Political themes influencing the housing system: The “Big Society”, Localism and Devolution

1. Political themes influencing the housing system: The “Big Society”, Localism and Devolution The Changing Tide; Will Current Reforms Work?

2. Free market and localist think tank Former ‘alumni’ include James O’Shaughnessy, Michael Gove, and various others Interested in housing and planning since 2005 but renewed in 2010 with ‘Making Housing Affordable’ and ‘Cities for Growth’ We aim to be neutral but influential

3. Problems Gov inherited • Over 5 million on ‘out of work’ benefits • Home ownership fell for first time since WWI after 2001 after rising around 9% a decade in most of the 20th Century • Most people (85%+) want to own home • Rents rose around 80% in recent years • 25% under-valued vs house prices and correction inevitable in medium term

4. Problems Gov Inherited • First Time Buyer’s income doubled since 1997 – only wealthy now buying homes • 2010: 90% FTBs need support of family • Biggest divide across generations – under 50s own just 20% of UK’s housing wealth • Prices at x5 incomes even in North • Ownership divide led 2010 Labour Gov report to note “housing wealth … is one of the starkest inequalities in Britain”

5. Rising Government housing costs • Housing Benefit rise with private rents to cost £8 billion extra a year since 1997 • Social housing waiting lists fell 1981-97 by 0.2 million households but rose 0.8 million post 97 despite RTB sales falling heavily • Rise in waiting lists entirely down to fall in households exiting into private sector • ‘Affordable housing’ helps 0.1% households a year costing £0.5 - £1 billion

6. Waiting lists rise because... A fall in net re-lets drove them up (the table below from the HCA shows key)

7. Housing costs society • Social housing tenants economic inactivity 66% higher compared to private tenants after basic adjustment for disadvantage (Hills), increasing poverty and poor social outcomes. Difficulty measuring (both ways). • The cost of social housing was around £30 billion in 2009/10: subsidised rents, maintenance, construction, housing benefit, and additional welfare dependence.

8. Social Housing (background) • Larger, not smaller, part of housing market compared with most EU countries • Location not key issue - Inner London has many job opportunities but low employment • Current mixed communities – large scale studies show not better results • Evidence suggests current system has no positive effect but possible negative impacts • Incentives are disastrous for new/existing social tenants (needs-based points system)

9. Government’s direction of travel • New “local authority-ist” direction and urgent need to save money • Major reforms are underway focusing on three areas: • Housing benefit/capital spend reductions • Planning changes • Social housing reforms

10. #1 Spending Reductions • Popular with the public • Aimed to reduce spend by £1.7 billion by end of Parliament, now around £1.4 billion • Most reduce entitlement (cap £55 million) • Very large reduction in capital spend (down by 60% by end of spending review) • Single person can’t have own flat, lower dependent allowance, 30th percentile

11. #2 Market housing affordablevia planning reform • Removal of national targets • Presumption in Favour of Sustainable Development (but what does this mean)? • Neighbourhood planning • Community Infrastructure Levy (CIL) • New Homes Bonus • Local authority supreme (90s)

12. #3 Social housing reforms • Short term tenancies (5 year not 2 year) • Capital subsidy to rental subsidy switch • Very large reduction in capital spend (down by 60% by end of spending review) • Change in allocation policies • 170,000 new ‘affordable homes’, charging higher rents (largely affects South) • Right to Buy II and reuse of sales receipts

13. Will it work? • The key question... • Housing is increasingly seen as a major crisis - because it is • The complexity of housing is immense • The Government’s reforms, while containing good parts, will fundamentally not work • Personal view (not PX overall view)

14. #1 Spending reductions Rents escalating (2011 rising by 4-5%) Housing benefit not driver of rents Housing benefit to hit £23 billion by 2015 May in fact be higher than this (rents rising, economic difficulties) Current difficulty of continuing to build past 2015 (leverage difficult, capital grant low)

15. #1 Spending reductions Social housing waiting list growth as rents rise and even more if economy tanks Pressure for more spending more acute Difficult to reduce housing benefit entitlements much further Wide economic effects (less building) So likely to struggle, largely because...

16. #2 Market housing affordable Local authority plans are supreme Local authorities reducing housing need Neighbourhood plans weak Presumption meaningless (unless planning by appeal returns) Confusion over CIL NHB very small Design still poor (guidance won’t fix)

17. #2 Market housing affordable • The UK saw 2nd highest price rise in developed countries in recent boom • Immigration impacts but not main cause • Household size decline is slowing • Build 50% of what built in 1960s • 50% of all homeowners have two spare bedrooms • There was a ‘bubble’ with 25% of mortgages supported by BoE in 2009

18. #2 Market housing affordable Mortgage lending explosion 2000 onward Since then barely increased (but should be deflating)

19. #2 Market housing affordable? Gigantic land bubble at system’s heart What does a house cost = land + building Rents = real price House prices = speculative price Rents rising due to planning system Bubbles build on top of this Land >£1 million a hectare

20. #2 Market housing affordable Lending simply inflates land/house prices Makes downturns very difficult to handle

21. #2 Market housing affordable Credit market turmoil will continue Most Western banks would be/are insolvent without huge interventions Interest rates will have to return to normal (6% or so) within a few years and/or rampant inflation is likely Risk mispricing, time distortions are intensifying not getting less

22. #2 Market housing affordable Rents will continue to rise Developers want rents to rise while house prices stagnate until they meet again Small risk is another bubble may take off and house prices begin to rise Housing is a core part of our dysfunctional economy and is seen by politicians as ‘too big to fail/reform’

23. #3 Social housing reforms • Danger of very high rates of benefit withdrawal at a time when Gov aim is to ‘make work pay’ via Universal Credit • Finally ‘market rents’ will just push up HB or provide negligible amounts to HAs • The Gov believes it has reformed allocations, wait to see how this works • Lending may become too risky (one failure will impact on whole sector...)

24. Current reforms... Policy Exchange has wide range of views This is only mine Current system is unravelling Local authority control won’t work as no financial autonomy But financial autonomy would fail (Spain, USA etc have worse financial implosion due to multi-layered overspend)

25. Current reforms... Incentives for housing at local authority level necessary but along will fail (13,000+ German LPA bodies, 326 English ones) The Big Society, devolution and localism useful if put local people not local government in charge and fix incentives for individual people If not will make things worse

26. Social Housing • Funding crisis post 2015 • We believe in selling off stock above the median to pay for new social properties • We believe this could triple the amount of social homes being built this Parliament • This would mean social tenants could choose from 50% of properties • Popular and fair • Quality set for new social homes

27. Planning Needs a fundamental overhaul Externality-led rather than plan led Those near new developments have ultimate say Less micro-management (e.g. car spaces) This is real ‘localism’ with local people in control and dealing direct with developers Large new suburbs are needed by cities

28. Planning Anti-competitive and concentrating power as well as reducing quality High land prices drive out quality Reform would halt rise in rents and waiting list and allow deflation of house price bubble (with positive long term effects) Not going to happen; housing stress will continue to build in system

29. Possible options in 2012/13 • Things the Government could do... • Garden Cities • Brownfield liberalisation • Successful new urban extensions • Ministers are competent but need a better grip (even if uncomfortable to admit difficulties so far)