Housing and the Coalition’s dirty secret

Robert Henderson

There is a dirty secret which none of the mainstream parties is willing to publicly reveal: those who are owner-occupiers with mortgages are being heavily subsidised at the expense of those who live in private rented accommodation. This is being done by  the supposedly independent Monetary Policy Committee (MPC)  of the Bank of England (BoE)   keeping of British  interest rates at dangerously low levels (Bank Rate kept at half of one per cent since March 2009) while inflation is driven well above the MPC’s sole remit to keep inflation within one per cent above or below a  two per cent per annum target (http://www.bankofengland.co.uk/monetarypolicy/pdf/chancellorletter110323.pdf) by a mixture of  low interest rates and the Quantitative Easing (printing of money in effect http://www.bankofengland.co.uk/education/inflation/qe/video.htm) practised by the BoE with £200 billion put into the economy so far with another  £75 billion on the way (http://www.bankofengland.co.uk/publications/news/2011/093.htm).

Low interest rates and quantitative easing are just what the Coalition Government would have ordered had they been formally making the MPC’s decisions for them,  because the Coalition’s  focus has been on ensuring demand stays healthy to  prevent recession and promote   growth to reduce the massive and rapidly growing national debt.  As the MPC has spectacularly failed to keep within  the Committee’s   inflation remit for over two years,   with Retail Price Index (RPI ) inflation now at  5.6% and the Consumer Price Index (CPI)
inflation at 5.2% in September 2011,  (http://www.bbc.co.uk/news/business-15344297) it is not necessary to be unduly cynical to suspect  that the MPC is less than separate from
government.   This is scarcely surprising because of the way the MPC is recruited, viz: “The Bank’s Monetary Policy Committee (MPC) is made up of nine members – the Governor, the two Deputy Governors, the Bank’s Chief Economist, the Executive Director for Markets and four external members appointed directly by the Chancellor.”   (http://www.bankofengland.co.uk/monetarypolicy/overview.htm).

The effect of low interest rates and governmental pressure  on mortgage providers to not  foreclose quickly on those who default on their mortgages  has been to maintain (so far)  most people with a mortgage in their homes.   At the same time, the financial crisis has seen the  ending of easy-money mortgages  with little or no deposit and their replacement with mortgages which require a substantial deposit, commonly in the region of 20 per cent.

Because there is a general housing shortage in the UK,  the sky-high property bubble  prices have not collapsed dramatically enough to make the saving of such a deposit  practical for  most  people who are not on the housing ownership  ladder.  This has caused a  great  increase in demand for rented housing . The vast majority of that demand can only be satisfied by private rented properties because of the depredations on the social housing stock of Right-to-Buy (RTB)  and the failure to build much social housing since the 1980s.  Add in the additional  demand of the net two million immigrants  who have arrived in Britain since 1997, most of whom have gone to London and its environs,  and the result has been a massive hike in private rents since the  failure of Lehmann Brothers in 2008 fired the starting gun for the financial turmoil which still grips the world.

The private rental figures are bad for the whole country, but for London are  truly astonishing:  “FindaProperty.com  publishes a regular rental index. The typical monthly rent in London is now £2,075 compared with average net pay in Britain of £1,924 …” (http://www.thisislondon.co.uk/standard/article-24000371-renting-in-the-capital-tops-average-take-home-pay.do).

The proposed change to a so-called Universal Benefit (in reality many  benefits lumped under one heading) between 2013-2015 will have a cap on total benefits which “is
expected to be £350 a week for single person households and £500 for all others”. (http://www.thisislondon.co.uk/standard/article-24008380-130000-homes-face-rent-crisis-under-reforms.do).  That will  clearly make it impossible for people on benefits dependent on  private rented accommodation  to live in London, but the rents do much more than that. They bar people even on an above London average pay packet from living in private rented accommodation in London.  The £500 limit is equivalent to a gross pay of about  £35,000. London median  gross pay  is less than £35,000. ( Go to Office of National Statistics and search for Annual Survey of Hours and Earnings Pension Tables – 2010 Provisional Results).

The cry is increasingly heard that if people cannot afford to live in an area they have no right to do so. If you feel that way just sit and think about the consequences of such a mentality.  Large towns and cities do not run themselves. They need an army of people to service them who are on pay which would not allow them to buy a property or rent decent accommodation  in the private sector within the town or city.  That means  people doing such work who do not live in social housing have to choose between  travel ling a fair distance to work (increasingly expensive), living in indecently crowded accommodation or squatting.  It should be added that the large majority of people servicing expensive areas such as London fall into this category.   Make it impossible for people to work in expensive areas either because they cannot live there or afford the fares to commute and sooner or later things will fall apart.

Places like London are surviving at the moment because there is still a good deal of social housing there and large numbers of people of relatively modest means purchased properties before  house prices reached their  present absurdly high  levels.  But that situation will worsen steadily if the Coalition Government puts into operation their  proposal to massively raise social housing rents for new tenants  (80% of  the market rate is being mooted),  who will also have time-limited tenancies, the renewal of which will depend on things such as whether the tenant is in work and if they are,   their income remaining below a level deemed to be poor enough to warrant social housing.   (It is clear that the Coalition want to move those they consider  “unproductive” away from expensive areas  – http://www.totallymoney.com/news/index.php/2011/10/coalition-plans-to-uproot-unemployed-from-their-homes/).   There is also the likelihood that an 80% of market rent regime would make the rents too high for workers on average or below average pay in places like London and the South East.

Under the proposed new regime. the power to decide conditions will rest with the local council which  could in theory  still award lifetime tenancies and keep rents low. (http://propertydrum.briefyourmarket.com/Articles/Specialist-new-home-sales/The-end-of-council-tenancies-for-life-.aspx).  However, neither of those courses of action are likely to be followed because it is obviously not in the interest of councils to keep rents low or have tenants on long tenancies  who are very difficult to  remove.  Nor would it be logical to allow life tenancies to new tenants while adopting the policy line that a tenancy should be only for the less well off.

Bizarrely, the Coalition proposes to increase housing by reviving sales under the Right-to-Buy  (RTB), which affects council and housing association properties,  by increasing discounts  with  the money raised being used to build new “affordable housing “. This has obvious flaws.  The most obvious is that if social housing properties are sold at a heavy discount,  by definition they will not  provide sufficient funds to build equivalent properties to those sold  in the same area, because the new properties would have to be built at the  full market price.  It is also likely that a new build property would be more expensive than an existing council  or housing association property.

The next difficulty would be the acquisition of land. In many  places, especially  London,  it is unlikely that there would be  sufficient land  available on which to build replacement properties, and,  if the land had to be purchased rather than building on publicly owned land,  it will be prohibitively expensive to purchase.

To those objections can be  added the fact that even if like for like properties were built, the overall stock of social housing would be reduced because the new build properties would take time to  complete. During the building time  the social housing stock would be reduced because the property sold would be removed from the stock and no replacement added to it.

The upshot of these difficulties would be almost certainly significantly  fewer properties built than were sold and, most probably,  many properties not built in the area where the sales took place.

It is also  far from clear that  a new surge of RTB sales could be engineered. To begin with most of the desirable social housing has already been purchased through RTB . Buying flats in large blocks  on leaseholds is not an attractive proposition when the freeholder (the council or housing association) can hit you with massive  repair bills to maintain the fabric of the building and substantial service charges and ground rents.  To that barrier  can be added the outlandish property prices, especially in London. Even if the very generous discounts which used to be given for RTB were reinstated,  it might  well be that the discounted prices would still be beyond the reach of  most  social housing tenants. There is also the question of whether the proposed fixed term  tenancies will they have the RTB.   If  there is no RTB for new social housing tenants that will to a substantial  degree sabotage the plan to use RTB proceeds
to build new housing because the pool of potential purchasers will be considerably reduced over a relatively short time because there is a substantial turnover of  social housing tenancies.

If RTB is allowed for new tenancies how would this work? Would a tenant on a two year tenancy have the RTB or would they have to gain an extension of the tenancy?  If tenant’s financial circumstances improve substantially during a fixed-term tenancy, would that disqualify the tenant from RTB?

There is also the idea of providing social housing for “essential  workers” . This would be the city or town equivalent of the servants wing in a country house , with of course the threat of eviction if the person ceased to be an “essential worker”.  Entire towns and cities could become  a form of gated community, the gate being the possession of money or the lack of it, with housing being provided to the poor who serve the rich.

There have  always been parts of Britain which are more expensive than others, but the idea of whole towns or cities or even regions being beyond  the reach of not merely the poor but  people on average earnings or, in the case of London, people on double the average earnings, is something new.

London used to be noted as a place where  wealth would live cheek-by-jowl  against dramatic poverty,   Buckingham Palace a few hundred yards from Pimlico; Bloomsbury  next to the slums of Kings Cross.  The cost of housing, both rented and purchased reflected such differences.  Even 15 years ago London  (even  central  London) was  not a diabolically expensive place for property.  In 1996, The average house price in Greater London   was £84,000 (http://www.home.co.uk/guides/house_prices.htm?location=london).  In 2011, the average London price is £438,000 (http://www.houseprices.co.uk/london).  If prices had remained stable since 1996  in real terms,  the average price of a London property in 2010 would have been £123,000 (http://www.bankofengland.co.uk/education/inflation/calculator/flash/index.htm).

The Coalition shows no sign of understanding how devastating  the present housing shortage is.  What is needed is a programme of  council house building on the scale of that in the 1950s, a time when a Tory Housing minister Harold MacMillan could boast of building 300,000 homes in a year.  There are  plenty of brownfield sites in our towns and cities, much of it owned by councils.  The land which is held by private  companies, especially that with planning permission given but no building started , should be  subjected to a substantial tax every year
while it remains undeveloped.    Second  homes  and  unoccupied residential property  such be subject not to full council tax (as is already being considered by the Coalition) but council tax at one and half times that of fully occupied property. Those measures, together with a massive cut in new immigration, could save the day. Unless something radical  is done we could end up with armies of homeless on the streets in ten years. The situation is that serious.

A secure home is the most precious thing a human being can have. A society with  large numbers of people denied that will always be an unhappy and fractious one.  The present situation is simply immoral.

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