It is now widely accepted that the last Labour Government did not give enough priority to building new affordable homes. It made the planning system more proactive and it had a good record in some areas of housing investment, especially in tackling the enormous inherited backlog of repairs and improvements to the social housing stock. And its classical Keynesian response to the recession put large extra amounts of investment into new homes from 2008 onwards. Unfortunately, that investment – homes started under Labour but completed under the Tories – has obscured the disastrous collapse of the genuinely affordable housing programme since May 2010.
Looking forward, unless we think big, the lack of supply and the resultant high value of housing will be problems that blight the country for a generation. And it is increasingly clear that the broad policy framework, no matter how well conceived, will not deliver the needed homes unless the financial model is right. And that means not only making sure that each scheme is viable but also delivering sufficient investment in total with the right amount of subsidy to make a sufficient proportion of the homes affordable.
There are two big ideas around that could make the kind of difference – billions – that is needed.
First, to bring about a grand shift in the balance of investment by pension funds. All we pensioners have done badly out of a model that depended too much on the appreciation of stocks and shares – when they stopped appreciating, pensioners lost out. There is potentially a synergetic relationship between pension funds – which need good returns over the long term – and housing investment – which produces relatively weak short term but excellent long term returns. Most development for rented homes makes a loss in the first few years and a rising profit after that – because borrowing costs are reasonably constant over the lifetime of the home but rental income keeps rising year after year. If, and there have been some exemplars, many more deals could be struck whereby the investing pension fund received a lower return at the start, which then rose over time, thereby matching the income stream, affordable housing could be produced with a much lower need for initial subsidy.
The second idea which is bubbling under is quantitative easing through housing investment. The Bank of England has printed hundreds of billions of pounds through its QE programme. Essentially this means that money is created electronically and used to buy back gilts from banks, pension funds and insurance companies, strengthening their balance sheets and boosting their capacity to create new investments. The hope is that these institutions, with artificially boosted balance sheets, will in turn put more real resources into the economy by lending to businesses. The problem is that this is a chain with weak links and it is based more on the hope than a requirement that it will boost lending.
A more purposeful alternative would be to use QE – technically the Bank of England Asset Purchase Facility Fund (APF) – to create funds which come directly into housing by buying housing bonds. The purchase of corporate bonds, as opposed to the purchase of gilts, has been a very small part of QE so far. Some amendment might be needed to the APF’s rules, but in theory at least APF could buy local authority housing bonds (although there is a problem with falling foul of the public borrowing rules, see below) or bonds issued by housing associations or their intermediaries (which would count as private sector activity). Such bonds are highly rated by the credit rating agencies.
Even if the Bank of England is not willing to use APF to buy housing bonds, these two ideas could be brought together in a more circuitous route: the Bank buys gilts from pension funds, the pension funds use their extra capacity to buy housing bonds, preferably on a more sustainable long term financing model.
The issue about local authority bonds and public borrowing has been raised on Red Brick before. Although over the years people campaigning against the ‘Treasury Rules’ have seen some helpful shifts in policy – the creation of the prudential borrowing regime for example – the Treasury has remained obsessed by total public sector borrowing including government-owned trading corporations (which in turn includes housing). In many other countries borrowing by government-owned corporations is not included in the main measure of public borrowing because they are deemed, like private corporations, to be able to finance their own borrowing from their own business plans. Instead other countries measure ‘general government’ borrowing. The fact that these definitions are Treasury-made and not inviolable is shown by the fact that the nationalised banks are already treated differently from other government-owned bodies.
As Professor Steve Wilcox argues in the new UK Housing Review – his chapter includes an excellent round-up of the arguments against this Treasury orthodoxy – ‘Adopting those international fiscal measures would enable public corporations to play a far more active role in promoting economic growth….. there are …obvious examples in terms of housing policy where switching to international fiscal measures would open the door to a far more active role for local government’. Indeed the strength of this argument is reinforced by the growing evidence that housing investment pays for itself through increased tax income and reduced benefit expenditure – borrowing should be regarded differently if the Treasury gets its money back.
These are complex issues that have huge implications for housing, where policy is more dependent than in any other area, with the possible exception of transport, on borrowing for long term investment – investment that, because of rising rents, is highly profitable in the long term.
My knowledge is probably extended to the limit by writing this post, but there are others who understand this world of high finance and could develop detailed proposals. But it needs political will to do so: political will that unfortunately was absent during the Labour government years. But the opportunity of going into the next Election with a genuine offer of many more homes, and a worked-out plan to deliver them, is a prize which is at least worthy of detailed examination.
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