Two simple plans – mine and another

There’s a lot of interesting stuff in this Randeep Ramesh piece in the Grauniad.

However, the coalition is concerned that these levels of building will not meet the demand for properties, particularly in south-east England where outright normal home ownership is not an option for many. So [Danny] Alexander and his Tory cabinet colleague Eric Pickles will announce a review that will examine how “innovative financing mechanisms” could be used to raise the rate of affordable housebuilding.

That sounds like a simple plan! In fact, one of the proposals mentioned gives the simple plan an extra twist by suggesting that local authority pension schemes might be persuaded to invest in it. Unlike the central government schemes, council ones are funded, so they control some really large investment funds that need a safe home with a non-risible fixed return. I am actually kicking myself for not having included this in the original simple plan, as it’s a genuinely neat idea.

That said, it’s always worth counting your fingers with this lot.

Sources in the Treasury were keen to stress that the review would not be able to recommend measures that breached the government’s strict borrowing rules, seeking to contrast this with Labour’s “borrow to invest” political rhetoric.

Housebuilding based on the LHA income stream might well pass the government’s prudential borrowing tests, but so far councils have been told in no uncertain terms that there’s no point applying. So either the review is going to “offer all possible help other than actual assistance” in the words of Winston Churchill, or else it’s going to invent a new category of less borrow-y borrowing.

The government’s affordable rent scheme will see housing associations and councils offer rented homes to social tenants at a maximum of 80% of market rent rather than the 30% offered by traditional council housing. Accompanying changes to the way tenancies are offered will allow housing providers to offer more flexible leases, some as short as two years.

I don’t know why the “will say” trope is used here; “affordable” has been defined as 80% of market, i.e. not affordable, for years. The point about leases is also interesting and worrying. Up in the head of the piece, before the bit about local authority pension funds, there’s this:

The government is to announce a “wide-ranging” review to examine how to encourage City investors, insurers and pension funds to put up cash to build affordable housing schemes, designed to help poorer people get a roof over their heads.

Between 1989 and 2007, UK housing policy was famously to let housing benefit take the strain, pace Lord Young. This meant that people would rent, rents would be allowed to go where they might, and central government handouts would fill any gap and also act as a unacknowledged financial settlement between regions. They would rent from private landlords, and also from housing associations.

The private element of this was dependent on two innovations. The first was mortgage securitisation, which permitted the expansion of buy-to-let lending. The second was the assured shorthold tenancy, which permitted the expansion of buy-to-let borrowing by making it easier to function as a landlord without putting in time. The combination of these two innovations with the decline of final salary pensions and the string of mis-selling disasters from Barlow Clowes to PPI made rental property the middle class savings vehicle of choice. In the context of a property market with restricted supply and deregulated mortgage lending, it also made a property bubble very likely and made any action to stop it politically and eventually practically impossible.

The new policy sketched in the last quote is very similar, with one major difference. First of all, rents are deregulated and go up. Second, private landlords are central to it. Third, tenancies are shortened and made much less secure in order to financialise housing. This is precisely the package deployed by Young in the late 1980s.

The difference is that the landlords are expected to be strategic investors rather than retail savers. This represents the fact that a lot of people have burned their fingers and a lot more don’t have any savings, perhaps because of the cost of housing.

Anyone who’s ever been a tenant knows that there is more to being a landlord than rent; it’s fair to say that professional management, in itself, would be an improvement. You can make a case that amateurs are better out of the game, too. But we ought to be sceptical of the same old bullshit from the same old gang. “Unaffordable rent, mitigated by LHA” renders the people in the houses too vulnerable to political caprice. And real estate professionals are very often the biggest plungers in the boom and the biggest crashers in the crash. Watch out.

One comment

  1. Stephen

    one of the proposals mentioned gives the simple plan an extra twist by suggesting that local authority pension schemes might be persuaded to invest in it…I am actually kicking myself for not having included this in the original simple plan, as it’s a genuinely neat idea.
    Ahem
    UNISON Scotland in June last year…

    “Pension funds are in need of secure long term
    investments. UNISON has drawn up a proposal to
    encourage them to invest with one or more RSLs.
    RSLs have always represented a very low risk to
    lenders and this was reflected, pre credit crunch, in
    extremely low margins, in some cases as low as 20
    basis points. Loans were for 30 years with the
    ability to fix. This reflects a number of factors
    including:
    • Assets of around £7.125 billion as against debt at
    £2.6 billion
    • A huge demand for social rented housing with a
    waiting list of 335,000
    • Projected new supply of around 6,000 per year
    • Good performance in housing management,
    maintenance and refurbishment
    • Indirect government regulation
    • Government intervention in the event of
    individual RSL encountering difficulties,
    essentially making RSL lending ‘sovereign debt’
    • Historic above-inflation rent increases unlikely to
    change in the future
    However, since the financial crisis, banks have
    experienced a lack of capital with which to lend.
    Coupled with more stringent conditions under the
    Basel Accords on banking finance, banks are less
    likely to lend at all, let alone at previous margins.
    At time of writing, the cost of borrowing is largely
    the same as before the crisis. RSLs now experience
    much higher margins with much lower rates.
    Furthermore, lending is made available for ten
    years at most, with a five year review. RSL financial
    models are geared towards repayment of loans over
    30 years or more. Clearly this represents a risk.
    There are challenges, but there is merit in exploring
    the possibility of using pension funds to support an expansion in socail housing.”

Post a comment

You may use the following HTML:
<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>