Housing policy needs radical and affordable change

Structural reforms in housing policy can achieve better social and market outcomes with a lower price tag

Housing was, arguably, Labour’s biggest domestic policy failure. The housing market became unaffordable for most lower and middle income families, drove a worrying growth in private household debt and created a significant source of economic instability for the UK economy. Market housebuilders failed to build the new homes required and focused mainly on producing cramped city centre flats. Growing inequalities in property wealth also created a reverse escalator counteracting Labour’s redistributive tax and benefits regime.

Even worse, this failure was expensive. Though dispensed in great quantity, money was spent not just without an overall strategy, but all too often as a substitute for strategy. Labour in power presided over a rapidly growing housing benefits bill, whilst government investment in housing was poorly conceived and ineffective in tackling the roots of housing market dysfunction.

Labour has to rethink. The post credit crunch environment not only has tough constraints on government expenditure, it will also suffer from low external mortgage demand for many years. Luckily, these constraints should help create better policies. Our tighter times require Labour to be clear on its housing aims and to start to address structural market issues around stability, fairness and the control and distribution of assets. Below are three areas where radical and affordable change is possible.

Revisiting regulatory policy

Radical changes in financial and mortgage markets reshaped the housing market profoundly during Labour’s period in office – with far reaching consequences for market prices, stability and tenures. For a market as socially embedded as housing, patrolling these financial borders is vital to reigning in excesses and insuring socially just outcomes.

Labour should aim to embed the housing market into a regulatory framework emphasising economic and social stability. Volatile housing costs and speculative investment are not desirable, but rewarding stability for communities, families and individuals is. Grant Shapps has already centred the Conservative approach to the housing market as one of “housing market stability” in house prices but remains committed to laissez faire in practice. New regulatory measures cost very little1, yet would powerfully signal a new socially focused approach to the housing market.  A good place for a new approach to regulation is in the private rented market.

Private Rented Sector: Introducing family friendly longer tenancies

Private renting in the UK is currently the most insecure in Europe, whilst our investment model has been based on short term and volatile investment flows primarily seeking capital gains rather than steady rental yields. Improving the experience for tenants can go hand in hand with reducing the damaging speculative incentives for the investor.

An increasing number of working households in their twenties, thirties and forties find themselves renting. In 2010 there were over a million families with children in the private rented sector, and this figure grew by 77% in just the past two years. With unaffordable market housing and low levels of transactions set to remain for the foreseeable future this demographic will continue to grow rapidly.

Longer tenancies should be introduced to replace the current Assured Standard Tenancy (which allows families to be evicted at just two months notice). These longer tenancies should be asymmetrically balanced in favour of the tenant. They would enable tenants to have short notice periods (helping to preserve labour market flexibility) but tie in landlords to longer tenancies.

This would prevent uncertainty for renting families and bind investment in the housing market into longer-term commitments. Given the appetite among the British to ‘invest in bricks and mortar’ these measures are unlikely to jeopardise future investment but they would contribute to a rebalancing within the housing market to favour a more socially stable rental sector.   

Successful international examples include Ireland, where tenancy rights are gradually earned by good tenants, or more traditional longer tenancies seen in France, where tenancy lengths are a minimum of three years, and Germany, where tenancy lengths are unlimited and eviction requires one years notice from the landlord.

Rechanneling housing benefit into investment rather than landlord subsidy

Between 2000/01 and 2009/10 the housing benefit bill rose from £14.9 billion to £21.2 billion. This is ‘dead money’ on a huge scale, providing no long-term investment outcome for the state. It is also regressive in its distributional impact. Housing Benefit has become a defacto rentiers beneficiary fund, with over £8 billion, 38% of total housing benefit, going straight to private landlords in 2009/10. Housing benefit also pushes up market rents, leading to higher housing costs for low and middle income renting households.

Labour must grasp the nettle of housing benefit reform. It cannot do this solely by squeezing expenditure via caps and lower benchmarks – as this fails either to move expenditure away from the dead money of rent payments, but is also likely to fail – as rising housing costs will erode any successes won through cuts, at significant social and political cost.  

If Labour is serious about restoring fiscal credibility it must find ways to re-channel housing benefit into housing investment. This is not an impossible challenge – it requires a mechanism that uses the guaranteed future income stream created by housing benefit as a source of up front capital expenditure in housing stock in the present. This bridging of future income with present investment is bread and butter to financial markets, Labour just needs to decide on the best institutional and investment package to achieve it.

Housing benefit reform must also be tied into the explicit long-term goal of creating cheaper real housing costs. Lower market housing costs will have a significant pay off by lowering benefit expenditure in turn.

A new approach to house building: capturing land value and reshaping community control of assets

A hectare of residential land in England and Wales cost £1,770,000 in July 2009 compared to £12,335 for a hectare of land used for dairy farming: 143 times as much. In the South East, these multiples are as high as 400.

At present nearly all this value uplift is gifted by the state to two groups of private individuals: landowners and house builders.  This huge source of value is captured by a small group of private ‘insiders’ who are able to play the planning system and land market – to the cost of society as a whole, who lose the perceived amenity value of green spaces and pay much higher housing costs as a result of higher land prices. At the same time, private housebuilders have consistently failed to deliver the new homes needed to meet demand, using their oligopoly of the land market to drip feed poor quality, small homes at high prices rather than compete on quality and quantity.

Whilst in power, Labour tried narrow initiatives to share in this land value uplift (via ‘Section 106 agreements’ to force developers to build a quota of affordable housing), but this as well as being at the expense of higher housing costs in the general market, this failed to deliver the new houses needed and left the majority of land value untouched.

Labour should restructure the process of development with an eye to the group benefiting most from the increase in value created by the planning regime. It also needs to focus on building cheaper market homes that the average family can afford, not lose its way in ‘affordability’ gimmicks that tend to benefit developers more than home buyers.

This would take great strides towards greater social justice, but also stimulate economic growth at a very low price tag. Releasing land value through planning reform would not just act as a powerful impetus to employment and growth, but it is as close to a free lunch as a future Chancellor is going to find.  

Labour should reinvigorate the New Towns and Garden Cities model of development – in which a government agency buys land at agricultural market value through compulsory purchase and then ensures competition in the construction and design of new homes by developers.  Housing costs would be drastically reduced, whilst builders would have to focus on building homes rather than trading land.

This could be flexible in scale – ranging from large new towns, to small organic additions, to existing settlements. It could also reinvigorate the development sector, encouraging self builders and new entrants specialising in high quality design. It could also be populist and community based – giving land with development rights to sons and daughters within existing communities.  

What is more, Labour could test run the programme whilst still in opposition. Local Authorities already have powers for compulsory purchase of land and the Localism Act gives plenty of scope for trying out new populist housing measures.
 
In aiming to open up control of land assets and ability to benefit from them to more than a narrow class of landowners and developers, Labour can not only develop more and better quality homes, but can also take control of the debate about whom should benefit most from development.  In embracing the language of community control, Labour could create a ‘Right to Build’ legacy that rewards low and middle income working families over landowners.

In housing we can achieve better social and market outcomes with a lower price tag. As well as alleviating inequality, getting housing right would offer savings for the exchequer and a low cost source of economic growth. Labour must start taking it seriously again. 

This contribution forms part of Policy Network's Memos to the Left series on Social justice in tough times

Matt Griffith is an associate fellow at the IPPR specialising in economy policy and housing

1 Beyond the small cost of implementation, the primary fiscal consideration is any indirect impact on government revenue from stamp duty. Given the very low levels of current housing market transactions, introducing greater market stability is not likely to lead to short and medium term loses to the Treasury, particularly if placed within a wider reform of property taxation.