Good cop, bad cop and mad cop

Originally posted on November 13 on Inside Edge 2, my blog for Inside Housing

Inside Housing: ‘Clark promises deregulation package’. FT: ‘Osborne eyes social housing stake sale.’ Daily Mail: ‘Duncan Smith’s great council house giveaway.’

Three rival visions for housing in England from three rival politicians who all think they know best.

Let’s assume some of this is the result of private disputes about budgets (especially between Osborne and IDS) playing out in public. The run-up to any spending review features media briefings designed to promote pet projects or scupper those of others. But this is still different: it’s not pet projects at stake here but potentially the entire future of housing. And the rival visions directly contradict each other.

The good cop is Greg Clark at his emollient best in a speech to the Placeshapers conference last week. He hailed the ‘partnership’ with the NHF that led to the voluntary right to buy deal and Placeshapers’ role as ‘agents of change’.  And he addressed the ONS reclassification directly (note the last two sentences in particular):

‘This government is committed to a package of deregulatory measures intended to restore your classification outside of the public sector – so that your formal status matches the facts on the ground.

‘In the meantime the ONS decision does not change the fact that housing associations have always been accountable for the use of public resources. Nor does it change the respect that all governments must have for your expertise in social housing, your local knowledge and, therefore, your freedom of judgment and action. It is precisely because of your independence from both government and the private sector that you have the trust of your communities and the confidence to pursue your mission.

‘The ONS decision is a technical matter – and we will not allow it to be over-interpreted.’

‘Independence from both government and the private sector’ seems to rule out both nationalisation and privatisation, a victory for DCLG pragmatism over more radical voices. ‘We will not allow it to be over-interpreted’ begs the question over-interpreted by who?

Step forward the bad cop: George Osborne, muttering threats when he has the prisoner on their own and the tape recorder is switched off. The Financial Times reports on its front page this morning that the chancellor is ‘considering a multibillion pound plan to privatise the government’s stake in housing associations in an attempt to take the sector’s debt off the public books and inject new life into Britain’s housing market.

It’s important to stress that the report is tentatively framed – it would be surprising if Osborne was not considering anything that will raise cash for the spending review – and comes with views for and against in Whitehall. The pro side argues radical change will make large housing associations reinvent themselves and take more risks (chiming with Osborne’s view that the record of associations is ‘not particularly impressive’. The anti side cautions that only a more modest deregulation will retain the confidence of lenders.

If the radicals are winning the argument, the big question is of course how it could be done. As the FT points out, the government’s ‘stake’ amounts to £44bn worth of grant or interest-free debt, associations are independent charities and banks hold £60bn of mortgages. None of which sounds like an obviously attractive proposition for investors or an easy scheme for the Treasury to pull off.

However, as I’ve blogged before, there are plenty of hedge funds and investment banks out there that make their money out of coming up with ways through a legal morass to unlock under-valued assets. That’s exactly what social housing would represent to them if they could get their hands on it.

The best starting point is always Policy Exchange. The think-tank has a track record of persuading governments to adopt policies like selling expensive social tenancies and converting offices into homes. Its alumni are well placed in the Whitehall machine. And its current head of housing warned in September that privatisation would be the government response to reclassification. Its most relevant reports here are:

• Housing People; Financing Housing: a 2010 report by Natalie Elphicke that called for the ‘equitisation’ of housing associations as an alternative to privatisation. Investors would buy preference shares that only pay interest when the association is in profit. She calculated that based on existing assets and surpluses and the yield that investors would expect, associations could raise £30bn – enough to build 100,000 homes a year for five years without any public grant. That came out just before the last spending review.
• Freeing Housing Associations: a 2014 report by Chris Walker that called for associations to be allowed to buy out their historic grant at a discount and in return win substantial new freedoms over nominations, asset management and rents and the capacity to build many more homes. Future grant would be replaced by time-limited government equity investment repayable within 15 years.

I blogged about some of the problems with these ideas at the time (here and here). In the current context, I don’t understand how housing associations could buy out their historic grant without increasing their debt and either severely restricting their development capacity or breaching their loan covenants. I’m also unsure about the impact on lenders, who value the implicit government guarantee of associations and their ultimate ability to gain possession if things go wrong. Jonathan Guthrie has some good analysis in the FT today about the pitfalls. This blog by Matthew Gardinerfor IH  raises some points about ‘how’ and the likely consequences.

Meanwhile there are two warnings from history about what can happen when housing organisations are commercialised or become ‘free’: UK building societies (ironically the FT also reports today on the government selling off £13bn of Northern Rock mortgages); and Dutch housing associations (see my blog here and feature here).

The mad cop who you can hear raving in the cell next door is of course Iain Duncan Smith, who is locked in a dispute with Osborne about how to mitigate the impact of cuts in tax credits and seems to think giving away council housing is the solution. The ‘giveaway’ story has been through various different versions, with tenants given stakes ranging from 10% to 70% or a right to part buy them at a discount. The cost saving argument is that no housing benefit would be payable on the stake that tenants own.

Even if we assume for a moment that the legal issues with shared ownership can be resolved, it’s not hard to think of a long list of problems with this idea (see this blog by Kate Webb for a great summary). Tenants would get a ‘free’ stake that makes them liable to all of the repair costs on their home. Previous schemes like this have all flopped. And the idea cuts directly across other government policies: if all council homes are part-owned they cannot be sold off to pay for the housing association right to buy; if that right to buy is about being ‘fair’ to association tenants, surely they should get a free stake too; and the ‘saving’ will be like squeezing on a balloon as families can no longer get a council home and the housing benefit bill rises accordingly.

All of which leaves the housing prisoner locked in the cells for the night, wondering whether it will be the good cop, bad cop or mad cop who opens the door on November 25.