow the education gap, with his Free Schools and the “pupil premium” for poorer children.

But there’s lots more to be done to make Britain a fairer society.

Today Policy Exchange publishes a major new report, looking at how to make housing more affordable for everyone.  Britain’s current housing policy has failed the poorest, and is contributing to our huge deficit.  There are two main problems. 

Problem 1: Housing costs are rising, and this is pushing up government expenditure
Over the past few decades rents and house prices have risen much more rapidly in the UK than other countries.  This has driven up government expenditure on Housing Benefit and social housing, and is now driving down home-ownership. The largest single cause of high house prices is the restriction of supply. House building has more than halved in recent decades to rates that are consistently among the lowest in developed world.

Between 1975 and 1995 average house prices in real terms (i.e. excluding inflation) rose from £75,188 to £77,828, a rise of just 3.5%. But between 1995 and 2009 the average real terms house price rose by a historically unprecedented 120%. This has two bad consequences.

Higher private housing costs have pushed up waiting lists for social housing.  Some people blame “right to buy” for increased waiting lists.  But the real cause is higher housing costs, which have priced people out of private accommodation. In fact during the main period of right to buy sales in the early 1980s, the numbers waiting for a home fell.  Waiting lists shrunk slightly between 1980 and 1997 (as private housing costs rose slowly in this period), but then rose rapidly from 1 million to over 1.7 million households between 1997 and 2009 (as housing costs shot up).

Furthermore, rising rents have increased the Housing Benefit bill, which rose by 64% - from £12.2 billion in 1996/7 to £20 billion in 2009/10.  The new Government is now trying to hold down housing benefit spending to some extent. But it will only be able to save bigger amounts of money if we can reduce the underlying cost of housing.

High housing costs don’t just hit the Government.  Everyone loses.  Young people can’t get a house.  Families are forced to spend more on their mortgages.  Older parents who can just afford it feel obliged to act as “the bank of mum and dad”, and lend to their children.

Problem 2: Social housing is failing its tenants
Nearly a fifth of households in Britain live in social housing, roughly twice the EU average.  Polls show most social tenants would like to be owner occupiers.  Yet current social housing policies are driving unaffordable levels of welfare reliance and increasing poverty for social tenants – evidenced by an ‘unexplainable gap’ between social tenants’ much lower rates of employment when compared with similar individuals outside the sector. This is caused by the appalling incentives that social tenants face.

While around 90% of those in private households are have someone in work, less than 50% of households with social tenancies do – a more than 40% gap. Even adjusting for the other disadvantages of social tenants (e.g. single parent/disability status), studies show most of this gap still exists: social housing leads to 20-25% lower employment rates.

The direct costs of this ‘unexplainable gap’ in employment can be conservatively estimated at some £7 billion a year, due to around 550,000 extra households reliant on out-of-work benefits.

The reason social housing fails is because of the incentives it creates.  The 1977 Housing Act requires all councils to prioritise allocation of social housing to households in most difficulty.  The greater a tenant’s ‘need’ - largely linked to economic inactivity/welfare dependency - the higher a tenant is placed on the waiting list. This means over half of all new social tenants are economically inactive working age households reliant on benefits.  The ‘transfer applicant’ system used to allow social tenants to move within the social housing sector to another social property is also ‘needs-based’, and over the long-term most households use the transfer system, and almost all understand how it works. 

This allocation system creates a sharp poverty trap. Both those on the waiting list for a social property, and existing tenants wanting to move to another social property, are penalised for becoming less dependent on the state.

The larger the gap between the private sector and social housing costs, the greater the poverty and employment effects social housing causes. Appalling deprivation levels in Inner London areas like Tower Hamlets or Hackney confirm this.   In these expensive areas welfare dependence is generally the best way to obtain a long-term decent home, because private housing is far out of reach.

So what’s the solution to these problems?  There are three parts to it.

a) Reduce the rate at which rents and house prices rise by increasing the numbers of new homes built.
Since the evidence shows under-supply caused by the current planning system is behind rising prices it is necessary to create a ‘community-controlled’ planning system which moves to a more consensual model of planning, where those actually impacted by development (not local councils) decide on whether or not to allow developments.   Unless most local residents vote against it, the proposed housing development would automatically be approved.   This should substantially increase the numbers and quality of new homes built. This will in turn hold down rents, house prices, Housing Benefit, and the government’s inflation measure, the CPI (which will in future incorporate housing costs).

b) We should radically reshape the incentives current social tenants face.
The current ‘needs-based’ allocations for social housing should end.  Polls show most people support a move from the current needs-based system. Removal of the perverse incentives facing social tenants would lead to a reduction in the ‘unexplainable gap’ in employment rates. The statutory requirement to allocate social housing to those in the greatest need should be replaced with a requirement to give it firstly to those who are severely disabled, but then subsequently to those who wait longest or have the greatest local connections to an area.  This is the only way to remove the incentives to stay dependent.  To support vulnerable households whilst allowing a change in allocation, vulnerable tenants, (e.g. those with children), renting privately and relying on Housing Benefit should be given medium-term (e.g. three year) tenancies. This would be substantially cheaper than providing a subsidised home for life, while giving these households the immediate stability they need.

c) Social housing should become a stepping stone into ownership.
Current social tenants should be helped to own their own homes by renewing the Right to Buy and by making support between home-owners and renters more equal – so almost no social tenant pays more to own than to rent their property.  Right to buy has been choked off by rising house prices and the capping of discounts, which should be reversed.

New tenants should not go into classic social housing, but into a ‘Path to Ownership’ model of social housing.  They would be offered the opportunity to gradually buy their house.  Using rent receipts plus funds from selling off the most expensive social homes as they fall vacant, we could fund a large scale building programme for this new-style social housing, building 100,000 new affordable homes a year.

How much would all this save?
As well as addressing the problem of expensive housing, and the poverty caused by social housing, these reforms would also save really substantial amounts, starting quickly.

The reforms we set out in the report would generate around £20 billion of savings a year every year beginning immediately and continuing into the future. These will come from:

• Reducing existing expenditure on social/affordable housing.
• Selling off existing stock on the open market (if expensive) or into the new Path to Ownership model (if not), while building more new social houses.
• Over time, saving money on Housing Benefits, as rents rise more slowly.
• Over time, reduced welfare dependency for social tenants.

In contrast to other proposals for social housing reform, our paper does not recommend changing existing tenants’ contracts or raising social rents faster than in recent years. It is an attempt to generate reforms that open up home-ownership to all those who work and want it, provide for those in need, and break out of our current housing crisis.