Model theory

So is affordable rent value for money? After two hours of scrutiny from MPs we are still not much closer to an answer.

What seems clear is that between them the DCLG, HCA and housing sector have done a pretty good job of making the best of a grim situation up to 2015. What is far from clear is what that means over the next 10, 20 or 30 years.

The influential public accounts committee spent yesterday afternoon questioning experts from the sector plus Sir Bob Kerslake of the DCLG and Margaret Ritchie of the HCA. This follows publication of a report on the affordable rent programme by the National Audit Office that, as I blogged last week, left several key questions about the programme unanswered. By my reckoning I now have partial answers to two out of five questions, some more information on another two but an even more confused picture on the fifth.

Is it risky to weight the programme so much towards the end of the spending review period with construction of 45,000 of the 80,000 homes planned to start in the final year? Pat Ritchie said that another 6,500 starts have now been brought forward to earlier years. However, it’s still a concern and I learned a new phrase from David Montague of L&Q and the G15 Group of the largest associations. ‘The big issue we have is the drop dead date in 2015,’ he said. ‘If developments fall a few days after that date there is no funding.’

Is the programme repeatable? David Montague said that the sector as a whole was borrowing £15 billion and was approaching the limits of its gearing covenants and going beyond them would mean renegotiation with lenders. Would that mean re-pricing of existing loans? Sir Bob argued that: ‘We do know there is some headroom available. The key question is what things will look like in the next spending review. No decisions have been made on size, scale, and form of next programme. We do know there is still some capacity in the housing association sector to do more along these lines.’

We learned little more about the things the NAO report failed to mention. There is still no detail on the warning from providers in London may not be able to charge the rents they agreed although David Lunts, executive director of housing and regeneration at the Greater London Authority, said larger homes were being let at lower rents than smaller ones and he did not think that was sustainable in the longer term. There was only one mention of the implications of converting existing homes to affordable rent and none at all of the fact that homes sold under Right to Buy 2 are also supposed to be replaced by affordable rent homes.

On housing benefit costs, it’s still no clearer why the DCLG estimated that the first 56,000 homes will cost just under £10,000 extra each over the next 30 years but that the next 24,000 will cost £35,000. And there is still no estimate of the extra cost of up to another 180,000 conversions and Right to Buy 2 replacements. Sir Bob said that the extra cost of affordable rent worked out at around £45 million a year, which made it a minor concern in the context of a total housing benefit bill of £22 billion a year. That seems to take account of the savings that will be made when tenants in the private rented sector transfer to affordable rent but it’s not clear to me that it includes the extra costs of the homeless families who would have got social rent tenancies but will now go into private ones. There was no clear answer either to questions from Labour’s Meg Hillier about the effect of higher rents on work incentives.

Finally, is affordable rent value for money? This boils down to the difference between upfront capital grant subsidy and continuing revenue subsidy through housing benefit. The NAO report concluded that a hypothetical social rent programme costing the same as affordable rent over 30 years would have delivered 8,200 more homes and £700 million more benefits but, crucially, it would have required grant funding of £4.3 billion rather than the £1.8 billion available. The £1.8 billion would only have delivered 27,000 homes under the previous programmes.

Professor Christine Whitehead of the London School of Economics said there was nothing new about affordable rent. It was merely a continuation of the shift from public to private finance and supply side to demand side subsidy seen over the last 30 years. ‘Most of us thought we would be here ten years ago,’ she said.

David Orr of the National Housing Federation said shifting from capital to revenue subsidy meant less value for money in the longer term. Previous work by the NHF showed that revenue subsidy was more effective for the first seven or eight years but for any longer than that capital subsidy was better. David Montague said his current modelling showed that after seven to 10 years capital subsidy was more effective.

However, when Conservative MP Matthew Hancock raised this point later, Sir Bob Kerslake responded:

‘We’d challenge that particular argument. The NAO report captures that pretty well. If you take it over a 30-year period the old funding model comes out ahead, not by much but it comes out ahead, but if your judgement is that you want to see a housing impact now there is a strong case for reducing capital subsidy and increasing rents.’

If that is the pragmatic argument against capital subsidy, Christine Whitehead put the economic one. ‘It does matter how much the tenancy changes because tenants may not need subsidy over the whole time they are there,’ she said. This is the argument that capital subsidy ends up going to tenants who do not need it whereas personal subsidy is targeted at those in need. However, it may need some re-thinking in the light of the introduction of fixed-term five-year tenancies and pay-to-stay rents for higher-earning tenants.

Labour members of the committee seemed impressed by the way the DCLG and HCA had implemented the programme but less so by its long-term implications. When David Orr pointed to the impact of rising rents on the housing benefit bill, committee chair Margaret Hodge referred to it as ‘PFI under another name’.

The verdict of Labour member Austin Mitchell was that:

‘Sir Bob has done a wonderful job in producing something out of nowt. But these are hypothetical homes based on a hypothetical idea of what’s affordable. Under this system Cathy is not going to come home, is she?’

However, Conservative members Richard Bacon and Matthew Hancock were more intent on taking things back to first principles. If the market for food and shoes worked and there was equilibrium between demand and supply, asked Bacon, why couldn’t we get equilibrium in the housing market? Christine Whitehead suggested that supply was slow to respond to demand, incomes were unevenly distributed and land prices reflected what richer people would pay for their housing: ‘The market is fundamentally out of kilter’.

Hancock asked if the ‘value for taxpayers’ money’ solution might not be to grant more planning permissions. David Lunts told him there were 200,000 consented plots in London but they were being built out slowly if at all. ‘The structure of the housebuilding industry in this country means they are more interested in delivering margins than volume,’ he said.

Cue an outburst from Bacon. ‘It’s an oligopoly, basically. What you’ve just described is the absence of competition. In conditions of reasonable competition you could not do that, just protect your margins.’

And when Margaret Hodge attempted to draw the session to a close by telling him  ‘this is getting a bit theoretical’, he responded: ‘It’s not theoretical at all. It’s the absolute essence of the way the housing market hasn’t worked and why hundreds of thousands of people have nowhere to live. It’s not theoretical at all and we spend billions of pounds of taxpayers’ money on it. We have got representatives here of an industry that’s failed for 30-40 years to deliver enough housing in this country. And you call it theoretical. I’m sorry, it’s not and if you think I’ve got a bee in my bonnet you’re right.’

This diatribe against housebuilders was rather bizarrely delivered to an academic, two senior housing association people and Boris Johnson’s head of housing but it was still a point well made. No one part of the failing housing system can be considered in isolation from the rest and until we find a way to tackle the whole thing the search for value for money seems doomed.

Originally published as a blog for Inside Housing