A simple plan to save the world and win the elections

Everyone’s talking about the coming housing disaster again, after this Polly Toynbee column. Here’s the thread at Jamie Kenny’s in which we predicted how this would all turn out way back in July 2011, and here are the StabPrin posts from October 2010, including this valuable collection of links. Here’s some more early warning.

Anyway, the problem is simple enough. Buy-to-let landlords can’t actually cut their rents, because they are leveraged and they have to pay the carrying-cost of their investment, i.e. the mortgage. In fact, as most of them are in it for capital gains, the tenants are rather beside the point – they have them to pay the carrying cost of a leveraged bet on housing.

Therefore, the decision to slash Local Housing Allowance down to the 30th percentile of rents in your area, and also to impose a cap on an irrelevantly small number of people for PR reasons, implies evictions, an exodus from London, a wave of bankruptcies, repossessed properties rotting around London, and quite possibly one or more major financial failures. Way to go, Shapps! Perhaps I’ll take business advice from somebody else.

Now, Polly Toynbee reckons the crisis bursts in April. Rentergirl thinks there’s enough money in the sop fund and enough play in the system to get us to October 2013, rather as the second engine on a small plane is there to get you to the crash site.

London Councils, the umbrella organisation for the London boroughs, which is now controlled by Labour, reckons that all in all there are some 133,000 households impacted directly. That’s a lot of people.

So, what are we going to do about it?

Well. The government has set the amount of money it’s willing to pay in LHA at the 30th percentile of the rent distribution for properties of each size. How much money is that? In my area, which is part of the Valuation Office Agency’s Inner North London Broad Rental Market Area, it’s £290 a week for two bedrooms, £340 for three. The numbers are similar for most of the inner-ring of London. You can get the data here.

Skimming London Councils’ valuable research report Does the Cap Fit?, from November 2011, I couldn’t find an immediate number for the average number of bedrooms per household, although I think it could be derived from their tables. One conclusion that was clear was that the problem was skewed to the upper end of the distribution. So let’s use the £340 figure for now.

133,000*340*52 = that’s an annual flow of LHA into rents of £2.3bn. Quite the chunk of change.

OK, so we’ve sized-and-scoped the problem and identified the available resources. Here’s a really interesting article in Public Finance, regarding councils issuing bonds rather than borrowing from the Treasury’s Public Works Loan Board. Note especially that part of Comedy Eric Pickles’ Localism Bill provides for councils getting to keep their rent income.

So, here’s my simple plan. London Councils launches a company, Ponyco, controlled by its member boroughs. This minimises Tory obstruction. If necessary, just the Labour boroughs could go ahead, rather like Ed Miliband’s electricity company plan. We bid for Boris Johnson’s £2bn housing fund as Ponyco’s initial capital. Ponyco raises a covered bond issue, to be repaid out of the LHA-rent stream, secured on property. What property? Obviously, the failed BTLers’ investments, which Ponyco will buy and assign to the respective borough’s housing department to manage.

PWLB loans are made at the 10 year gilt rate plus 1%. At Friday’s rates, that’s 2.8%. As yer man points out, it might be possible to beat that in the market. Over 10 years, at that rate, the 30th percentile LHA income stream would be worth £21.5bn today, plus the shower-jobby fund. Daniel Davies reckons you could buy 12,000 homes with the Boris fund alone:

Using the same pro-rate, and keeping a £1bn back as a maintenance sinking fund*, that would mean a purchasing capacity of 135,000 gaffs. I think D^2’s number is low, though. At £300,000/house (i.e. what I paid for mine give or take a few grand) that would be 75,000. Much of the difference will come down to how desperate the BTLers are to sell and how hard a bargain the councils drive on them.

Either way, though, it’s either a complete solution to the problem or it’s a big chunk of the problem, and the limiting factor isn’t so much financing as the supply of properties. (We could up the capacity of Ponyco by extending the term of the bonds or by squeezing harder on the rate.) And, if you see the original policy as a Tory strategic initiative, it would boot it right back at them. If Boris or Shapps whines, I suggest sending teams of Labour activists to follow them around with the dealbook and a giant comedy biro. Make them wear it. After all…

Which reminds me I could have titled this post Girl, I’ll *House* You, like so. Jungle Brothers ftw, the year after the 1987 Rent Act.

Over time, turnover will lead to some of the properties becoming available. As this happens, the social housing waiting list can be relieved into them. As the bonds are paid off, the rent could even fall to social rented levels. Other UK councils could of course join Ponyco.

So, this proposal:

1) Solves the problem.
2) Does so at no extra cost to the taxpayer over and above the LHA budget as originally planned.
3) Vastly increases the London social housing stock.
4) Renders the Tories’ Porterism futile.
5) Provides the BTLers with a relatively dignified exit.
6) Sees off the possibility of a policy-induced bank failure and inevitable bailout.
7) Prevents the urban consequences of mass landlord failure.
8) Creates a whole bunch of paper that would be Bank of England eligible collateral.

Problems I see include finding enough large properties, due to the stereotype BTL two-bed flat, and the fact that the plan basically re-invents a special investment vehicle for residential mortgage-backed securities, which makes me wonder if I shouldn’t just climb a statue in Whitehall and stay up there until Francis Maude agrees to discuss the policy with me. Up the statue. Skyclad.

Of course, if Iain Duncan Smith doesn’t want me to nationalise everything, he can simply put the whole mess off to the indefinite future. He’s put it off before. He can cave and do it again.

*By definition, the properties have sitting tenants, and there is a waiting list, so I don’t think voids are a problem.

8 Comments on "A simple plan to save the world and win the elections"

  1. Anyway, the problem is simple enough. Buy-to-let landlords can’t actually cut their rents, because they are leveraged and they have to pay the carrying-cost of their investment, i.e. the mortgage.

    Sadly, no. Buy-to-let landlords don’t want to cut their rents, as they will lose money on their investment. New investors will be discouraged from buy-to-let in a depressed rental market, cutting growth in the availability of rental housing. And some buy-to-rent landlords will be forced to sell their properties, possibly incurring a capital loss.

    But it’s supply and demand. Landlords seeking to maximise their rent. Renters seeking rents that they can afford, with affordability slashed as Housing Allowance is slashed. Both renters and landlords lose as the subsidies are withdrawn and a new equilibrium is reached – lower yet less affordable rents.


  2. Well, to estimate a number of BTL landlords going to the wall over this you have to do something like multiply

    The number of private tenants on housing benefit by
    The proportion who will be seriously affected by the cuts and caps, by
    The proportion of those seriously affected unable to make up the shortfall from elsewhere, by
    The proportion of the above who are tenants of BTL landlords, by
    The proportion of affected landlords unable to find other tenants at the same or similar rent, by
    The proportion of affected landlords who are so straitened as to be unable to absorb any shortfall.

    I submit that the number you end up with will not be zero, will be enough to be of some concern, but will not be anywhere near as apocalyptically large as you suggest. Probably the key point is that overall rents are rising due to the ongoing shortfall of overall supply plus the mortgage drought. Those conditions are going to apply for a while yet, probably long enough for the benefit cuts to work through the system. So the tenants on HB are going to suffer, but the landlords not so much.


  3. I submit that the number you end up with will not be zero, will be enough to be of some concern, but will not be anywhere near as apocalyptically large as you suggest.

    Very few landlords will “go to the wall” directly because there are very few professional full-time social housing landlords. What people will do is find themselves with a void, find that they can’t get the level of rent they need to cover the monthly mortgage payment and then decide something like “forget about this for a game of soldiers” and put the house on the market.

    That means you suddenly chuck a load of supply at a not very robust London market, which pushes the price down.

    At this point you get financial stress, because a load of loans that were conservatively underwritten when they were made are now at loan/values of >100%. So a bunch of the normal run of bad luck starts becoming a problem rather than an inconvenience. Mortgage banking really isn’t very good at coping with falling property prices.


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