The Simple Plan: The Definitive Statement

OK, so this is the extended 12″ jacking tech-house hot wax remix of the piece at Liberal Conspiracy.

It’s October, 2013. As unseasonable snowfall turns the streets into a fairy wonderland and the transport system into a Pratchettesque mess, police are herding the last holdouts out of the Elthorne Estate in London, N19. Homeless shelters around the capital are brimming already. Elsewhere, thousands of families are facing up to a Christmas in seaside bed-and-breakfasts or semi-abandoned estates in semi-abandoned ex-industrial towns hundreds of miles away.

The occupations and demonstrations, although they made us all catch our breath, seized the headlines, and caused a whole lot of expense, trouble, and slippage, are over. It’s just not an option to go to jail with children on the breadline. In a few months’ time the courts will probably hold that Laurie Penny’s arrest under the Terrorism Act was flagrantly illegal, but by then the point will be academic.

Elsewhere, in the supposedly comfortable suburbs, more and more of the buy-to-let generation of landlords are staring at letters from their mortgage lenders demanding answers about their arrears. At a number of specialist finance houses, people are poring over increasingly grim spreadsheets, and the further you go towards the Bank of England, the greater the anxiety is becoming. Everyone is waiting for the trigger-event that will flip us into a second financial crisis.

This isn’t looking too pretty, is it? What’s up?

Over the 20th century, the UK made a political choice that we probably never articulated as such. That is, we decided that the huge expensive city in the lower right-hand corner of the map had to remain a proper city, rather than shipping out its working class to a concrete jungle on the M25 and giving over the centre to the role of a dead museum, sorry, an exciting retail and heritage offer for high-value tourism, and the City and the East to the banks. At the same time we decided that the outward sprawl had to stop, halting at the green belt. The solution, up to the 80s, was to make housing in the major cities into a public service. Since the 1980s and the key decision to sell the council properties accumulated up to then, the policy changed; instead of taking housing out of the market, we would instead subsidise it. As Tory minister Sir George Young said, housing benefit would take the strain.

Now, the strain will no longer be taken. Local housing allowance – it’s housing benefit but for people in private rentals – is to be drastically cut. Until now, the maximum rent LHA would pay was set at the 80th percentile of the distribution of rents in your area. (That is, the level at which 80% of rents are cheaper.) The Tories have now set it at the 30th.

Serious criticisms of this system tend to focus on the fact that it gives a lot of money to landlords. This is very true. Housing benefit (I’ll drop the technical distinction from here on) is paid to landlords, not to households. No claimant “receives thousands in housing benefit”. This has the effect that every landlord knows precisely how much the Government is willing to pay, and unsurprisingly, they tend to set their rents accordingly. The Tories, supposedly, hoped that rents would fall if they cut the rate.

There is only one problem. In the past, a typical landlord owned property outright, often property they had inherited. The buy-to-let era changed all that; now, they are much more likely to have bought the property with a mortgage. If the rent coming in falls below the payments on the mortgage, ruin is certain. Actually it’s worse than that, as the mortgage isn’t the only cost – they have to budget for maintenance and for voids, the periods between tenants.

Another important point is that the BTLers weren’t in it for income, but for capital gains. The tenants are there to pay the mortgage. Once the mortgage is paid, the property is yours, so your return on investment is the selling price divided by the deposit. It’s a classic example of leverage, which always juices the return by increasing risk. So, many of the BTLers didn’t stick at one property, but used more and more mortgages to swing a whole string of them with ever greater leverage. They can’t cut their rents without going bust.

If the tenants can’t pay, they will get the stick. Councils are actively planning to rehouse mass numbers of people outside London. London Councils, the boroughs’ umbrella organisation, reckons 133,000 households are hit. The Department for Work and Pensions estimates that over 100,000 more people will be “accepted” as homeless, and therefore the legal responsibility of someone to rehouse. This presumably includes their estimate of how many more of the homeless they can turn away. Shipped off to Stoke, south Wales, or Margate, they will be badgered to find jobs in some of the UK’s highest unemployment areas. Some of the UK’s most underfunded councils will have to provide for them, somehow. The worst of it is that the 30th percentile cap hits families first.

Of course, faced with this prospect, people will try to survive somehow. On the tenants’ side, some of them will try to disappear in the black economy and tolerate back-garden sheds, friends of friends’ sofas, or perhaps squat in repossessed property rather than be shipped away from their jobs. (Yes, their jobs; housing benefit is mostly paid to people in work. Surely I don’t need to say this.) On the landlords’ side, they will tell themselves that of course they can find new tenants. They will juggle financing between properties, personal loans, their credit cards, etc. But they will eventually fail. When they go bust, their lenders are going to repossess property that is worth much less than it is on their books for.

Most BTL financing didn’t come from the high-street clearing banks, but from specialist finance companies. The danger here is that “specialist finance” is a lot like “shadow banking” – companies that aren’t banks, and therefore escape from bank regulation, but don’t have access to the central bank in an emergency, but do provide services that amount to banking. This is notoriously dangerous. In many ways, the great financial crisis was a shadow-banking crisis on the grand scale. Many people expected the specialist lenders to crash in 2007-2008, but they survived – possibly because housing benefit was keeping the landlords they funded afloat. We don’t really know how shaky the specialists might be, and we don’t really know how the shadow banks and the real banks are linked. In 1974, the end of a bubble in London property funded by shadow banks led to a run on the shadow banks, which the authorities of the day hoped were separate from the real banks. They weren’t, and the Midland Bank came dangerously close to the edge.

So, our friends in the Conservative Party have come up with a policy that is likely to deliver an honest-to-goodness humanitarian disaster right here in London, and that also risks bringing about a second run on the banks, while bankrupting thousands of middle-class Kirstie Allsopp Kommandos, and leaving the city littered with repossessed crackhouses. She’s a beauty. The only bit of it that might work as desired is the Shirley Porter element; fewer Labour voters in London.

But there is a solution. Under Eric Pickles’ Localism Bill, councils get to keep their income from rent rather than giving it to the Government. So, let’s buy the houses, quick. I propose that the London Labour councils, and indeed any others who want to join, launch a jointly-owned company to buy up the BTLers’ property and to manage it as social housing. We could organise this via London Councils itself, as it is now Labour-controlled.

How much is that again?

The rents paid under housing benefit are worked out by the Valuation Office Agency, and for their Inner North London Broad Rental Market Area, the 30th percentile for three-bedroom properties is £340 a week. I don’t have data about the distribution of bedroom requirements, but it makes sense to assume that the bigger properties are the problem. This level is roughly the same around the inner ring of London councils. George Osborne has decided that the rate will be held to a 1% increase to 2015 and to the CPI inflation rate beyond that. There are 52 weeks in a year, 133,000 households claiming, so that estimates the flow of housing benefit into rents for the people involved at £2.3bn a year. That’s quite a lot of money. There’s also a £2bn “affordable housing” fund controlled by Boris Johnson we might bid for.

Councils can borrow money from the Government at a 2.8% interest rate, being the rate the Government can borrow for 10 years plus 1%. At 2.5% for 10 years, the stream of housing benefit for the people the Tories are targeting would be enough to pay off a £22bn bond issue. I’m going to set aside a billion as an allowance for maintenance and improvements – I’m really not sure how to model that, so there’s a fudge factor.

2.5%, not to speak of 2.8%, isn’t actually all that good. There is an enormous demand for safe assets that actually pay a coupon at the moment. Some councils, therefore, have decided to issue bonds on the open market instead. So have housing associations, as the Financial Times makes clear.

The appetite among long-term investors, such as pension funds and insurers, for debt secured by large portfolios of social housing has grown during the past year. Low government bond yields and the relative stability of social housing rental income, much of which is underpinned by government benefits, have made the sector increasingly attractive to risk-averse investors.

The demand is reflected in cheap cost of capital enjoyed by housing associations. The £42m bond issued by Places for People in January will, for example, pay interest of just 1 per cent for 10 years.

One per cent! In real terms, they’re actually paying us to keep their money.

Depending on who you ask, and using the Boris fund, this is worth between 77,000 and 139,000 properties, depending on how good a deal you could make. So, our buying vehicle issues 2.5% 10-year covered bonds, buys the properties, and hands them to the local housing department to manage. The tenants stay in them, and the housing benefit is paid to the vehicle, which uses it to pay off the interest and principal on the bonds. As the bonds are paid off, the rents could fall towards social levels. The BTLers get to make a relatively dignified exit, and the hit to the financial system is at least reduced.

And the plan could be scaled up. The annual housing benefit flow is about £23bn, so the Londoners targeted by Eric Pickles make up about 10% of the national bill, which reassures me about my calculations. Imagine the possibilities of doing something similar with the lot.

One problem I see is that the quality of a lot of the new-builds from the boom era is poor, and apparently some housing associations up North have refused properties they have been offered. To this, I would say that this is an emergency, and I have made some provision for the problem. Further, most of the new building was up North, rather than in London, and I suspect that a surprising proportion of houses acquired by the vehicle might turn out to be ex-local authority flats sold under right to buy.

This isn’t a new idea. In the 1970s, a lot of rental property was bought up by London Labour councils’ housing departments and they’ve still got more of it than you might think. When I lived across the street from the Elthorne, about half the buildings were actually council-owned, something that only became clear when the Decent Homes programme sent the builders round.

So, let’s buy the houses, quick. We have, depending on who you ask, between three and nine months before the bomb goes off, although it’s not at all beyond the bounds of possibility that the whole thing will be put off. It has been once before. But I think it is much better to turn up at the crisis with a solution than it is to expect people with children to fight the bailiffs.

4 Comments on "The Simple Plan: The Definitive Statement"

  1. I applaud the sentiment etc but I don’t this stacks up, at least in London, because there is little prospect of a crash in the private rented market and even if there was councils wouldn’t be willing or able to go around hoovering up properties.

    The thing is, by definition the Housing Benefits cuts have the greatest impact in areas where wider market demand is strongest and the gap between market rent and the new LHA rate is highest. Central London being the prime example. Landlords losing LHA tenants from these areas have had a great few years of rent and capital increases and have a very strong market to find new tenants in. Only some BTL landlords are dependent on LHA tenants, only some of them will have to cut rents in response to the cuts, and only some of them will be so badly hit that they go to the wall.

    Bear in mind that the private rented housing benefit caseload has fallen quite substantially in places like Westminster and Kensington and Chelsea in the last year or so. This has not led to an avalanche of bankruptcies and a flood of cheap properties onto the market in those areas. If there was an exodus of tenants from places with weak rental markets we might see the effect you’re expecting, but those are the places where the benefit cuts are pushing up demand.

    As for the remedy, there’s a cap on the amount of council Housing Revenue Account debt which will currently prevent most of them from doing the kind of mass acquisitions programme you’re talking about, even if there were lots of cheap properties available and they wanted to acquire a lot of scattered and probably low-quality homes. Housing associations have much more financial capacity but they don’t show much enthusiasm for market acquisitions either, which should tell you something.

    In the 1970s councils bought up a lot of street properties because in the 1970s London was depopulating and there were streets full of empty properties. Today the population of the GLA area is growing by about a million every ten years and we’ve got the lowest housing vacancy rates in decades. As I said I don’t think there will be an LHA-induced collapse in the BTL part of the private rented sector, but even if there was prices will remain prohibitively high.


  2. Excellent. If a large organisation with maybe funding from a big pension fund turns them into cooperatives they will be much cheaper. When Camden council were faced with the impossibility of converting all their stock to HMO standard a few years ago they sent a delegation down to our cooperative with a view to changing their entire stock into a (HMO exempt) cooperative.


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